Category Archives: taxable supply

Commissioner publishes draft Addendum to ruling on cancellation fees and two ATO IDs

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Yesterday the Commissioner published a draft Addendum to GSTR 2009/3 dealing with cancellation fees plus two ATO IDs dealing with the supply and transport of goods into Australia and increasing adjustments for unredeemed vouchers.

Draft Addendum GSTR 2009/3DA states that it amends GSTR 2009/3 to take account of the decision of the High Court in Commissioner of Taxation v Qantas Airways Ltd [2012] HCA 41, which considered the GST treatment of fares received for flights booked but not undertaken by prospective passengers. The High Court found that the fares were consideration for a taxable supply.

The thrust of the addendum can be found in proposed paragraphs 176A and 176B, which provide as follows:

176A. When an airline ticket is issued and the terms and conditions of the ticket are accepted by the customer, the supplier (usually the entity operating the airline service) enters into a contract with the customer.

176B. Accordingly, where a fare is paid to secure an airline ticket governed by contractually binding conditions of carriage in which the airline promises (subject to exceptions) to transport the passenger, it is considered that the airline makes a supply for consideration even if the passenger is subsequently a no-show.

Comments on the draft addendum are invited by 22 May 2013.

In ATO ID 2013/20 – GST and supply of goods and the transport of those goods into Australia the Commissioner takes the view that where a non-resident supplies goods to a recipient in Australia, that entity is not making a GST-free supply of international transport under paragraph (b) of item 5 in subsection 38-355(1) when it delivers those goods to the recipient in Australia. Rather, the supplier is making a composite supply of delivered goods to the recipient in Australia.

This ATO ID provides a guide as to the Commissioner’s application of his views in GSTR 2001/8 regarding mixed or composite supplies. The Commissioner’s approach was as follows:

If the delivery services are integral, ancillary or incidental to the supply of goods, the supply is a composite supply of delivered goods. A composite supply of delivered goods is treated as a single supply and takes its GST status from the dominant part of the supply, being the goods. If this is the case then Item 5 of the GST Act will not be relevant and therefore will not apply.

However, if the supply of goods and delivery has separately identifiable parts that require individual recognition due to their relative significance in the supply, the supply is a mixed supply…If the supply is a mixed supply then the delivery services can be considered separately to determine if that part of the supply meets the requirements of being GST-free under Item 5 of the GST Act.

The Commissioner took the view that the delivery of the goods was integral, ancillary or incidental to the dominant supply of goods.

In ATO ID 2013/24 – GST and increasing adjustments for unredeemed vouchers the Commissioner takes the view that an entity has an increasing adjustment under s 100-15 where it writes back to current income the unredeemed stated monetary value of expired gift vouchers. The Commissioner found that this was the case notwithstanding that historical data showed that some of these unredeemed vouchers could have been redeemed for GST-free supplies.

International cases update – December 2012/January 2013

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In December 2012 and January 2013 the judgments listed below were handed down in the UK dealing with VAT. Of interest is the decision of the Privy Council in Director General, Mauritius Revenue Authority v Central Water Authority (Mauritius) [2013] UKPC 4 where the perennial issue of characterising a transaction as a single supply or multiple supplies was raised, this time in the context of the Mauritius VAT legislation which was largely based on the UK legislation.

The issue was whether the Central Water Authority was entitled to input tax credits for acquisition of water meters to fit in customers’ properties. This depended on whether CWA made a single taxable supply of water (with the supply of the meters being ancillary or incidental supplies) or the supply of water and a separate exempt supply of the supply of water meters. The Courts below found in favour of CWA by adopting the long standing approach to issue established in Card Protection Plan Ltd v Commissioners of Customs and Excise [1999] 2 AC 601. However, the Privy Council allowed the appeal by the Revenue on the basis that it was open to the legislature to identify a “concrete and specific aspect” of what would otherwise be a single supply and to impose a different VAT treatment on that separate aspect. My analysis of the decision can be accessed here.

United Kingdom

Privy Council

First tier Tribunal

  • Cambrian Hydro Power Ltd v Revenue & Customs [2012] UKFTT 764 – VAT – effective date of registration – request to backdate – statutory power – HMRC administrative procedure – genuine error on part of applicant – error unknown to HMRC – whether HMRC acted reasonably – matter sent back for further decision
  • Groundwork Cheshire v Revenue & Customs [2012] UKFTT 750 – VAT –  consideration for supply – Article 73 Principal VAT Directive – subsidies directly linked to the price of the supply – provision  of free environmental consultancy services to businesses – funding from third party – whether payments  amount to consideration – yes –  appeal allowed
  • Hawes & Curtis Ltd v Revenue & Customs [2012] UKFTT 758 – VATA 1994 s24 – input tax – supplies not made to taxpayer – whether input tax reclaimable – whether supplies to agent on behalf of taxpayer – taxpayer ultimate beneficiary – absence of relationship between supplier and beneficiary –  appeal dismissed
  • Market & Opinion Research International Ltd v Revenue & Customs [2013] UKFTT 779 – VAT – INPUT TAX – Fleming claim for unclaimed input tax for period 1 January 1986 to 30 April 1997 on the fuel element of mileage allowances reimbursed to researchers engaged by the appellant – HMRC’s application to amend Statement of Case granted  – Tribunal’s jurisdiction was  appellate rather than supervisory on the  issue of whether appellant had  previously recovered the input tax which was the subject of the claim.
  • McAndrew Utilities Ltd v Revenue & Customs [2012] UKFTT 749 – VALUE ADDED TAX – input tax – section 24 VATA 1994 – regulation 29(2) VAT Regulations 1995 – whether there were taxable supplies by taxable persons – whether the appellant in possession of valid VAT invoices to support its input tax claim – discretion as to alternative evidence of the charge to VAT – appeal substantially dismissed but allowed in part
  • Nettermedia.com Ltd v Revenue & Customs [2013] UKFTT 50 – VALUE ADDED TAX — discounted price sales — customers paying monthly fee for right to buy at discounted price — whether fee taxable if no goods bought — yes — appeal dismissed
  • Noble v Revenue & Customs [2012] UKFTT 760 -Value Added Tax – Whether supplies made – Input tax recovery – evidence required to discharge burden – insufficient evidence – appeal dismissed
  • South African Tourist Board v Revenue & Customs [2013] UKFTT 780 – VAT – statutory body funded by government under performance agreement – whether supply for consideration – whether economic activity – no

ATO publishes ID on points fees for loyalty programs; Tribunal decision on GST refunds and time limits

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Earlier this month the ATO published ATO ID 2013/1 “GST and points fee in a loyalty program” which takes the view that a loyalty program operator is making a taxable supply to a program partner where it allocates points to members in return for a points fees and those points would be redeemed by members for vouchers which are subject to the voucher provisions in Division 100 of the GST Act. The ATO ID applies the views of the Commissioner in GSTR 2012/1 that the supply of points by the program operator to the program partner is a supply of rights, being the rights that program members obtain on receiving points.

In Dandenong Motors Unit Trust and Commissioner of Taxation [2012] AATA 920 the Tribunal found that the applicant was not entitled to a refund of overpaid GST paid in respect of holdback payments beyond the four year statutory time period to the extent that the applicant’s net amount was negative.  The case dealt with the construction of s 105-55 before its amendment in 2008.  The applicant contended that the effect of the decision of the Federal Court in KAP Motors Pty Ltd v Commissioner of Taxation [2008] FCA 159 was that the limitation period in s 105-55 (prior to its amendment) only had application to GST paid on supplies – the provision did not apply to GST paid in respect of arrangements which were not supplies.  The Commissioner accepted that the applicant was entitled to a refund of overpaid GST to the extent that it reported a positive net amount in its monthly GST returns, but contended that s 105-55 operated to restrict that entitlement to the extent that its net amount was a negative amount. The Tribunal found that the applicant’s contention was based on a misunderstanding of what the amendments in s 105-55 (and s 105-65) were intended to do.  Further, at all relevant times, s 105-55 limited the right to refunds of negative net amounts.

ATO publishes guide on Division 81 payments

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The ATO has published on its website a helpful guide to assist government agencies to determine whether GST applies to a government charge or whether the charge is exempt from GST under Division 81 of the GST Act.  The guide can be accessed here.

The current determination of the Treasurer, which lists government charges that are exempt from GST, no longer applies from 1 July 2013.  From that date, government agencies must review their government charges to self-assess whether GST is payable.

UK Tax Tribunal finds VAT not payable on retained overpayments

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In Borough Council of King’s Lynn and West Norfolk v Revenue & Customs [2012] UKFTT 671 the UK First Tier Tax Tribunal found that the Council was not liable to pay VAT on overpayments made by members of the public in respect of car parking.  The Council operated ticket vending machines which displayed sliding scale hourly parking charges and indicated that overpayments were accepted but no change was given.  The overpayments occurred where members of the public voluntarily paid more for a parking ticket than they were required to pay (for example if they did not have the correct change), which ranged between 2.25% to 3.46% of total payments per year.

The Revenue submitted that there was a supply of services by the Council and VAT was payable on “the whole consideration paid or payable”.  Further, the parking ticket confirmed the full payment as being made for the supply.

The Council submitted that the payment was ex gratia and the member of the public gets nothing in return for the payment.  There was no link between what is supplied and what is received – in the absence of the nexus, the overpayment cannot be treated as consideration for the the purposes of VAT.

In considering the issue, the Tribunal made the following statement of principle:

There must be a direct link between the supply made and the consideration given.  The supplier would normally expect something in return for a supply and will not fulfil their contractual obligation unless payment is received or forthcoming.  If there is no direct link between the supply which is made and the payment received or if a party was not obliged to pay then it cannot be said that there was consideration for the supply.  There must be some form of reciprocity between the parties.

In finding for the Council, the Tribunal observed that the fact that a party receives a sum of money does not mean that that sum represents consideration.  What was missing in this case was a direct link between what is supplied and what is paid for.

In the Australian context, the “nexus” is broader (being “in connection with” rather than a direct nexus between supply and consideration).  The question would be whether the overpayment was received “in connection with” the supply of car parking – or to use the approach adopted by the Commissioner – whether there was “a substantial relation, in a practical business sense”, between the overpayment and the supply.  The application of the nexus was recently considered by the Tribunal in AP Group Limited and Commissioner of Taxation [2012] AATA 409 dealing with the GST implications of various motor vehicle incentive payments.  The pending appeal of that decision to the Federal Court may well provide some guidance as to how the issue considered in the UK Tribunal should be dealt with in the Australian context.

UK Tribunal looks at whether retailer entitled to refund of VAT for goods paid for by fraudulent use of credit cards – is there a supply?

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In Dixons Retail plc v Revenue & Customs [2012] UKFTT 666 the UK Tax Tribunal has referred to the ECJ the question of whether a retailer is required to account for VAT on the sales of goods paid for by the fraudulent use of credit cards where the retailer has not been required to repay the payments received from the issuing banks.

This case raises the interesting question of whether the retailers made a “supply” of goods to the customers, notwithstanding that the goods were obtained by fraudulent means.  The context of the dispute has a similarity with the recent decision of the High Court in Qantas as in both cases the taxpayer received a payment in circumstances where the “intended transaction” does not proceed but is entitled to retain the funds received. If a supply is nevertheless made, VAT/GST is payable.  If a supply is not made, the taxpayer receives a financial benefit with no VAT/GST consequences.

While the Tribunal referred the question to the ECJ, it is interesting to consider the arguments put by both parties.

The taxpayer made the following submissions:

  • the presence of a legal relationship requiring reciprocal performance is a fundamental criterion to the identification of a “supply of goods”
  • the existence of a supply will primarily be determined by the terms of the agreement between the retailer and the cardholder
  • it has already been held that obtaining goods by illegal means (theft) does not equate to a transfer of a right to dispose of tangible property as owner – there is no legitimate distinction to be drawn between goods obtained illegally by theft and those obtained by credit card fraud
  • any payment received by the retailer only forms part of the “taxable amount” to the extent that there is a direct link between the goods provided and the consideration received.  In the circumstances of a fraudulent card transaction there is no reciprocal assumption of any obligation by the fraudster in connection with the payment for the goods and thus no direct link between any sum received by the retailer and the release of the goods
  • it is crucial to identify what the payment is “for”

The Commissioner made the following submissions:

  • there is plainly a supply of goods by the retailer to a customer where the customer fraudulently uses a credit card which he knew he was not authorised to use – in the course of the transaction the relevant goods were handed over to the fraudulent customer by the retailer in the same way a they would have been to any other customer
  • the transactions are not identical to the theft of goods – the latter is a unilateral undertaking by the thief, with nothing agreed and no relationship between the thief and the owner
  • the state of mind, motive or dishonest intent of a customer is not relevant to whether there is a supply – an objective approach is required.  A transaction is not prevented from being a supply because it involved some fraud and is therefore unlawful
  • the retailer received payment of the price of the goods from the third party bank – the payment was directly linked to the making of the supply of the goods to the customer – this payment constituted third party consideration for the supply of the goods

While the UK VAT system is different to here, in particular the UK requires a “direct link” between supply and consideration whereas here the link is the broader “in connection with”.  Nevertheless, the views of the ECJ on this issue may well have relevance in the Australian context.


Commissioner issues Decision Impact Statement for Qantas

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On Friday the Commissioner issued his Decision Impact Statement for the decision of the High Court in Commissioner of Taxation v Qantas Airways Ltd [2012] HCA 41.

Some highlights from the Commissioner’s views in the statement include:

  1. The decision does not cause any significant change in the way the Commissioner approaches ‘supply’ or the nexus between supply and consideration.
  2. In cases where a payment is made on entry into a contract which secures rights (whether conditional or not) to a further supply, the Commissioner considers that the payment will be consideration for a supply consisting of at least the provision of those rights (and entry into the corresponding obligations), even if the further contemplated supply is not ultimately made
  3. There is nothing in the Qantas decision that would suggest that supplies need to be ‘dissected’ into their component parts, or that the focus of GST should be on contractual rights and obligations instead of performance.
  4. The Commissioner maintains the view, as recognised in his public rulings, that in many cases, the entry into contractual obligations and corresponding creation of rights should be construed, where relevant, as part of a composite supply that includes the performance of those obligations.

The views of the Commissioner in the Decision Impact Statement will likely cause much discussion.  For my part, I am not sure that matters 2, 3 and 4 sit comfortably together.

PSLA issued on retaining GST refunds pending verification; Appeals update on “son of holdback” – Commissioner lodges Cross Appeal

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In the wake of the Multiflex decision, Tax and Superannuation Laws Amendment Act (2012 Measures No.1) Act 2012 was introduced to amend the Taxation Administration Act 1953 to allow the Commissioner of Taxation to hold refunds for verification prior to payment.  Yesterday, the Commissioner published PSLA 2012/6 ‘Exercise of the Commissioner’s discretion under section 8AAZLGA of the Taxation Administration Act 1953 to retain an amount that would otherwise have to be refunded’.  The purpose of the practice statement is to provide guidance to tax officers on when it is reasonable to exercise the Commissioner’s discretion to delay a refund amount pending verification of the taxpayer’s entitlement to the amount.

An analysis of the practice statement will be posted next week.

Appeals update

In September the Tribunal handed down its decision in in AP Group Limited and Commissioner of Taxation [2012] AATA 617, finding that the taxpayer’s objection was partially allowed, on the basis that certain incentive payments were not consideration for a supply.  The Tribunal handed down its interim decision in July 2012, [2012] AATA 409.

The Federal Court portal shows that on 12 October 2012 the taxpayer lodged an appeal to the Federal Court.  Also, on 19 October 2012 the Commissioner lodged a cross-appeal.  Given both parties have appealed, it would appear that the Federal Court will have an opportunity to consider one of the fundamental planks of GST, namely whether payments are consideration for, or in connection with, a supply.

The matter has been set down for directions on 6 November 2012.  Because the decision was by two Deputy Presidents, the appeal can be heard by the Full Federal Court (rather than a single Judge) if considered appropriate. One would expect that this would likely be the case.

My post discussing the Tribunal’s decision can be accessed here.

International cases update – October 2012: analysis of three decisions with Australian implications

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In October the following decisions dealing with VAT and GST were handed down in the UK and Canada.  From my research no decisions were handed down in New Zealand.

This month I have analysed three decisions, each of which has potential interest in the Australian context:

  • Whether a payment received under a Settlement Agreement in respect of the breach/termination of an agreement is taxable in Canada: Surrey City Centre Mall Ltd v The Queen 2012 TCC 346.  The Canadian legislation has a specific deeming provision which treats payments for the breach of an agreement to make a taxable supply to be consideration for that taxable supply.  Australia contains no such provision and whether such a payment is taxable depends on whether it is consideration “in connection with” a supply. Under the current view of the Commissioner in GSTR 2001/4, the payment would not appear to be subject to GST as it is in the nature of damages.  However, the recent decision of the High Court in Qantas gives cause to revisit the issue.  My analysis of the decision can be accessed here.
  • Whether the supply of “hot food” in UK is taxable or zero-rated: Sub One Limited T/A Subway v HMRC [2012] UKUT 34.  The Upper Tribunal found that the subjective test applied by the Courts since 1988 was contrary to EU law, which required that an objective test be applied.  This raises the question of whether the test to be applied in Australia is subjective or objective.  My analysis of the decision can be accessed here.
  • Whether the sale of goods sold online where a charge was imposed for postage involved the single supply of delivered goods (all taxable) or two supplies: Orchardcrown Ltd v Revenue & Customs [2012] UKFTT 608. The Tribunal applied the established principles in Card Protection Plan and found there was a single supply.  In light of the recent decision of the High Court in Qantas, this raises the question of whether that test will continue to be applied here.  My analysis of the decision can be accessed here.

United Kingdom

Upper Taxation Tribunal

  • HMRC v The Rank Group Plc [2012] 347 – whether imposing VAT on gaming machines a breach of the principle of fiscal neutrality
  • Sub One Limited T/A Subway v HMRC [2012] UKUT 34 – Value Added Tax – zero-rating – Value Added Tax Act 1994 Schedule 8 Part II Group 1 Note (3)(b)(i) – food – toasted sandwiches and meatball marinara – whether heated for the purposes of enabling it to be consumed at temperature above ambient air temperature – whether legislation and/or interpretation and/or application thereof infringed principle of fiscal neutrality – whether FTT findings irrational – application to adduce further evidence – for my case analysis click here

Tax Tribunal

  • Damazda International UK Ltd v Revenue & Customs [2012] UKFTT 615 – Value Added Tax Act 1994 sec 84(7B) &  Sch 11 para 6A – Directive 2006/112 Art 273 – Direction to keep records – scope of appeal jurisdiction – proportionality – risk of tax loss – appeal allowed
  • Isle of Wight Council v Revenue & Customs [2012] UKFTT 648 – Value Added Tax – Taxable person – Local authority – Provision of off-street car parking – Impact of exemption on relevant market – Distortion of competition – Whether local authorities taxable persons in respect of provision of such parking – Questions referred to ECJ for determination – Application of ruling of ECJ (Case C-288/07) – EC Council Directive 77/388, art 4(5) (now art 13 of Directive 2006/114)
  • Kandiah Skandamoorthy v Revenue & Customs [2012] UKFTT 638 – VATA 1994 s73 – incomplete records – assessment to ‘best of their judgment’ – whether all relevant evidence taken into account – prolonged delays by taxpayer – appeal dismissed
  • Orchardcrown Ltd v Revenue & Customs [2012] UKFTT 608 – VAT – output tax – supply of goods with charge for postage – whether a single supply – whether supplier acts as agent for customer in contracting with Royal Mail – Customs & Excise Commissioners v Plantiflor Ltd considered – single supply by appellant – no agency established – appeal dismissed
  • Pinevale Ltd v Revenue & Customs [2012] UKFTT 606 – Value Added Tax – Reduced rate supply – Energy saving materials – Insulation for roofs – Polycarbonate panels for conservatories – Panels supplied to create new roof – Panels supplied to replace existing panels – Radiation reflector strips installed in  existing panels – Whether energy saving materials comprising insulation for roofs – Appeal allowed

Canada

Tax Court

Commissioner issues ATO ID on whether council rates are an “Australian tax” for the purposes of Division 81 of the GST Act

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On Friday the Commissioner issued ATO ID 2012/87 ‘GST and Division 81 of the GST Act: whether payment of general rates imposed by local government is an ‘Australian tax” for Division 81 purposes.  The view of the Commissioner is that general rates are an “Australian tax” for the purposes of s 81-5(1) of the GST Act, so that general rates are not subject to GST.

An “Australian tax” is defined as a tax imposed under an ‘Australian law’, which is defined to be a law of the Commonwealth, State or Territory.  The power to charge rates is found in the Local Government Act (being a legislative act of State Parliament).  Further, the rates as a “tax” because they are “a compulsory exaction of money by a public authority for public purposes, enforceable by law, and is not a payment for services rendered”: referring to Matthews v Chicory Marketing Board (Vict) (1938) 60 CLR 263 per Latham CJ.

The Commissioner also relied on the long-standing High Court decision in The Municipal Council of Sydney v The Commonwealth (1904) 1 CLR 208, where all three judges found that the municipal rates in question were taxes within the meaning of s 114 of the Constitution.

I note with interest that the Commissioner also refers to this decision in GSTR 2006/5 ‘GST: meaning of ‘Commonwealth, a State or a Territory’, where the Commissioner states as follows:

…all three judges found that the Council was the “State” for the purposes of s 114.  The power delegated to the Council, by State legislation, which allowed the Council to levy rates, was the determinative factor in that case.

Somewhat surprisingly, in that ruling the Commissioner contends that there is no general proposition that local governments are “State” for the purposes of s 114 of the Constitution, and that the legislation constituting a particular local government must be considered.  This contention is made notwithstanding the subsequent approval of The Municipal Council of Sydney by the High Court in Essendon v Criterion Theatres Pty Ltd (1947) 72 CLR 1 (per Latham CH at 13, Dixon J at 17, McTiernan J at 27), Deputy Federal Commissioner of Taxation v State Bank of NSW (1992) 174 CLR 219 (per the Court at 25), SGH Ltd v Commissioner of Taxation (2002) 210 CLR 51 (per Gummow J at [47]), Roy Morgan Research Pty Ltd v Commissioner of Taxation [2011] HCA 35 (per the six judge majority at [23]-[24]).

It is difficult to understand the basis for the Commissioner’s contention.  No examples are given where the legislation in question does not constitute local councils as “State”.  It is instructive to consider the following extract from the Court in Deputy Federal Commissioner of Taxation v State Bank of NSW (at [25]):

Indeed, the decision in The Municipal Council of Sydney v The Commonwealth is direct authority for the proposition that a corporation exercising governmental functions is “a State” for the purposes of s 114.  In that case the municipal council, a body corporate, which levied local government rates on property, was held to be the State and its rates were held to be a tax on property for the purposes of that section.

Given the above statement, for the Commissioner’s contention to succeed it would arguably need to be shown that the terms of the legislation constituting a local council were such that the local council was no longer exercising governmental functions.  This would include, presumably, the government function of levying rates on properly held by its constituents.  I am not aware of any of the various State Acts in question being drawn in such terms.