Today the Commissioner issued GSTR 2012/2 – Goods and services tax: financial assistance payments.  The Ruling replaces GSTR 2000/11 Goods and Services Tax: grants of financial assistance.

The Ruling was previously issued in draft as GSTR 2011/D4. For my analysis of the draft ruling, click here.

In my analysis of the draft Ruling, I considered the following issues to be noteworthy:

• the draft ruling helpfully seeks to deal with matters not directly covered by GSTR 2000/11, such as sponsorship and tripartite agreements;
• the draft ruling appears to take a narrower view on what constitutes a taxable supply for a financial assistance payment than in GSTR 2000/11; and
• the draft ruling sets out detailed transitional rules which appear to envisage the potential for refund claims for those taxpayers who have relied on the broader scope of taxable supply in GSTR 2000/11.

A more detailed analysis of the Ruling will follow next week, as at present preparation for the High Court appeal in the Qantas case (which is being heard on Monday 4 June 2012 in Brisbane) is occupying my time.  However, based on a preliminary review of the Ruling it appears that the comments in my analysis of the draft Ruling remain relevant and there is scope to seek refunds of GST, which seems to be acknowledged by the Commissioner, given paragraphs 88-91 of the Ruling which state as follows:

88. As this final ruling can apply before its date of issue, where there is a discrepancy between GSTR 2000/11 and this Ruling, taxpayers can choose to apply this Ruling.

89. Where entities have relied on GSTR 2000/11 to treat a supply as a taxable supply before the date of issue of this Ruling and the supply is not a taxable supply under the views expressed in this Ruling, they may choose to seek a refund for past overpaid GST if it is within relevant time limits and the payer is first refunded the overpaid amount.

90. Where entities have relied on GSTR 2000/11 to determine that they did not make a taxable supply and the supply is a taxable supply under the views expressed in this Ruling, they may choose to pay GST on that supply.  If GST is paid on the supply the payer may be entitled to an input tax credit.

91. Where, entities rely or have relied on this Ruling or GSTR 2000/11 to determine that there is no GST payable on that supply, there is no input tax credit available to the entity making the payment.

In Norwich Airport Ltd v Revenue & Customs [2012] UKFTT 277 the Tribunal found that VAT was payable by an airport operator in respect of a levy imposed on departing passengers.  The purpose of the levy was to raise funds to enable the airport operator to carry out improvements and enhancements to its infrastructure and passenger facilities at the airport. While the Tribunal found that there was not a relevant nexus between the levy and the improvement works, there was a relevant nexus between the levy and the ability to pass through the gates (permitting access) and to proceed through the security check and thereafter be in a position to take the flight. As permitting access to land is a supply, that supply was subject to VAT.

The case provides an analysis of the “nexus” rules in the UK, which require a “direct” nexus between supply and consideration.  In finding that there was not a sufficient nexus between the levy and the improvements to the airport, the Tribunal stated:

There was no direct link because the benefit of the improvement words would be for airlines and passengers generally and the payment of the levy by each individual passenger had no direct relationship to the level of benefit, if any, he might receive.  A person could pay the levy and never use the airport again and therefore entirely fail to benefit from any of the improvements. As a matter of English law, there was not even a contract for the improvement works because the explanation of what the ADF would be used for was no more than a statement of intent by NAL and far to vague to amount to an enforceable contract with the passengers paying the ADF.

The above statement has some similarities to the Commissioner’s approach  to Funding Arrangements in GSTR 2011/D4, where the existence of a “sufficient connection” between the payment and some action to be taken by the recipient would appear to depend on whether the recipient enters into an obligation to take that action (see example 3 at paras 28-30).

The case also provides an illustration of how Courts look at the actual legal relationship between the parties, rather than the labels put on transactions.  The airport operator argued that the payment was a fund raising levy, equivalent to the imposition of a levy by a statutory body. The Tribunal noted that the airport operator did not have any statutory revenue raising powers and posed the question “So why did passengers pay the levy?”.  In answering that question, the Tribunal found that the passengers did not pay a levy, they bought a ticket which entitled them to pass through the automatic gates and ultimately on their journey.

Earlier this month the UK Upper Taxation Tribunal handed down its decision in Vehicle Control Services v The Commissioner for Her Majesty’s Revenue & Customs [2012] UKUT 130. The Upper Tribunal dismissed the taxpayer’s appeal from the Tax Tribunal and found that the penalty parking charges were not damages in trespass and, as there was no contract between the parking operator and the motorist, the penalty charges could not constitute damages for breach of contract.  However, the Upper Tribunal found that the parking charges were received by the taxpayer as consideration for the parking control services provided by the taxpayer to the landowner.

The case provides an interesting analysis of a tripartite arrangement and how, as found by the Upper Tribunal, two sets of obligations are said to be “triangulated” into a single supply.

Facts

The facts of the case can be simply stated:

• The taxpayer entered into contracts with landowners to provide “parking control services” to the landowners.  Under those agreements, the taxpayer’s obligations included erecting warning signs, issuing parking permits for authorised vehicles, inspecting the car parks and taking enforcement measures which included the issue of parking charges, vehicle immobilisation and towing, with consequent fees for release.  The taxpayer was to collect and could retain all parking enforcement charges.
• In return for the services, the landowner agreed to pay a registration fee (on signing the contract) and an annual fee for each of the warning signs, plus ensure that all vehicles authorised to use the car park clearly displayed the permits on their windscreens
• The warning signs set out the requirements for valid permits or tickets to be displayed, various other rules and charges that were imposed for failure to comply with the rules – the signs also stated “You are entering into an a contractual agreement.  Do not park in this area unless you fully understand and agree to the above contractual terms”.
• If a car was parked in contravention to the rules, the taxpayer could issue a “parking charge notice” which was placed on the windscreen of the car.  The notice was enforced by the taxpayer who retained the charges.
• The issue was whether the taxpayer was required to account for VAT on those charges.

The trespass issue

The First-tier Tribunal concluded that the charges were not damages for trespass because the taxpayers had not been given the right to occupy the land.  Rather, the taxpayer had been given a licence to enter the land for the purposes of the agreement but had not been given any rights of possession.  Accordingly, the taxpayer could not bring an action for trespass as principal but could only do so as agent for the client.  The Upper Tribunal agreed.

The contract issue

The First-tier Tribunal found that the arrangements constituted a contract between the taxpayer and the motorise, but that the parking charges were not damages for breach of contract, but rather were paid as a condition of the contract and therefore constituted consideration for a supply of services.

On appeal, the taxpayer contended that the Tribunal was correct to find that there was a contract wt, but that it should have found that the charges were outside the scope of VAT as they were either a penalty or damages.

Interestingly, both parties agreed that, if there had been a contract between the taxpayer and the motorist, the parking charges would not have been payment for a supply made under the contract – reference was made to a decision of the VAT Tribunal, Bristol City Council (No 17665, 15 May 2002) in which, on the facts of that case, a contract between the Council and motorists entering a Pay and Display car park had been held to have been created, but that the excess charges were not consideration for the supply of parking services under that contract – the excess charges did not arise until the right to park had been lost.  One can see similarities with that approach in the judgment of Emmett J in American Express International Inc v Commissioner of Taxation [2009] FCA 683  (at [52]-[58]) where his Honour found that “late payment fees” on credit cards were not “in connection with” the provision, acquisition or disposition of the credit – but were payable by reason of a novas actus interveniens, namely the card holder’s breach of the credit card terms and conditions.

The Upper Tribunal disagreed with the First-tier Tribunal and found that there was no contract between the taxpayer and the motorist.  This was because the taxpayer was not in a position, by virtue of its limited licence and notwithstanding the words in the warning statements about the motorists entering into a contractual agreement, to make any offer of a right to a park.  Accordingly, the penalty charges could not constitute damages for breach of such contract.

The Upper Tribunal then found that the only relevant contract was between the taxpayer and the landowner, and, in finding that the parking charges were consideration to the taxpayer for providing parking control services to the landowner, the Upper Tribunal said as follows:

…there are two sets of obligations that are being “triangulated”.  The first set of obligations is between the client (acting through its agent, VCS) and the motorist, and the second is between VCS and the client.

The legal analysis is that VCS collects the various parking charges as agent for the client, which represents damages for trespass, or for breach of a contract between the landowner and the motorist.  Such payments are outside the scope of VAT.

By allowing VCS to collect and retain the charges, the client was giving consideration, or further consideration, to VCS for its parking control services under the contract.  That was consideration for the standard-rated supply by VCS to the client.

As far as I am aware, the concept of “triangulation” of obligations is yet to find its way into the Australian GST system.  A search of austlii and the ATO legal database registered no hits.

Today the Commissioner issued two ATO IDs on the implications of intra-GST group supplies where an entity subsequently leaves the GST group.  The IDs illustrates the problems that may arise due to the GST Act failing to include rules dealing with the time of supply.  In particular, in the second ID, the Commissioner appears to address the issue by inserting words into the legislation which are simply not there – in recent times the Federal Court has been reluctant to adopt such an approach.

ATO ID 2012/33 Goods and Services Tax: intra-group supply when an invoice is issued after recipient leaves a GST Group

The issue is whether s 48-40(2) of the GST Act applies to a supply made by entity A to entity B if it is made when the entities are in the same GST group, but the related invoice is issued when entity B is no longer a member of the GST group.  The Commissioner considers that the answer is yes – so that the supply is not a taxable supply as it was made at a time when both entities were members of the GST group.

The Commissioner acknowledges that the GST Act is silent on the issue of when a supply is made, also noting that Division 29 deals with attribution only and does not address the time of supply.

ATO ID 2012/34 Goods and Services Tax: intra-group supply of services that is partly performed after the recipient leaves the GST group

The issue is whether s 48-40(2) of the GST Act applies to a supply of services made from entity A to entity B, to the extent that the services are performed at a time when they are in the same GST group, despite the fact that some of the services are performed when B is no longer a member of the GST group.  The Commissioner considers that the answer is yes, but only to the extent that the supply was performed when both entities were members of the GST group.  To the extent that the services were performed after B left the GST group, the supply will be taxable.

The Commissioner saw the issue as whether s 48-40(2) applied “to the extent” that the supply was made when both entities were members of the GST group. Notwithstanding that the section does not contain those words, the Commissioner is of the view that the section should be interpreted in such a way as to allow apportionment of the supply – this is an interesting view, particularly considering the recent focus of the Courts on the words of the legislation, rather than taking a purposive view.  The basis for the Commissioner’s view is stated as follows:

At the time immediately following Entity B leaving the GST group, Entity A is still making a supply by continuing to perform the service, however from this point in time there is no longer a ‘supply that entity makes to another member’, because Entity B is not ‘another member’ for the purposes of paragraph 48-40(2)(a).  As such, a reasonable interpretation is that to the extent that the supply of services is performed after the recipient ceases to be a member, paragraph 48-40(2) no longer has application to that part of the supply.  Paragraph 48-40(2)(a) can be interpreted in this way, despite the absence of the words ‘to the extent’ in the provision.

One may question whether a Court would adopt such an approach, as it involves inserting words into the section which are not there.  What this ID does illustrates is the problems that can arise by reason of the GST Act not having any rules dealing with time of supply.

Today the Assistant Treasurer released an exposure draft regulation and explanatory statement specifying the GST treatment of certain Australian government fees and charges.

The Treasury release states that exposure draft regulations prescribe fees and charges that will be treated as GST exempt, and fees and charges that will be treated as taxable supplies from 1 July 2012.  Also, the draft regulations will also ensure that the GST treatment of particular goods and services supplies by governmental related entities is consistent with the principles contained in the Intergovernmental Agreement on Federal Financial Relations.

Please see the following links:

• Treasury page
• Exposure draft regulations
• Explanatory statement

Submissions are due by 30 May 2012.

Yesterday the Commissioner published two rulings dealing with the GST treatment of farm-out arrangements;  MT 2012/1 Miscellaneous taxes: application of the income tax and GST laws to immediate transfer farm-out arrangements and MT 2012/1 Miscellaneous taxes: application of the income tax and GST laws to deferred transfer farm-out arrangements.  The rulings were initially in draft form in MT 2011/D1 and MT 2011/D2.  The rulings also refer to the newly issued A New Tax System (Goods and Services Tax) (Particular Attribution Rules where supply or acquisition made under a contract subject to preconditions) Determination 2012, which are to apply in certain circumstances in place of the attribution rules in Division 29 of the GST Act

Background to farm-out arrangements

The Rulings describe farm-out arrangements as follows:

• they are common in the mining and petroleum industries and broadly speaking are arrangements entered into for the purpose of facilitating exploration for the discovery of minerals and petroleum resources.
• A typical arrangement provides for the owner of an interest in a mining tenement (the farmor) to transfer a percentage of that interest to another party (the farmee) if the farmee meets specified exploration commitments or contributes monetary payments.
• Often the commercial driver for such an arrangement from the farmor’s perspective is funding.  That is, the farmor giving up future economic benefits, in the form of reserves, in exchange for a reduction in future funding obligations.  For the farmee, it provides an opportunity to acquire an interest in a mining tenement.
• Broady, farm-out arrangements may be divided into two types, being “immediate transfer” and “deferred transfer” farm-out arrangements.

Under an immediate transfer farm-out arrangement, an obligation to transfer a percentage interest in a mining tenement from a farmor to a farmee arises for the farmor upon entry into the agreement.  Typically, the farmor and farmee will also establish a joint venture or, if a joint venture is already in existence, the farmee will become a joint venturer.  In return for the transfer of the interest in the mining tenement, the farmee will undertake exploration commitments or contribute to a joint venture account on the farmor’s behalf for that purpose.  The farmee may also make cash payments to the farmor or to third parties to meet expenses incurred by the farmor.
The ruling considers that an immediate transfer farm-out arrangement is treated as a a sale of a percentage interest in a mining tenement by a farmor to a farmee, in return for the non-cash benefit of the services from the farmee undertaking exploration commitments (the “exploration benefit”), constructive receipt of cash payments made by the farmee to a joint venture to meet cash calls to fund expenses and any additional cash payments made by the farmee to the farmor
The GST implications are considered at paras [58] onwards, and can be summarised as follows:

• under the terms of an immediate farm-out arrangement, there is a supply by the farmor to the farmee of an interest in a mining tenement;
• if the supply of the interest is for non-monetary consideration only (ie, the exploration benefit), that is a barter transaction – the farmee also makes a supply to the farmor of the exploration benefit for non-monetary consideration.  On the basis that the parties are at arm’s-length, the GST-inclusive market value of these supplies will be the same.
• the supply of the interest will also be for monetary consideration if the farmee; makes cash payments to the farmor, makes cash payments to third parties to meet expenses incurred by the farmor (thereby relieving the farmor from meeting those expenses) or makes cash payments to the joint venture account on the farmor’s behalf.
• if total consideration is known, and the farmor or farmee accounts on a non-cash basis, the attribution rules in A New Tax System (Goods and Services Tax) (Particular Attribution Rules where supply or acquisition made under a contract subject to preconditions) Determination 2012 apply in place of the attribution rules in Division 29 of the GST Act
• the going concern provisions may be available.

Under a deferred transfer farm-out arrangement, the transfer of the interest only occurs after the farmee has met all of the exploration commitments and any payment requirements to earn that interest (referred to as the “earn-in requirements) within a specified period of time.  The farmee is able to terminate the agreement at any time provided the mining tenement is in good order at the time of giving the notice of termination.  If the farmee does not satisfy the earn-in requirements during the period, the farmee does not earn the specified interest in the mining tenement.
The ruling views a deferred farm-out arrangement as the farmor granting the farmee a right (akin to an option) to acquire an interest in a mining tenement.  The farmee’s exercise of that right is subject to the farmee satisfying the earn-in requirements within the earn-in period.

The GST implications are dealt with at para [83] onwards in the ruling, and can be summarised as follows:

• the grant of the right to acquire an interest in the mining tenement is a supply
• on the exercise of the right, the supply of the interest in the mining tenement is a taxable supply.
• the attribution of GST is determined pursuant to A New Tax System (Goods and Services Tax) (Particular Attribution Rules where supply or acquisition made under a contract subject to preconditions) Determination 2012 apply in place of the attribution rules in Division 29 of the GST Act

On 11 April 2012 the Commissioner issued GSTR 2001/8A3 – Addendum – Goods and Services tax: apportioning the consideration for a supply that includes taxable and non-taxable parts.  To access the consolidated ruling, click here.

The purpose of the Addendum is to amend the ruling to reflect the reasoning of the Full Federal Court in Commissioner of Taxation v Luxottica Retail Australia Pty Ltd [2011] FCAFC 20 and the Administrative Appeals Tribunal in Re Food Supplier and Commissioner of Taxation [2007] AATA 1550, in respect of the calculation of the value of the taxable part of a mixed supply under s 9-80 of the GST Act.  Referring to Luxottica, the ruling states:

To work out the taxable proportion following the Full Federal Court decision, the value of the taxable part of the supply has to be determined by having regard to the facts and circumstances and taking a practical, common sense approach.  The question to be answered is what is a fair and reasonable measure of the value of the taxable part?

The Addendum also updates the commentary in the ruling on differentiating between mixed and composite supplies by making reference to recent case law.

On 31 March 2012 a paper of mine was presented at a Property Law Conference titled “GST and “Enterprise” in the context of the sub-division and sale of real property”.  The focus of the paper is the ATO’s views on what constitutes an “enterprise” and when an entity is required to “register” for GST, through looking at the ATO’s public rulings and at some recent private rulings published by the ATO.

The paper can be accessed here and under the “My Articles” menu of the site.