Category Archives: taxable supply

UK Tribunal finds that there was a “supply” of goods which were paid for but not delivered

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In David Peters Ltd v Revenue & Customs [2012] UKFTT 124, the First Tier Tribunal found that the taxpayer was entitled to an input tax credit where it had paid for goods but those goods were not delivered.  The essential issue in the case was whether there was a “supply” of the goods to the taxpayer, notwithstanding that delivery never occurred.  While we usually think of GST or VAT as a “transactions tax” or a “practical business tax”, this case is an example of how the law (in this case constructive ownership) can sometimes intrude.

The facts of the case are simple.  The taxpayer entered into a contract to purchase a number of pieces of equipment.  The price included VAT and payment was made, an invoice was provided and the taxpayer claimed input tax credits.  Not all of the equipment was delivered and the Commissioner contended that the taxpayer was not entitled to input tax credits for the goods which were not delivered.  The Commissioner’s argument was that there was no supply of goods where, though payment was made, the goods were never physically supplied.

In finding for the taxpayer, the Tribunal referred to section 18 of the Sale of Goods Act and found that where there is an unconditional contract for the sale of specific goods, which are in a deliverable state, the property in the goods passes to the buyer when the contract is made.  Further, the Tribunal found that there was constructive delivery of the goods, which was to say that while there was no change in the physical possession of the goods, the buyer acquired the immediate right to possession on payment.  The completion of the sale was therefore separate from the physical delivery of the goods.  The seller became a bailee of the goods for the buyer, who was the owner of the goods.  As noted by the tribunal at [44]:

Thorneycroft, while in physical possession of the goods, were not the owners of the goods.  Rather the owners were the Appellant.  A distinction is made in English law between ownership (the Appellant) and possession (Thorneycroft) and that distinction is appropriate in this case.  The owners will take priority to the title of the goods since on payment for the goods they acquired an immediate right to possession and an attendant right to sue in conversion.  Thorneycroft therefore held the goods for the buyer, the Appellant.

Based on this reasoning, there was a supply of the goods and the taxpayer was entitled to the input tax credits.

It is unclear how such a case would be treated in Australia.  The GST Act does not have “time of supply” rules, but some guidance can be found in s 6(2) of the GST Transition Act which provides that “a supply or acquisition of goods is made when the goods are removed“.  The word “removed” is not defined, and it is unclear whether it is referring to removal of the goods in a physical sense, or in a constructive sense.  If the focus is on physical delivery of the goods, this may conflict with section 22 and 23 of the Sale of Goods Act 1958 (Vic) (other jurisdictions have similar provisions, I believe) which are to the effect that, unless the contract otherwise states, where there is an unconditional contract for the sale of specific goods in a deliverable state, the property in the goods passes to the buyer when the contract is made.

The case can also be distinguished from cases involving the provision (or non-provision) of the supply of services, such as the domestic air travel at issue in the Qantas matter (the Commissioner’s appeal from the decision of the Full Federal Court is to be heard by the High Court later this year).

UK First-tier Tribunal finds VAT payable on grant of financial assistance

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In January 2012 the First Tier Tribunal in the UK handed down its decision in Aberdeen Sports Village Ltd v Revenue & Customs [2012] UKFTT 80.  The decision is interesting because the Tribunal considered the question of whether provision of financial assistance was subject to VAT, which is an issue sought to be addressed by the Commissioner in Draft GST Ruling GSTR 2011/D4 on financial assistance payments.  The Tribunal also considered the fundamental question of determining whether the payment of consideration is for a supply – an issue which is at the heart of the Commissioner’s Special Leave application in Qantas, which is being heard this Friday 10 February 2012 in Sydney.

The facts of the case were as follows:

  • Aberdeen City Council (ACC) and Aberdeen University (AU) entered into a joint venture to develop the Aberdeen Sports Village (ASV).  As part of the venture, ACC and AU committed to “Annual Grant Funding” to ensure that the funding of the running costs were met on an ongoing annual basis.
  • The objectives of ASV included to provide sports and recreational facilities with the object of improving conditions of life for the students and staff of AU and the local community; to make the facilities available to the public at large; and to advance public participation in sport
  • The Annual Grant Funding payable each year by each of ACC and AU was 50% of the net operating cost of the village
  • The joint venture imposed a number of obligations on ASV, including to operate and maintain the village on the basis of minimising the Annual Grant Funding required, to submit annual audited accounts to ACC and AU, to submit monthly management accounts
  • Various discounts were provided, including to AU staff and students, to ACC staff, to those in full-time education, over 60s and some others – no evidence was given as to the amount of use by “the wider community” – i.e., people not connected with AU or ACC

The issue before the Tribunal was whether the Annual Grant Funding payments are consideration for supplies made by ASV to ACC and AU.  The applicant submitted that the payments were not consideration for the supply of services and the payments had no direct link with discounts offered on admission charges.  Further, the annual payments were solely defect funding.

In finding that VAT was payable, the Tribunal found that there was a supply of services by ASV to ACC and AU and the annual payments were consideration for that supply.  The supply was constituted by the obligations under the joint venture agreement.  In doing so, the Tribunal found that “the purpose of the Annual Grant Funding was the operation and maintenance of leisure services for ACC and AU, despite protestations that the Village was available to a much wider community“.  This is a similar to the approach taken by the Full Federal Court in Qantas, where the Court looked at what the fare (i.e., the consideration) was paid “for”.  Of course, it should be noted that the appellant failed to adduce evidence about the usage of the Village by “the wider community”.

GSTR 2011/D4

The approach taken by the Tribunal in this case is broadly consistent with the approach of the Commissioner in GSTR 2011/D4, which can be summarised as follows:

  • regard must be had to the surrounding facts and circumstances, including any documentation, to determine whether a financial assistance payment is consideration for a supply [paragraph 11-12];
  • it is not sufficient that there be a supply and a payment – the supply must be “for” that payment [paragraph 17]
  • in determining whether a financial assistance payment has a sufficient nexus to a supply regard needs to be had to the true character of the transaction [paragraph 22]

 

 

 

Welcome to 2012 – parties agree on consent orders in Centrebet refund case – ATO private rulings and International Cases update for December 2011

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Welcome to my first post for 2012.  This promises to be another big year for GST.

To start the year off, on 20 December 2011 the Commissioner and Centrebet Pty Limited agreed on consent orders for the dismissal of the Federal Court proceeding.  I understand that the proceeding was similar to that considered by the Federal Court in International All Sports v Commissioner of Taxation [2011] FCA 824 regarding the GST treatment of gambling supplies, where the Federal Court found that refunds of GST should be paid to the applicant.  A copy of the orders can be found here.

ATO Private Rulings for December 2011

In December 2011 the ATO published more than 50 private rulings dealing with GST.  The rulings can be accessed from the drop-down menu and also here.

Some of the more interesting rulings are discussed below, dealing with bare trusts and refunds.

GST and charitable property trusts – Ruling no 1011991811094

  • this private ruling request was made by a State Trustee (being an unincorporated association that acts as the State arm of the organisation) -the functions of the State Trustee included providing trustee services to local branches in regard to real property.  In such circumstances, charitable property trusts were established for the benefit of local branches whereby the State Trustee, or a specific purpose corporate trustee, acts as trustee
  • the facts relevant to the arrangements can be stated as follows:
  1. the State Trustee enters into contracts to acquire real property as trustee to hold the property for the public charitable purposes of the local branch
  2. the terms of the trust usually oblige the State Trustee to act on the direction of the local branch (the controller)
  3. the State Trustee is normally passive in the trust arrangement with the costs and management of the real property being met and carried out by the local branch
  • the issue sought to be addressed in the ruling was whether the relevant entity for the purposes of GST was the State Trustee or the beneficiaries (with the State Trustee acting as bare trustee).  In finding that the State Trustee was not acting as a bare trustee, the ATO accepted that the terms of the trust deed required the State Trustee to deal with the property in accordance with the instructions of the local branch, the trust deed conferred considerable powers on the State Trustee to act independently of the local branch and, in certain circumstances, was required to act in accordance with the direction of the State Executive.
  • In taking this view, the ATO relied on GSTR 2008/3 dealing with bare trusts,and referred to the following paragraphs:
37. The activities of a bare trustee are essentially passive in nature.  A trustee of the type of trust considered in this Ruling has either no active duties to perform or only minor active duties.  A bare trust as that term is used in this Ruling does not carry on an enterprise for GST purposes by virtue of its dealings in the trust property.
39. If the asset is sold, the transaction will involve a transfer of the legal title to the property to a third party by the trustee at the direction of the beneficiary.
  • Without having an opportunity to review the terms of the trust deed, but having regard to the terms of the trust deed outlined in the private ruling, I have some concerns with the ATO view.
  • The judicial approach to “bare trust” focuses on the absence of any duties of management on the trustee and the ability of the beneficiary to compel the trustee to transfer the trust estate to them: see Christie v Ovington (1975) 1 Ch D 279 at 281; Morgan v Swansea Urban Sanitary Authority (1878) 9 Ch D 582 at 585; Schalit v Nadler [1933] 2 KB 79; Herdegen v FCT (1988) 84 ALR 271 at 282. The “powers” of the State Trustee relied on by the ATO (which include powers to sell, lease and mortgage the property) could arguably be seen to be administrative mechanisms whereby the directions of the local branch can be given effect to, rather than facilitating the lawful independent action of the State Trustee.
  • While it is true that, taken literally, some of the powers relied on by the ATO may give the State Trustee the “power”, or the capacity, to act independently of the local branch (for example in selling the property) – one must always consider whether such a power would be a lawful act of the trustee.  As noted at paragraph 12 of GSTR 2008/3, “the key point is that the trustee only acts at the direction of the beneficiary in respect of the relevant dealings win the trust property and has no independent role in respect of the trust property” – in this ruling application, one may have cause to question whether the State Trustee did have the lawful capacity to undertake an independent role in respect of the trust property.
  • the issues in this private ruling application were whether the supply of online content by an overseas company (OSCo) to Australian consumers was subject to GST free, and if not, whether the ATO would pay the GST refund to OSCo in light of s 105-65 of Schedule 1 to the TAA – the private ruling found that the services were not subject to GST, but that no refund would be paid because the discretion in s 105-65
  • in support of the refund application, given that the Australian consumers were not registered for GST and the consumers had not been reimbursed for the overpaid GST, the matters relied on included:
  1. the RRP for the price was the same, regardless of whether the customers were located in territories that imposed GST/VAT;
  2. the GST/VAT was not factored into the RRP
  3. OSCo sets its RRP and then recognises its revenue after any applicable GST or VAT was deducted
  4. the consumer pays the RRP, whether or not GST applies to the transaction, and does not bear the cost of the GST
  5. giving a refund to costumers would be a windfall gain to an ‘undeserving consumer’ as referred to by the Tribunal in Luxottica Retail Australia Pty Ltd v Commissioner of Taxation [2010] AATA 22
  • In finding that the refund should not be paid, the first point to note is that the ATO characterised the discretion in s 105-65 as effectively relieving the Commissioner from any obligation to refund the overpaid GST, but nevertheless  giving the Commissioner a residual discretion to pay the refund.  That approach appears to be contrary with the recently stated view of the President of the Tribunal (sitting with Senior Member O’Loughlin), that the discretion  is to “not pay” the refund: see MTAA Superannuation Fund (RG Casey Building) Property Pty Ltd and Commissioner of Taxation [2011] AATA 769 at [65] and National Jet Systems Pty Ltd and Commissioner of Taxation [2010] AATA 766 at [79].
  • The second point to note is that the private ruling gives an insight into the limited circumstances in which the ATO will allow refunds to be paid, where the transactions involve consumers who are not registered for GST – in this regard, the presumption is that the cost of GST is a foreseeable cost that is passed on as part of the cost recovery and pricing structure of the supplier and it would appear that only in very limited circumstances will a supplier be able to satisfy the Commissioner that the overpaid GST has not been passed on.

International cases update 

December 2011 saw a number of cases handed down in the UK, NZ and Canada relating to VAT and GST.

United Kingdom

Court of Appeal

Tax Tribunal

New Zealand (High Court)

  • FB Duvall Limited v Commissioner of Inland Revenue [2011] NZHC 1783 – application for judicial review of Commissioner’s refusal to accept late objections to GST assessments – whether open to Commissioner, having determined for income tax purposes that no services are supplied in return for the payment assess for GST on the basis that the payment is made in return for a supply of services – scope of ‘supply’

Canada (Tax Court of Canada)

Tribunal finds supply made on settlement of real estate contract, not execution – The Trustee for Naidu Family Trust and Commissioner of Taxation [2011] AATA 909

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On 19 December 2011 the Tribunal handed down its decision in The Trustee for Naidu Family Trust and Commissioner of Taxation [2011] AATA 909.

The vendor had executed a contract of sale for real property but the sale was subsequently completed by the agent of the mortgagee in possession who executed the transfer and completed settlement.  The applicant, the agent of the mortgagee in possession, contended that the supply took place on execution of the contract and that the vendor was liable for the GST on the sale, not the mortgagee in possession pursuant to s 105-5 of the GST Act.  Not surprisingly, the Tribunal applied the reasoning of Gordon J in Central Equity Limited v Commissioner of Taxation [2011] FCA 908 (I should note that the taxpayer has appealed that decision to the Full Federal Court) and found that the taxable supply occurred at settlement and the GST liability fell to the mortgagee in possession.

 

New Article – GST and compulsory acquisitions – can you have an “involuntary supply”?

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I have added a new article to the site entitled — GST and compulsory acquisitions – can you have an “involuntary supply”?

The article looks at whether there is such a thing as an “involuntary supply”, considered in the context of compulsory acquisitions of land by governments and government authorities.

Consistent with the problematic relationship between GST and real property transactions, the GST implications of compulsory acquisitions remain uncertain.  Further, the guidance from the Commissioner on the matter in GSTR 2006/9 (at paragraphs 81-90) leaves a number of matters unresolved.

The article can be accessed here and under the menu item “My Articles”.

ATO issues draft GST Ruling on Financial Assistance Payments

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On 2 November 2011 the ATO issued draft GST Ruling GSTR 2011/D4 ‘Goods and Services tax: financial assistance payments’.  This ruling is intended to replace GSTR 2000/11 ‘Goods and Services tax: grants of financial assistance’.

The draft ruling deals with the GST treatment of the following matters:

  • what constitutes a taxable supply in return for a financial assistance payment, including determining the relevant nexus between supply and consideration;
  • sponsorships
  • gift to non-profit bodies;
  • non-monetary consideration;
  • financial supplies.
The ruling also details the transitional rules catering for the replacement of the current ruling.
Comments are invited on the ruling by 16 December 2011.
Stay tuned for a more detailed analysis of the draft ruling.

Commissioner lodges Notice of Discontinuance in Reglon appeal

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On 13 October 2011 the Commissioner lodged a Notice of Discontinuance of Appeal in his appeal of the decision of Emmett J in Reglon Pty Limited v Commissioner of Taxation [2011] FCA 805.

In this case, the Court found that no taxable supply was made by the taxpayer by reason of a Supreme Court judgment for conversion of scaffolding owned by the taxpayer.  As noted by the Court (at [26]) “The effect of the payment in full by Citidel of the judgment in conversion against it was to vest in Citadel the ownership of the Taxpayer’s scaffolding.  However, the mere obtaining of judgment in conversion against a defendant does not of itself affect the ownership of the coverted goods.  Nor does the formal entry of judgment.  It is the satisfaction of the judgment that effects a transfer to the defendant of property in the goods that were the subject of the conversion.” and further (at [32]) “The payment made in satisfaction of that judgment resulted in ownership and was triggered by the payment of the judgment sum by Citadel.  That payment did not depend upon any action of the Taxpayer.  I do not consider that, in those circumstances, the Taxpayer may be said to have made a supply.  There was no taxable supply by the Taxpayer.”

 

Qantas wins Full Federal Court appeal on “no-shows”

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In a dramatic development, the Full Federal Court has allowed the appeal by Qantas with respect to its liability to pay GST on forfeited airfares.

In Qantas Airways Limited v Commissioner of Taxation [2011] FCAFC 113, the Court (Edmonds and Perram JJ, with Stone J agreeing) allowed the appeal from the decision of the Tribunal and found that GST was not payable by Qantas where the passenger had paid the far, but cancelled or did not show for the fare and no refund was available or claimed.  The Court identified the air travel as the taxable supply, and as no travel took place there was no taxable supply.

The Court also found that there was no relevant distinction between fares which were non-refundable and fares which were fully refundable (but no claim for a refund was ever made).

This decision is arguably the most important GST case to date and the decision has ramifications far beyond the airline industry, with implications for all suppliers who may enter into transactions that do not complete.  Further, the decision is in direct conflict with the views of the Commissioner in GSTR 2009/3 ‘Goods and services tax: cancellation fees’.

The Commissioner has lodged an application for Special Leave to appeal to the High Court.