Category Archives: taxable supply

GST Private Rulings published in September 2012 – focus on grants of financial assistance and GST refunds

Posted on by

In September 2012 the Commissioner published nearly 60 private rulings dealing with GST issues on the Private Rulings Register.  A list of the rulings can be accessed here.

This month I would like to focus on a private ruling made on the difficult issue of whether grants of financial assistance are consideration for taxable supplies and a private ruling made on the perennial issue of GST refunds.

Private ruling No. 1012140548318 – grants of financial assistance

This private ruling deals with the difficult issue of whether grants of financial assistance are consideration for taxable supplies.  The private ruling is interesting because it involves the application of the Commissioner’s views in GSTR 2012/2 ‘Goods and services tax: financial assistance payments which was published earlier this year.  My analysis of that ruling can be accessed here.

The facts of the private ruling were as follows.  The applicant (A) was registered for GST and under the terms of a deed, B made a grant to A for the approved purpose, being the design, construction, delivery and installation of an item to be used in a specified location.

Clause A provided the following conditions for the grant:

  • to use the grant only for the approved purpose
  • to store, maintain, transport, clean, erect and dismantle the item
  • to make the item available to authorised users
  • to maintain proper financial records in relation to the grant
  • to disclose the grant as a separate and identifiable item in your financial statements
  • to provide annual audited financial statements
  • to keep the other party informed on progress and provide other information as agreed

Clause B provided that A was required to publicly acknowledge the assistance of the grant from the other party

Clause C dealt with the possible repayment of the grant, at the option of the other party, if A failed to apply the grant for the approved purposes.

Clause D stated that the grant did not include GST, but B agreed that if GST was payable the additional amount for GST would be paid.

Having regard to GSTR 2012/2, the Commissioner concluded that, viewing the arrangement as a whole, A made a supply to B for consideration and GST was payable on the grant.  The basis for this conclusion is that the terms of the deed go beyond providing a grant to enable A to acquire the item, which on its own could result in a mere expectation only (and no supply).  The additional clauses (including the obligation to make the item available to authorised users and to store, maintain, transport, clean, erect and dismantle the item) evidence that there is more than a mere expectation.  Further, it is only be building the item that the express obligations to maintain them and make them available to users can be fulfilled.

In coming to this conclusion, the Commissioner referred to the following example in GSTR 2012/2 where it was considered no supply was made because there is a mere expectation:

  • A local tennis club is seeking funding to enable them to resurface their privately owned tennis courts.  The local council provides financial assistance to the tennis club on the basis that the money is only used for the resurfacing of the tennis courts.
  • The local council has an expectation that the works will be carried out.  However, as there is no binding obligation on the tennis club to actually carry out the resurfacing of the courts, and there are no other goods or services passing between the parties there is no supply to the local council

As discussed in my analysis of the Ruling, the reasoning behind this example appears to be that the agreement with the local tennis club is not binding and it creates expectations alone. This may be a simplification of the arrangement between the parties, which in my view would necessarily involve a binding agreement, including the following terms (whether express or implied):

  • the funds will be used for no other purpose than to resurfacing the tennis courts; and
  • the funds will be repaid if the funds were not used for that purpose

If not, the payment would simply be a gift and the tennis club would be free to spend the money as it saw fit, including retaining the money.

The justification for departing from this example in the private ruling appears to the presence of additional obligations on A. However, those obligations only come into effect if A actually uses the grant to acquire the item.  There are no obligations on A to actually acquire the item, and in this regard it is difficult to see how a distinction can properly be made with the example of the local tennis club.

What this private ruling does show is the difficulty of drawing a line between those arrangements which, while being enforceable legal arrangements, involve no supply because there is simply an expectation on a recipient of the funds to do something, and those arrangements where there is an obligation on the recipient to do something.

The recent decision of the High Court in Commissioner of Taxation v Qantas Airways Ltd [2012] HCA 41 may also raise difficulties with the Commissioner’s approach in GSTR 2012/2.  Where a party receives a grant in return for entering into a deed (and thereby entering into legal obligations), applying the reasoning of the majority (that the airline made a taxable supply upon entry into contractual obligations), it is difficult to see how there could not a be a taxable supply.

Private Ruling No. 101224509666 – GST refunds

The register shows that a number of private rulings were published on whether the Commissioner would exercise his discretion in s 105-65 of Schedule 1 to the TAA to refund overpaid GST.  This ruling is interesting because it deals with the difficult question of taxpayers having to reimburse recipients for the overpaid GST before being entitled to a refund of the GST (and thereby be exposed to the cash flow issues and also the risk of the Commissioner refusing to pay the refunds).

In this case, where the recipients were not registered nor required to be registered for GST, the applicant proposed the following arrangement because it claimed that it was not in a financial position to first reimburse its customers:

  • the applicant would send a letter to each recipient notifying them of their entitlement to a refund of GST, to which those recipients must respond within a specified time frame and also agree to being charged an administration fee, which would be offset against the refund entitlement
  • based on the response of the customers, the applicant could confirm the exact quantum of the GST refund to be claimed (i.e., the refund claim would equate to the claims made by recipients)
  • any refund paid by the Commissioner would be held in an audited trust account for the benefit of customers and the funds would be solely used to refund GST to customers (subject only to the administration fees)

The Commissioner denied to exercise the discretion to pay the refunds, for the following reasons:

  • the Commissioner will generally not exercise the discretion in cases where the supplier has not reimbursed the unregistered recipients a corresponding amount of the overpaid GST, unless there are countervailing reasons for doing so
  • the applicant has not presented any countervailing reasons why the discretion should be exercised – in citing cash flow reasons, the applicant has not demonstrated that its circumstances are exceptional or different to any other entity that may refer to receive a refund in advance.
  • if the Commissioner was to exercise the discretion, it would result in increased costs of administration for the Commissioner – he would need to take appropriate measures to ensure that all the terms of the arrangement were complied with both before and after the refund was paid, otherwise there was a risk that the refund would not be passed on to end consumers and this would result in a windfall gain to the applicant.

In denying the discretion, the Commissioner was clearly concern about setting a precedent.  As noted in the private ruling:

If the Commissioner were to exercise the discretion in your circumstances, then all future requests for similar arrangements would have to be considered accordingly.  The wording of the legislation, and the public ruling, indicate that this is not the scope or intention of the legislation.

The Commissioner was also clearly concerned about having to assume an administrative burden in ensuring that the refund was eventually paid to the recipients. In circumstances where the applicant has entered into legally binding arrangements to pay the refunds to customers, and the refunds are placed in a trust account solely for the benefit of those customers, whether the Commissioner should properly undertake this administrative burden may be doubted.

In any event, this private ruling shows that the Commissioner is taking a very strict approach to the requirement that the overpaid GST first be reimbursed to the customers before any refund is paid to the supplier.

International cases update – September 2012 – single vs multiple supplies and possible impact of Qantas

Posted on by

In September 2012 the following cases dealing with VAT issues were published in the UK.  From my research there were no significant cases published in New Zealand or Canada.

It is notable that two of the decisions of the Tribunal involved the perennial question of whether a transaction involved a single supply or multiple supplies for VAT purposes.  My analysis of these decisions can be found here.  Also, as discussed in my analysis, one wonders whether the recent decision of the High Court in Qantas will impact on how Australian Courts will approach this question going forward.

United Kingdom

First Tier Tribunal

  • Chipping Sodbury Golf Club v Revenue & Customs [2012] UKFTT 557 – VAT – sporting exemption for golf clubs – Article 13A(1)(m) Sixth Directive – members’ subscriptions – single supply or multiple supplies – Card Protection Plan considered – held single supply – profit making proprietary clubs – whether entitled to exemption – no – appeals dismissed
  • Colin Summers & Christopher Summers v Revenue & Customs [2012] UKFTT 590 – VALUE ADDED TAX — registration — whether appellants trading as single partnership or as two differently constituted partnerships — on the evidence, two separate partnerships — appeal allowed
  • Goals Soccer Centres plc v Revenue & Customs [2012] UKFTT 576 – VAT – Single or multiple supplies; five-a-side football; Pitch hire agreements and management services of sports leagues; whether single supply or multiple supplies, whether artificial to split or artificial to combine; tests to be applied and factors to be taken into account; relevance of the principle of fiscal neutrality
  • Goodman Equine Ltd v Revenue & Customs [2012] UKFTT 565 – VAT – input tax claim refused – horse trading – is business test satisfied – no
  • JIB Group Ltd v Revenue & Customs [2012] UKFTT 547 – VAT – INPUT TAX – was professional independent trustee of pension schemes entitled to deduct VAT on services of third party advisers relating to schemes? – held yes – are amounts paid by schemes in relation to advisers’ services consideration for supplies of services by trustee? – held yes – do principles of legitimate expectation, fiscal neutrality and equal treatment lead to different result? – held no – appeal allowed
  • Lakeside Collector Cards v The Commissioners Revenue & Customs [2012] UKFTT 563 – VALUE ADDED TAX – Input tax – Change from cash accounting – Return submitted 2½ years late – Capping provisions – Whether input tax capped as from time return due or from time received by Respondents – Status of Respondents’ manual published on Internet considered
  • Lok’nstore Group Plc v Revenue & Customs [2012[ UKFTT 589 – VAT – INPUT TAX – partial exemption – whether standard method and special method produce fair and reasonable attribution of input tax – held yes – whether special method proposed by Appellant produces fairer and more reasonable result than standard method – held yes – appeal allowed
  • Nathaniel David Roden and Rebecca Catherine Roden v Revenue & Customs [2012] UKFTT 586 – VAT –  let of hotel accommodation by undisclosed agent – deemed supply by and to agent under s47(3) VATA – whether deemed supply to agent necessarily has same VAT status as deemed  supply by agent – no – whether Item 1(d) of Group 1 to Schedule 9 VATA only exempts supplies to physical user of accommodation – no – appeal allowed in principle
  • Westminster College of Computing Ltd v Revenue & Customs [2012] UKFTT 579 – VAT – EXEMPT SUPPLIES – education – whether appellant school – held no – whether appellant college of institution of UK university– held no – appeal dismissed

High Court allows Commissioner’s appeal in Qantas

Posted on by

Today the High Court handed down its decision in Commissioner of Taxation v Qantas Airways Ltd [2012] HCA 41.  By a majority of 4:1 (Heydon J dissenting) the Court allowed the Commissioner’s appeal and found that Qantas was liable to pay GST with respect to fares for travel which was not taken by passengers.

In summary, the view of the majority was that upon entry into the contract with passengers, Qantas made a taxable supply for consideration (being the fare) and GST was payable and attributable to the tax period in which the fare was received.  At [33] the majority said as follows:

The Qantas conditions and the Jetstar conditions did not provide an unconditional promise to carry the passenger and baggage on a particular flight.  They supplied something less than that.  This was at least a promise to use best endeavourrs to carry the passenger and baggage, having regad to the circumstances of the business operations of the airline.  This was a “taxable supply” for which the consideration, being the fare, was received.

My initial comment is that while this case involved the GST implications of a transaction which did not proceed to completion, the majority’s conclusion would appear to apply to all contracts, regardless of whether those contracts complete or not.  Accordingly, whenever a party enters into a contract and receives consideration (or provides an invoice), that party makes a taxable supply, with the supply being the entry into the obligations and or the provision of rights to the recipient.  This may raise a number of difficulties going forward.

In his dissenting judgment, Heydon J essentially approved of the reasons given by the Full Court.  In doing so, his Honour found that the expression “supply for consideration” connoted a bargained-for exchange of value for performance and identified the flight as what the passenger paid for. His honour also found that an interpretation of s 9-5 fastening on the latter supply (ie, the flight) conforms more closely to practical reality.

News Flash! High Court to hand down Qantas decision on Tuesday morning

Posted on by

The High Court email notification service shows that the Court will hand down its decision in the Qantas case on Tuesday morning at 10.15am.  The decision involves the GST treatment of fares paid by passengers who did not show for the flight.  The Commissioner appealed against the decision of the Full Federal Court that no GST was payable (the Full Federal Court having allowed Qantas’ appeal against the decision of the Tribunal that GST was payable).

The decision should appear on the High Court website and austlii during the day.

 

Tribunal hands down decisions finalising Wynnum Holdings and “son of holdback” cases

Posted on by

On Friday the Tribunal handed down its decisions in Wynnum Holdings No 1 Pty Ltd and Commissioner of Taxation [2012] AATA 616 and AP Group Limited and Commissioner of Taxation [2012] AATA 617

Wynnum Holdings

On 5 May 2011 the Tribunal handed down an interim decision ([2011] AATA 296) dealing with two preliminary matters, being whether the Commissioner’s claim was made out of time (“the timing issue”) and whether the Commissioner was prevented from recovering because of a ruling previously made in the Applicant’s favour (“the ruling issue”.  The Tribunal found against the Applicant on both these matters and found it necessary to decide the remaining issues of whether the Applicant was carrying on an enterprise at the time it purchased a property in 2003, or whether it was acting as bare trustee of joint venture parties (“the enterprise issue” and whether the property is properly characterised as “commercial residential premises” or “residential premises” (the commercial residential premises issue”).

The Tribunal found in favour of the Commissioner on both the remaining issues.  My analysis of the decision can be accessed here.

AP Group Limited

Also, the Tribunal handed down its final decision 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 and my post discussing that decision can be accessed here.

The decision confirms that adjustments for three of the incentives were to be made for the May 2007 and March 2008 tax periods (being the sample months for testing), thereby reducing the taxpayer’s net amounts for those tax periods.  In the interim decision, the Tribunal raised the the issue of whether the Commissioner could rely on the discretion in s 105-65 to refuse to pay the refunds and whether the Tribunal has jurisdiction to review such a decision.  The Tribunal did not appear to consider this issue.

GST private rulings for August 2012 – focus on Executors Commission and GST refunds

Posted on by

In August 2012 the Commissioner published over 40 private rulings on the Private Rulings Register dealing with GST issues.  A list of the rulings can be accessed here.

Of particular interest were private rulings dealing with the GST implications of Executors Commission and the perennial issue of GST refunds.

Private Ruling No.1012201810746 dealt with the question of whether GST was payable on executors commission to be received by an executor appointed to administer an estate. The Private Ruling found that GST was payable because the executor was carrying on an enterprise (he was already registered in respect of a farming business) and GST was payable.  While accepting that the appointment was a “one off”, the ruling found that the activity had the characteristics of a business deal and fell within the definition of “enterprise” in the GST Act.

This ruling has important implications for any person who takes an appointment as executor and seeks to recover executors commission.  Where a person is not registered for GST, there will only be an issue where the turnover threshold of $75,000 is exceeded.  However, where a person is registered (albeit in respect of a totally unrelated enterprise – in the case of the private ruling, the applicant was registered as a farmer), that person will be potentially exposed to a GST liability of 1/11th of the Commission.  This also raises the question of whether the Commission can be “grossed up” for the GST liability and whether the Estate should (or can) be registered for GST so that it can claim an input tax credit in respect of the GST.

Private Ruling No.1012202126278 dealt with the GST treatment of an out of court settlement payment and whether the Commissioner would exercise its discretion in s 105-65 of Schedule 1 to the TAA to refund the overpaid GST.  In the private ruling, the Commissioner confirmed that the payment was not subject to GST and that “on balance” the Commissioner would exercise the discretion to pay a refund of GST because he was satisfied that the settlement amount was set without taking GST into account and the applicant made a later decision to treat the amount as consideration for a taxable supply, meaning that the overpaid GST was not passed on to the recipient and the burden of the GST was borne by the applicant.

Last month the Treasurer released a controversial exposure draft for introduction of Division 36 into the GST Act, which is to replace s 105-65 of Schedule 1 to the TAA.  My post on the exposure draft can be accessed here and my analysis of the new provisions can be accessed here.  Under the new provisions, the same result would occur because the Commissioner accepted that no part of the overpaid GST was passed on to the recipient.

It is interesting that in the private ruling, no tax invoice was given to the recipient.  Under the proposed changes, if a tax invoice had been provided (which the applicant would have been required to do under the GST Act if required by the recipient), this would have provided “prima facie evidence” of the GST being passed on to the other entity.  In these circumstances, it is difficult to see how the mere fact of the provision of a tax invoice can potentially convert a situation where GST is not passed on, to one where GST is passed on.

Federal Court finds student accommodation is the supply of “commercial residential premises”

Posted on by

In ECC Southbank Pty Ltd as trustee for Nest Southbank Unit Trust v Commissioner of Taxation [2012] FCA 795 the Federal Court accepted the taxpayer’s contention that the supply of shared and studio style apartments was the supply of “commercial residential premises” and therefore taxable, rather than the input taxed supply of residential premises (as contended by the Commissioner).

The central question was whether the complex, as a whole, fell within paragraph (a) of the definition of “commercial residential premises”, being “a hotel, motel, inn, hostel or boarding house” or paragraph (f) as “anything similar to residential premises described in paragraph (a)”.

The Commissioner contended that none of the words “hotel”, “motel”, “inn”, “hostel” or “boarding house” described accommodation “similar to that which would be expected for those who own or rent a house or apartment”.  The Commissioner contended that a resident of the premises in question rented his or her accommodation in much the same way as a person would rent any apartment for the purpose of exclusive or shared residence.  The policy of the GST legislation was that “those renting a house or apartment are to be on the same footing as person who own their own homes – neither is to pay GST in connection with such occupation”.

The Court considered whether the premises in question were similar to each of the types of establishment referred to in the definition of commercial residential premises.  The Court found as follows:

  • there were a number of features which distinguished the premises from a hotel or motel
  • the premises bear a much closer resemblance to a hostel than a hotel.  While meals were not provided to residents as they might be in the case of a more traditional hostel, the Court found that this did not mean that the premises could still be fairly described as a hostel, or at least similar to a hostel.
  • the premises were not similar to an inn or boarding house.

The Court also placed weight on the attributes specified at para 15.12 of the Explanatory Memorandum to the 2006 amendments to the definition as normally found in commercial residential premises (the Court also noted that Greenwood J referred to these attributed in Meridien Marinas Horizon Shores Pty Limited v Commissioner of Taxation [2009] FCA 1594 at [74]):

  • are run by a controller for a commercial purpose;
  • have multiple occupancy;
  • are held out to the public as such;
  • have a central management;
  • provides services in addition too commercial accommodation;
  • are used for the main purpose of accommodation.

The Court found that the premises met all of these requirements.  In doing so, the Court noted as follows:

It is true that in comparison with some other types of establishment referred to in the relevant definition, the level of services provided in addition to accommodation may seem slight.  But the services provided by staff to residents through the reception desk are by no means insignificant and, considered along with all other relevant matters, confirm my view that the Urbanest premises are properly regarded as commercial residential premises for the purposes of the GST Act.

The Court also noted that the fact that accommodation is the principal place of residence of the individual concerns does not mean that the supply is not taxable as commercial residential premises.  In such circumstances, the Court noted that the value of the supply may be substantially reduced for GST purposes by Division 87.

It will be interesting to see whether the Commissioner appeals the decision to the Full Federal Court.

Commissioner publishes final GST ruling on retirement villages

Posted on by

Last week the Commissioner published GSTR 2012/3 ‘Goods and Services tax: GST treatment of care services and accommodation in retirement villages and privately funded nursing homes and hostels.  The ruling explains when care services and accommodation provided to residents in privately funded nursing homes, aged care hostels and serviced apartments in a retirement village are GST-free under ss 38-25(3), (4) and (4A).  The ruling was issued in draft as GSTR 2011/D5.  The transitional arrangements under the Ruling are that Fact Sheet ‘GST and serviced apartments in retirement villages”: NAT 12761 is withdrawn but for tax periods prior to the date of issue, the Commissioner will not seek to disturb the GST treatment where the taxpayer has followed and applied then news as set out in the fact sheet and also Issue 10 of the Retirement Villages Industry Partnership – issues register.

My analysis of the Ruling can be accessed here.

Tribunal hands down decision in “son of holdback” GST case – partial wins for both sides

Posted on by

Yesterday the Tribunal handed down its decision in AP Group Limited and Commissioner of Taxation [2012] AATA 409, involving the GST treatment of certain “incentive” payments by car manufacturers to dealers.  The decision follows from the earlier decision of the Federal Court in KAP Motors Pty Ltd v Commissioner of Taxation [2008] FCA 159 where car dealers successfully obtained refunds of GST paid on “holdback” payments.

A range of incentive payments were before the Tribunal.  In each case, the Tribunal had to decide whether the payments were properly characterised as consideration for supplies made the the applicant.  If they were not, an issue was whether the applicant was entitled to a refund of overpaid GST.  In this context, the operation of the Commissioner’s discretion in s 105-65 of Schedule 1 to the TAA was relevant.

The Commissioner’s first argument was essentially that by performing (or agreeing to perform) the obligations imposed by the Dealer Agreements and the various sales bulletins and incentive flyers, the applicant made a supply to the manufacturer and the incentive payments were consideration for that supply. In rejecting the Commissioner’s argument, the Tribunal noted as follows:

Given the breadth of the concept of supply – “any form of supply whatsoever”, and specifically “an entry into…an obligation to do anything” – it is not hard to see why the Commissioner submits that the Applicant made a supply to the manufacturer when it did, or agreed to so, any of those things.  But there is an air of unreality in such an outcome.  One could just as readily conclude that a retailed makes a supply to its wholesaler by taking on an obligation to pay for the goods it purchases, or that the wholesaler makes a supply not only of its goods, but also of the promise to deliver those goods in a timely fashion.  When one overlays on to the concept of “supply” the similarly broad concept of “consideration” – which includes not only payments but also any “any act or forbearance in connection with a supply” – it would follow, on this analysis, that the retailer probably makes a taxable supply to the wholesaler (of a promise to pay for the goods) and also that the wholesaler makes an entirely unexpected taxable supply of the promise to deliver goods on time.

…

In the context of the overall business relationships and contractual arrangements between the applicant on one hand, and the various manufacturers on the other we do not think that the Applicant’s acceptance of the obligations or the making of the promises is properly viewed as the making of supplies to the manufacturers.  Instead, they are part of the foundation underpinning the relationships, the background to the bargain the parties have made – in a sense, the rulebook by which the game is to be played.

If we are wrong with that, and the Applicant is to be regarded as making supplies to the manufacturers, we nevertheless do not think it is making taxable supplies to them.  The incentive payments are not made “for” or even “in connection with”, any such supplies. There is no nexus between the payment of the incentives and the making of the promises, the performance of the oblations, or the compliance with the manufacturers’ various rules and policies.  The Commissioner’s submissions do not grapple with the indisputable truth that, on his argument, the Applicant always carries on its business in a particular way (as it has agreed with the manufacturers to do), but it only gets paid for doing so in circumstances which warrant the payment of an incentive; otherwise the supply is provided for free.  We do not see how that can possibly be so.

The Commissioner’s second argument only related to some of the incentives before the Tribunal.  The argument was that these incentives (fleet rebate, run-out model support payment and retail target incentive payment) were consideration for the supply of a vehicle to the retail customer.  The Tribunal agreed with the Commissioner on the fleet rebate and run-out support payment and found that the payments were “in connection with” the supply of the vehicle to the customer.  The Tribunal found that there was not a sufficient connection for the retail target incentive payment as the incentive did not have a nexus with any one particular supply, but rather was paid in connection with supplies generally.

The result was that the applicant was successful in arguing that GST was not payable in respect for some of the payments.  This raised the issue of whether the Commissioner could rely on the discretion in s 105-65 to refuse to pay the refunds.  The Tribunal has asked the parties to provide submissions on whether the Commissioner had, in fact, made such a decision and if so, whether the Tribunal has jurisdiction to review such a decision.  This is an important development as in the past Tribunals have considered the operation of s 105-65 (see for example Luxottica Retail Australia Pty Limited and Commissioner of Taxation [2010] AATA 22).  Further, the question on jurisdiction would appear to extend beyond s 105-65, but also to the limitation provisions in s 105-50 and s 105-55.

Analysis of GSTR 2012/2 – financial assistance payments

Posted on by

On 30 May 2012 the Commissioner published GSTR 2012/2 ‘Goods and services tax: financial assistance payments’, which replaced GSTR 2000/11.  The Ruling outlines the Commissioner’s views on when a financial assistance payment is consideration for a supply made by the recipient of the payment.

The ruling is particularly important for government, community groups and not-for-profit entities as it seeks to outline when the recipients of financial assistance may have a GST liability (which would represent 1/11th of the payment).

My detailed analysis of the ruling can be accessed here.