Category Archives: Input tax credits

Commissioner issues Draft GST Determination on second hand goods

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Yesterday the Commissioner issued Draft GST Determination GSTD 2013/D2 “Goods and service tax: What are second-hand goods and when are they acquired for the purposes of sale or exchange (but not manufacture) in the ordinary course of business under Division 66 of the GST Act”.

The  views in the draft determination  can be summarised as follows:

  • “goods” are any form of tangible personal property. However, fixtures are not goods as they form part of the real property to which they are affixed.
  • The term “second-hand” takes its ordinary meaning and requires a commonsense approach. Goods are second hand if they have been previously used or are not new. Goods do not become second-hand simply because they were sold by manufacturer or a distributor before being retailed.
  • The provisions will be satisfied where an entity acquires second-hand goods in the business of buying and selling second-hand goods. An interview that carries on business involving the leasing and selling of second-hand goods will satisfy the provisions. In this context, second-hand goods will not be acquired for the purposes of sale or exchange in the ordinary course of business simply because there is an intention that the goods will ultimately be sold after they are no longer required.

In the third.point, the Commissioner seeks to apply the reasoning of the Federal Court in Lease Plan Australia Limited v Commissioner of Taxation [2009] FCA 1309 where the Court found that the taxpayer acquired vehicles for the purpose of leasing and selling those vehicles. In that case, the contractual arrangements expressly provided for the sale of the vehicles at the end of the lease. Applying this decision, the Commissioner  considers that the section will be satisfied in the following circumstances:

  • the entity acquires second-hand goods in the ordinary course of its business:
  • the contractual arrangements under which the second-hand goods were acquired and leased contemplate that the entity will lease the goods back to the vendors for a defined term and then sell the goods at conclusion of the lease term:
  • the contractual arrangements provide that proceeds from selling the second-hand goods will be compared with a residual value agreed upon commencement of the arrangements, in order to determine the extent of any indemnity payable by the lessee, or, entitlement of the lessee to participate in profits from the sale of the goods.

The Commissioner seeks to make a distinction  with the position where second-hand goods are  acquired by an entity for use in its enterprise and those goods are ultimately sold when they are no longer required. In those circumstances, the goods are not acquired in the ordinary course of a business of selling goods. That view does not appear controversial. However, the Commissioner appears to   require that the intention to sell the goods be expressly included in the contractual arrangements. In my view, there may be cases where the contractual arrangements do not expressly provide for the sale of goods, but the intention to sell the goods as part of the ordinary course of business is nevertheless evidenced by the way the business is conducted. Support for this view  is found in the following observations of the Federal Court in Leaseplan (at [39]) (emphasis added):

“Leaving aside the legal characterisation of the composite “sale and lease back” of the vehicles,  the evidence establishes that the Leaseplan’s  business purpose in acquiring the vehicles was to lease them and to sell them at the end of the lease. So was necessary to provide the forecasted financial returns to the Leaseplan’s  business, either by returning the anticipated proceeds of sale or to trigger the lessee’s top-up obligations. I accept that the whole transaction was a composite operation, where the disposal of the vehicles for forecasted valuable consideration was  integral to Leaseplan’s business.

The question therefore, is whether the evidence establishes  the requisite business purpose of the entity. The terms of the contractual arrangements will certainly assist in providing that evidence, but in my view the scope of the enquiry should not be limited to the terms of the contract. It should be open to have regard to all of the surrounding circumstances to establish the purpose of the entity in acquiring the goods.

Commissioner publishes draft Determination on reduced input tax credits and managed investment funds

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The Commissioner has published Draft GST Determination GSTD 2013/D1 “Goods and Services tax: whether item 32 of the table in subregulation 70-5.02(2) of A New Tax System (Goods and Services Tax) Regulations 1999 applies to some extent in respect of an acquisition for a single fee by a managed investment fund that is a recognised trust scheme from a Responsible Entity”. This may well be the longest title for a GST Ruling or Determination.

The draft Determination deals with the entitlement of the Managed Investment Fund to a reduced input tax credit under s 70-15 of the GST Act where the Responsible Entity (RE) charges a single fee for managing the fund which is calculated as a percentage of the total asset value of the fund. The Commissioner considers that it necessary for the Fund to determine the extent to which its acquisition from the RE is covered by Item 32 (in which case the reduced input tax percentage is 55%) and the extent to which its acquisition is covered by other reduced input tax credit items (which have a reduced input tax percentage of 75%). The basis of this view is that the Commissioner considers that the single fee is properly characterised as a payment for a “mixed acquisition” from the RE, rather than a singe “composite acquisition” of investment portfolio management services and are fully excluded from Item 32 (thereby being fully entitled to the higher reduced input tax credit percentage of 75%).

The Commissioner considers that the Fund can apply any “fair and reasonable methodology” to undertake the apportionment. For example, a “deductive benchmarking methodology” is considered to be an example.

Comments on the draft Determination are due by 5 June 2013.

Also, the Commissioner issued the following Addendums to GST Rulings:

  • GSTR 2000/30A3 – Goods and services tax: supplies that are GST-fre for pre-school, primary and secondary education
  • GSTR 2002/3A5 – Goods and services tax: prizes.
  • GSTR 2004/4A4 – Goods and services tax: assignment of payment streams including under a typical securitisation arrangement.

International cases update – March 2013

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March was a busy time in the UK for VAT decisions. In additional to the usual raft of decisions by the Tribunal, there were two notable decisions of the higher courts, being the Supreme Court and the Court of Appeal.

The first decision is Her Majesty’s Revenue and Customs v Aimia Coalition Loyalty UK Limited (formerly known as Loyalty Management UK Limited) [2013] UKSC 15 where the Supreme Court considered whether the promoter of a loyalty scheme was entitled to input tax for payments made to retailers of goods who participate in the scheme and provide goods to customers who redeem points. The Court also considered the issue of whether the principles established in the Redrow line of cases were still good law. My analysis of this decision can be accessed here.

The second decision is Vehicle Control Services Limited v The Commissioners for Her Majesty’s Revenue & Customs [2013] EWCA Civ 186 where the issue was whether parking charges were subject to VAT as being consideration for a supply or payments in the nature of damages. My analysis of this decision can be accessed here.

United Kingdom

Supreme Court

Court of Appeal

High Court of Justice

Upper Tax Tribunal

  • British Association of Leisure Parks, Piers and Attractions Ltd v Revenue and Customs [2013] UKUT 130 – Value Added Tax – claim to repayment of output tax allegedly overpaid – whether services provided by Appellant Association to its members exempt under Value Added Tax Act 1994, Schedule 9, Group 9, Item 1(d) – whether primary purpose of Association was lobbying – whether any exemption under Item 1(d) disapplied by Note 5 – whether membership of Association restricted in accordance with Note 5 – whether defence to repayment of allegedly overpaid output tax on the ground of unjust enrichment
  • HM Revenue & Customs and Ford Motor Co Ltd v Brunnel Motor Co Ltd [2013] UKUT 6 -Value Added Tax – Whether original agreement for supply of cars discharged by subsequent agreement – Question of fact remitted by the Court of Appeal for determination by the First-tier Tribunal – Whether material error of law in determination of that question by the FTT – No – Appeal dismissed
  • Reed Employment Ltd v HMRC [2013] UKUT 109 – Value added tax (VAT) – what constitutes a new claim as compared to an amended claim under VATA section 80 – whether HMRC can rely on a defence of unjust enrichment in relation to claims made after 26 May 2005 – application of EU principles of effectiveness, equal treatment and fiscal neutrality

First Tier Tribunal

  • Longridge on the Thames v Revenue & Customs [2013] UKFTT 158 – VAT – whether building intended for use solely for a relevant charitable purpose – charity with objects of educating young people in water activities – construction of training centre – whether construction services zero-rated – whether charity carrying on a business/economic activity – no – Items 2 and 4 of Group 5 of Schedule 8 to VATA 1994 – Notes (6) and (10) to Group 5 – Articles 2, 9, 132 and 133 of VAT Directive – appeal allowed
  • Sandwell Metropolitan Borough Council v Revenue & Customs [2013] UKFTT 125 – VAT – single or  multiple supply- 10 year lease of memorial in a  crematorium and right to inscribed plaque – held single supply; nature of supply – held supply of letting of immovable property
  • Systems Aluminium Ltd v Revenue & Customs [2013] UKFTT 201 – VAT – overpayment of output tax charged by Appellant to business customer registered for VAT; reimbursement arrangements with HMRC; whether arrangement a binding contract; whether reimbursement arrangements ultra vires; Appellant crediting customer with reimbursement to reduce customer’s indebtedness to Appellant; whether reimbursement made “in cash or by cheque”; assessment to recover repaid VAT on grounds of unjust enrichment; whether Appellant unjustly enriched; whether Appellant incurred loss or damage through mistaken assumptions made in his case about the operation of VAT provisions; VAT 1994 s80(1)(3), 80(4A), 80B, 80(3B); VAT Regulations 1995, regulations 43B, 43C, 43G; whether Tribunal has jurisdiction to consider public law remedy; appeal dismissed
  • Tallington Lakes Ltd v Revenue & Customs [2013] UKFTT 159 – VAT – exempt supplies – pitches for mobile homes – voluntary disclosure for periods 04/89 to 12/96 – claim to repayment of output tax – Group 1 Schedule 6 VAT Act 1983 – seasonal pitches – supplies properly standard rated –  appeal dismissed
  • The Royal College of Paediatricians and Child Health v Revenue & Customs [2013] UKFTT 202 – VAT – Whether sale of property subject to agreement for lease  TOGC –  on facts – yes – Whether assessment to tax made timeously – no – Whether vendor of property required to repay input VAT to reflect partially exempt use of property by purchaser – no – appeals allowed

European Court of Justice

Tribunal decision on GST and use of industry benchmarks; ATO ID on input tax credits for employee reimbursements

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On Friday the Tribunal handed down its decision in Carter and Commissioner of Taxation [2013] AATA 141 and on Thursday the Commissioner issued ATO ID 2013/3 “Amount of input tax credits relating to employee reimbursements”.

In Carter and Commissioner of Taxation the Tribunal affirmed the Commissioner’s assessment for income tax and GST in respect of the applicant’s florist business. The basis of the assessment was that the BASs and income tax returns lodged by the applicant were based on a Cost of Goods Sold (COGS) of 83% of her reported business income, which was outside the COGS industry benchmark of between 44% and 54%. The Tribunal found that the applicant had failed to discharge her burden of showing the assessments were excessive. The Tribunal also rejected an argument by the applicant that the use of benchmarks by the Commissioner breached s 99 of the Commonwealth Constitution (which prevents the Commonwealth from giving preference to one State over another State). The applicant contended that the use of benchmarks were in appropriate for Western Australia as the costs of flowers and other items are more expensive than the eastern States. The Tribunal found that there was no factual basis for the contention, but found that it did not have jurisdiction to consider the question.

In ATO ID 2013/3 the Commissioner takes the view that the amount of input tax credit available under s 111-10 of the GST Act is reduced under s 11-30 if the acquisition is partly creditable. The issue was considered in the context of a financial institution where an employee is reimbursed for an expense that is related directly to his activities as an employee and is for an acquisition that was a taxable supply to the employee.

The basis of the Commissioner’s view is that while s 111-10 provides that the amount of the input tax credit is 1/11th of the reimbursement, and the section expressly overrides s 11-25 (which is about the amount of input tax credits for creditable acquisitions), s 111-10 does not override s 11-30 (which is about partly creditable acquisitions) so therefore, to the extent that the acquisition for the reimbursement relates to making input taxed supplies, the acquisition is not creditable. Having regards to the words of the various sections, while I can understand the reasoning behind the Commissioner’s view, in my view this approach may be doubted.

Section 111-10(3) states that s 111-10 has effect despite s 11-25 (and makes no express reference to overriding s 11-30). However, in my view it can be argued that s 111-10, by implication, also overrides s 11-30. The basis for that view is as follows:

  • s 11-25 states that “The amount of input tax credit for a *creditable acquisition is an amount equal to the GST payable on the supply of the thing acquired. However, the amount of the input tax credit is reduced if the acquisition is only *partly creditable.” (emphasis added). The underlined words shows that s 11-30 operates to reduce the input tax credit otherwise available under s 11-25.  Accordingly, if s 111-10(3) excludes s 11-25, it also (by implication) excludes s 11-30.
  • S 111-10(2) provides a stand alone mechanism whereby the input tax credit deemed by s 111-10(1) can be reduced – the Commissioner’s view is that s 11-30 operates as a further mechanism whereby that input tax credit may be reduced. If the intent of Parliament was to provide for the further reduction of the input tax credit on that basis, it could easily have said so.
  • The Explanatory Memorandum introducing Division 111 states that “the input tax credit is generally  equal to 1/11th of the actual reimbursement” and refers to the scope for reduction in s111-10(2) – no reference is made to a further scope for reduction under s 11-30.
  • Section 45-5 provides that the special rules (which includes Division 111) override the provisions of Chapter 2 “but only to the extent of any inconsistency”. In my view it can be argued that the provisions in s 111-10 are inconsistent with s 11-25 and s 11-30.

The effect of this construction is that the financial institution referred to in the ATO ID would be entitled to an input tax credit equal to 1/11th of the amount of the reimbursement, notwithstanding that the financial institution would be entitled to a lower recovery threshold for acquisitions made directly.