Yesterday the Commissioner published Miscellaneous Taxation Ruling MT 2012/3 Administrative penalties: voluntary disclosures, which outlines the Commissioner’s interpretation of s 284-225 or Schedule 1 to the TAA.  This Ruling relates to all taxes, including GST, and provides an important resource for taxpayers and their advisers who form the view that GST may have been underpaid.  The ruling was issued in draft form as MT 2011/D3.

The Ruling outlines the circumstances where the penalties otherwise imposed under Schedule 1 to the TAA will be:

• reduced to nil – where the entity voluntarily tells the Commissioner before being told by the Commissioner that an examination of its affairs is to be conducted (or before the day the Commissioner, in a public statement, requests voluntary disclosures with respect to the matter) and where the shortfall amount is less than $1,000 or there is no shortfall amount;
• reduced by 80% – where the entity voluntarily tells the Commissioner before being told by the Commissioner that an examination of its affairs is to be conducted (or before the day the Commissioner, in a public statement, requests voluntary disclosures with respect to the matter)
• reduced by 20% – where an entity voluntarily tells the Comissioner after being told by the Commissioner that an examination of its affairs is to be conducted.

The Ruling also outlines the Commissioner’s views on the a number concepts which are important concepts in s 284-255 of Schedule 1 to the TAA, including

• what constitutes an ‘examination…of your affairs’;
• when an entity will be taken to have been told that an examination is to be conducted of its affairs;
• the words ‘voluntarily tells’;
• the principles regarding the making of a voluntary disclosure.

In April 2012, the Commissioner published over 60 private rulings on the private rulings register dealing with GST issues.

The private rulings I found interesting deal with GST refunds and going concerns.  The refund ruling appears to take the view that the Commissioner can rely on s 105-65 in the context of the operation of the adjustment provisions in Division 19 of the GST Act.

The list of the private rulings can be accessed here and through the menu on the site.

Ruling No. 1012091511798 – GST and refunds of overpayments

This application involves the perennial question of whether the Commissioner will exercise his discretion in s 105-65 and refund overpaid GST.  Where this ruling is interesting is that it appears to involve the question of whether that discretion will (or indeed can) be exercised where the refund is otherwise payable by way of an adjustment pursuant to Division 19 of the GST Act.

The facts of the ruling involve the sale of land by way of a terms contract where the parties entered into an agreement to terminate the sale contract, whereby the instalment payments were to be repaid to the purchaser.  GST had been paid on the instalments by the vendor and the purchaser had claimed input tax credits.

While it is not clear from the ruling, it appears that the basis for the refund arose from the operation of the adjustment provisions in Division 19.  Further, the Commissioner considers that s 105-65 applies because the taxpayer treated an arrangement as giving rise to a taxable supply but it did not give rise to a taxable supply.  This may be considered to be a controversial view, given that the apparent intent of s 105-65 is to address the implications of parties mistakenly treating supplies as taxable where they are not – e.g., because they are GST-free.  In the present circumstances, the parties at all times correctly treated the transaction as taxable until the transaction was cancelled, triggering Division 19 which operates to unwind the GST consequences of the transaction.  One may question whether s 105-65 should interfere with that process.

Ruling No 10102090255175 – GST and going concerns

The issue in this ruling was whether the sale of a motor vehicle repair business was GST-free as the supply of a going concern.  What I found interesting was the discussion of the implications of the statutory licence which was necessary to operate the business, but could not be transferred by the vendor.  The agreement provided that if the licence could not be transferred to the purchaser, that the vendor would make all reasonable efforts to have a new operating licence issued to the purchaser.  The ruling took the view that provided a new licence was issued to the purchaser, the vendor would be “considered to have have supplied the purchaser with an operating licence in respect of the relevant premises, for the purposes of the going concern provisions”.

I personally struggle with the conclusion in the ruling, essentially because the requirement of s 38-325(2) of the GST Act is that “the supplier supplies to the recipient all of the things that are necessary for the continued operation of an enterprise”.  In circumstances where the supplier has no ability to transfer a statutory licence and a new licence must be issued to the purchaser, I cannot see how the words of s 38-325(2) can be satisfied.

The private ruling refers to paragraph 53 of GSTR 2002/5 and seeks to address the issue in the following way:

In accordance with paragraph 53 of GSTR 2002/5, the supply of a thing which is incapable of assignment or supply because of a statutory or legal impediment, but which is necessary for the continued operation of an enterprise by a party other than the supplier is taken to be a supply to the purchaser of that thing for the purposes of section 38-325 of the GST Act, where the following criteria are met:

– the vendor of the enterprise makes all reasonable efforts to have the thing supplied to the recipient, for example, by way of surrender;

– the supply to the purchaser is by a statutory authority or other party to the relevant contract with the vendor; and

– the thing is actually supplied to the purchaser by a party other than the vendor.

While I can appreciate the commercial practicality of this approach, I struggle with how it can fit within the clear words of the section.  In recent times, the Federal Court appears to have moved away from the purposive, “practical business tax”, approach to the interpretation of the GST Act, towards a more literal construction.  I do wonder what the Federal Court would make of the question.

In Simpson v Commissioner of Inland Revenue [2012] NZCA 126 the Court of Appeal has allowed an appeal against the decision of the High Court ([2011] NZHC 490) that receivers of a mortgagee who sold the mortgagor’s real property were “personally liable” for the GST.  However, the Court nevertheless ordered that the receivers pay the GST to the Commissioner (in preference to the secured creditor of the mortgagee) as the GST properly represented a cost of the sale of the property.

In this case, which has unusual facts, the mortgagee was a finance company which was not registered for GST.  The mortgagee went into receivership and after the receivers were appointed, a mortgagor defaulted on its loans which the mortgagee then sold.  The receivers accepted that the mortgagee was liable for the payment of GST in respect of the sale of the properties (in Australia, a mortgagee would be liable for the GST pursuant to Division 105 of the GST Act).  However, the receivers argued that because the mortgagee was in receivership and was unable to meet its debts, the Commissioner was an unsecured creditor and the receivers must first account to the secured creditor of the mortgagee for the amounts received as GST.

On appeal, the Court approached the matter on the basis that the authorities had established that a selling mortgagee is obliged to pay the GST charged on the supply of land in priority to any payment in respect of secured debts.  Further, the Court found that this was not altered by the appointment of receivers.  In doing so, the Court found that there was no policy in the GST Act of protecting secured creditors and that, far from being an unsecured creditor, the Commissioner is in a better position that secured creditors with respect to GST.  The Court also found that the GST simply did not reach the general funds of the mortgagee as it was a cost of the sale of the property.  Finally, while the Court found that the receivers did not have any personal liability to pay the GST, that did not mean that they were entitled to keep the GST and pass it on to the secured creditor.  As noted by the Court “The corollary of the receivers having no liability for CMI’s debts is that as agents they cannot have a greater claim to the proceeds of sale than CMI itself“.

In finding that the receivers did not have personal liability, the Court found that the provisions making receivers liable for GST on sales made by a company during a receivership (similar to s 58 under our GST Act) did not apply to a mortgagee sale.  Similar considerations should apply under our GST Act.  The Court also found that the High Court’s finding that the receivers were personally liable for GST was contrary to the clear wording of the legislation,which limited the liability for GST to the entity exercising the power of sale (in this case the mortgagee).  As noted by the Court, “The receivers may have been in actual control of the sale, but they could only conduct the sales by exercising the powers of CMI on its behalf, as its agents.”  Again, similar considerations should apply under Division 105 of our GST Act as the provision is arguably limited to the entity which makes the supply of the other entity.

Today the Commissioner issued his first GST ruling for the year, GSTR 2012/1 – Goods and services tax: loyalty programs and a GST Determination, GSTD 2012/4 – Goods and services tax: what is ‘hospital treatment’ for the purposes of section 38-20 of the GST Act.

The GST Ruling considers the GST implications of certain loyalty programs, which are particularly complex.  Paragraph 2 of the Ruling states that its particular focus is on the following issues:

• whether it is necessary to apportion some consideration to the supply of points, when a member pays the consideration to purchase goods or services and as a consequence has points allocated to them;
• whether a payment from a program partner to the loyalty program operator is consideration for a supply;
• to the extent that such a payment is consideration for a supply, how is that supply characterised? and the implications of such characterisation in determining whether the supply is to any extent GST free or input taxed.
• whether the provision of a reward to the member (upon redemption of points by them) is a supply to the member for consideration.
• whether any payments made by the loyalty program to a redemption partner is consideration for  a supply made by the redemption partner to the loyalty program operator, or is instead consideration for the supply of the reward made to the member; and
• whether the redemption partner makes a supply to the program member, even if it also makes a supply to the loyalty program operator.

INTERNATIONAL CASES UPDATE – MARCH 2012

The following cases were handed down in the UK (some of the first tier tribunal cases were only published in March), by the ECJ and the NZ Court of Appeal.

New Zealand Court of Appeal

• Commissioner of Inland Revenue v Stiassny [2012] NZCA 93 – whether receivers of partners personally liable to pay GST on sale by partnership, whether right to refund on the basis that GST paid because of a mistake of law – my analysis of the decision – here

United Kingdom

High Court

• Investment Trust Companies v HM Revenue & Customs [2012] EWHC 458 – whether consumer has claim in restitution against Revenue for overpaid VAT – whether statutory limitation on recovery of overpaid VAT extends to rights beyond taxpayers – my analysis of decision – here

First Tier Tribunal

• Chan v Revenue & Customs [2012] UKFTT 155 – VAT – Regulation 34 VAT Regulations 1995 – whether Appellant could recover VAT deliberately overpaid in earlier period by adjusting subsequent returns without making voluntary disclosure – no – HMRC’s  assessment also subject to time limits under Schedule 39 Finance Act 2008 – overpaid tax not recoverable
• El Flood & Sons Partnership v Revenue & Customs [2012] UKFTT 147 – Value Added Tax  –  whether work in replacing a damaged plasterboard ceiling with a lath and plaster ceiling in a Grade II listed building, the change of fabric resulting from insistence by the planning authority, qualified as an alteration to the fabric of a listed building, and thus to be zero-rated  –  Appeal allowed
• Gosling Leisure Ltd v Revenue & Customs [2012] UKFTT (TC) – Value Added Tax  –  Whether capital costs, incurred by the Appellant, were directly and immediately related to supplies made by the Appellant, so as to rank as deductible input tax  –  how supplies under a licence, rather than a lease or sub-lease were treated for VAT purposes  –  how to deal with a relatively minor category of supplies made by the Appellant to its parent company  –  decision in principle  –  Appeal allowed
• Macaw Properties Ltd v Revenue & Customs [2012] UKFTT 170 (TC) – VALUE ADDED TAX – whether tax on supplies was input tax on the basis that it was tax on goods or services to be used for the purpose of a business to be carried on by the Appellant – whether (and when) the Appellant had formed the intention of carrying on a business – Rompelman v Minister van Financïen considered and applied – declared intention by the Appellant that it had formed the intention on the acquisition of an historic estate – whether (and from when) there was objective evidence to support such declared intention – evidence considered – appeal allowed in part
• Majid v Revenue & Customs [2012[ UKFTT 144 – VAT – registration – whether Appellant liable to register in respect of earnings from part-time judicial appointment in absence of earnings from practice as barrister – classification previously for income tax purposes as self-employed – EC Directive 2006 arts 9, 10 – held, not a taxable person so not liable to register – appeal allowed

European Court of Justice

• BLM (Sixth VAT Directive) [2012] EUECJ C-436/10 – Right of deduction – Business assets which belong to a taxable person which is a legal person and which are placed at the disposal of its staff for their private use)
• Kopalnia Odkrywkowa Polski Trawertyn P. Granatowicz, M. Wasiewicz (VAT) [2012] EUECJ C-280/10 – Deduction of input tax paid in respect of transactions conducted with a view to carrying out planned economic activity – Purchase of land by the partners of a partnership – Invoices drawn up prior to registration of the partnership seeking the deduction

In March 2012 the ATO published over 70 private rulings dealing with GST issues.  The full listing of the private rulings can be accessed here.

The highlights of the published rulings discussed below involve the perennial issue of GST refunds and the Commissioner’s discretion in s 105-65.

GST refunds

Ruling No.1012063484502

This ruling raises a central issue with the Commissioner’s current view on the application of his discretion in s 105-65 of Schedule 1 to the TAA. In this ruling, the Commissioner accepted that the applicant (a corporate advisory entity) had overpaid GST in respect of services provided to a client, who was not registered nor required to be registered for GST.  The issue was that the applicant had not actually reimbursed the overpaid GST to the client, but rather had provided a written undertaking to do so, without delay, as soon as the refund was received.  The applicant had not reimbursed the client because it was felt that the ATO may not pay the refund (thus leaving the applicant out of pocket) and also, there was a risk that the client may subsequently register for GST, thus giving the ATO a further ground not to pay the refund.

The ATO’s ruling was that no refund would be paid, because the amount of the overpaid GST had not been reimbursed to the recipient.

One might think this was a harsh result. Given the uncertainty around the Commissioner paying refunds of overpaid GST, it is not be surprising that taxpayers may seek to defer the actual reimbursement of customers the overpaid GST until some sort of comfort is provided by the ATO (e.g., a positive private ruling).

It also raises the interesting question of whether the word “reimbursement” in s 105-65 requires the actual payment of money, or simply the entry into a legal and binding obligation to do so.

Ruling No.102071100659

This is another private ruling relating to GST refunds and this ruling arguably provides a better mechanism for the Commissioner to deal with the question of whether an applicant must first reimburse the recipient for the overpaid GST.  In this case, GST was paid and recovered from the recipient, but the recipient’s claim for input tax credits was subsequently disallowed and the BAS was amended. The applicant informed the ATO that it would refund the GST to the recipient.

The private ruling deals with the reimbursement issue in the following manner:

As the other party (a registered recipient) is unable to claim the relevant ITC, the Commissioner would pay a refund to you provided that you first reimbursed the other party.  The mechanism of how to reimburse the other party (cash remittance, book entries etc) can be arranged between you and the other party as long as the reimbursement is to be completed prior to the refund claim as required under paragraph 105-65(1)(c) and paragraph 115 of MT 2010/1.

One would think that a similar paragraph could have dealt with the issue in the first ruling considered above, rather than the ruling being simply denied.

Ruling No.1012077683062

This private ruling is of interest because it provides an example of where the ATO accepts that the refund should be paid, even though there has been no reimbursement of the overpaid GST to the recipient.

Over 5 years, the applicant’s software treated supplies of its product as taxable supplies, which resulted in transactions being documented as taxable supplies even though no GST was included in the price.  The mistakes were not detected but were having an adverse effect on the profitability of the business.

The ruling states that the Commissioner will pay the refunds, even though the taxpayer had not reimbursed the overpaid GST to the recipients. The basis of the decision was that it was fair and reasonable to refund the overpaid GST, because the overpayment was due to a mistake  in the accounting software. In my experience, this is one of the few circumstances where the Commissioner has accepted that the taxpayer has not (at least indirectly) passed on the cost of the overpaid GST.

On 21 March 2011 the legislation amending the GST Act to ensure that sales of residential premises under “developmental lease arrangements” received Royal Assent.  On 29 March the ATO published its proposed administrative treatment of the amendments.

The purpose of the amendments is stated on the ATO website to be:

Today the Commissioner issued Practice Statement Law Administration PSLA 2012/1 (GA) “How to calculate input tax credits and bad debt adjustments when a dividend is paid to creditors”

The purpose of the statement is to assist representatives of incapacitated entities in calculating input tax credits and bad debt adjustments when a dividend is paid to creditors.  The statement does not deal with the GST consequences for creditors who receive dividends.

Broadly, the statement deals with the following calculations:

• a bad debt increasing adjustment arising from a final dividend payment;
• a bad debt decreasing adjustment arising from an additional dividend payment; and
• an input tax credit entitlement arising from the payment of a first and final dividend.

The formulas in the statement were previously contained in GSTB 2003/1, which referred to Division 147 (which was repealed and replaced by Division 58).  The formulas in this practice statement remain unchanged, but they have been revised to reflect the provisions of Division 58.

Yesterday the Commissioner released Draft PSLA 3541: GST classification of food and beverage items.

The purpose of the draft statement is to set out the following matters:

• the arrangement the ATO has with GS1 Australia to ensure food and beverage items shown on GS1net are correctly classified for GST purposes
• the administrative approach the ATO will take for past years or periods where manufacturers and other suppliers have relied on the ATO confirmed GST classification for GST purposes
• the procedures for tax officers to follow and matters to take into account when considering a change in the GST treatment of a food or beverage item listed on GST1net.

The ATO had previously entered into an arrangement with GS1 Australia, which ensured that food and beverage items were correctly classified for GST (see Fact Sheet NAT 7162.  GS1 is an organisation that administers a system of number, bar coding and electronic messaging.  GS1 numbers and barcodes are on most food and beverage items sold in retail stores.

The arrangements in the Practice Statement are intended to provide certainty and to minimise compliance costs for suppliers that rely on the GS1 net system to determine the GST classification of their products.  This certainty will be provided by the ATO undertaking that, where suppliers have relied on an ATO confirmed classification in GST1, changes to that GST classification will only be applied prospectively.  In determining this prospective date, the statement acknowledges that industry practice will generally require a minimum of 30 days from the notification of the change to implementation through the supply chain.

The ATO classification in the GS1 system does not have the legal status of a ruling.  Where a manufacturer or supplier disagrees with the classification, it can seek a private ruling, which has review rights attached.

Comments on the draft Practice Statement are invited by 13 April 2012.