In February 2012 the following VAT decisions were handed down in the UK and the ECJ (some of the First Tier Tribunal decisions were handed down in January 2012 but were only recently published).  My research did not disclose any decision of note in New Zealand or Canada.

The most interesting decisions were Aberdeen Sports Village (VAT on financial assistance payments) and David Peters (whether goods not delivered were nevertheless supplied).  I have already published my thoughts on these decisions.

Upper Tribunal

• Powa (Jersey) Ltd v HMRC [2012] UKUT 50 – VALUE ADDED TAX – input tax – MTIC and contra-trading – whether connection to fraudulent trading as condition of denial of right to deduct input tax requires privity of contract with fraudulent trader – test in Kittel and Recolta Recycling – whether English mistranslation of French text of the judgment – whether to refer question to ECJ – application of Court of Appeal judgment in Mobilx

First Tier Tribunal

• Aberdeen Sports Village Ltd v Revenue & Customs [2012] UKFTT 80 – SUPPLY:  Whether payment was a consideration for a supply of services or donation; amount of consideration; link between payer and payee; appeal against decision that services were supplied; Appeal refused.  For my analysis of the decision see here.
• Arkeley Ltd (in liquidiation) v Revenue & Customs [2012] UKFTT 126 – Exports – pharmaceutical goods exported – evidence of export
• Davison v Revenue & Customs [2012] UKFTT 89 – VAT assessment – cars imported from Germany into UK – German supplier incorrectly charged VAT – Importer liable for UK VAT – unable to recover German VAT – insolvency of German supplier – double taxation
• David Peters Ltd v Revenue & Customs [2012] UKFTT 124 – VAT – input tax – taxpayer paid for goods which were not delivered – whether supply – whether taxpayer entitled to credit for input tax; for my analysis of this decision see here.
• Eyin v The Commissioners of Revenue & Customs [2012] UKFTT 106 – VATA 1994 ss 56, 57, 63 & 73 – fuel scale charges – misdeclaration penalty – underdeclaration of standard-rated outputs – unreceipted and unrecorded cash purchases
• Jones v Revenue & Customs [2012] UKFTT 108 – VAT -Section 35 VAT Act 1994 – the DIY Refund Scheme- HMRC refused the claim by the Appellants for a VAT refund on the grounds that at the time the development took place the correct statutory planning permission was not in place – Appellants had done all that was required of them but the planning permission produced by the council was inadequate
• Shop Direct Group & Ors v Revenue & Customs [2012] UKFTT 127 – Corporation tax – receipts of payments in respect of overpaid VAT and statutory interest – whether VAT repayments trading receipts
• Spearmint Blue Ltd v Revenue & Customs [2012] UKFTT 103 – VAT –  MTIC fraud – contra trading – fraud established both in dirty chain leading up to contra trader and also by contra trader – insufficient evidence to show that Appellant knew of either fraud, but held that it should have known
• The Harewood Estate v Revenue & Customs [2012] UKFTT 93 – Value Added Tax – deductibility of input tax – stabilisation works to Harewood Castle – whether directly attributable to taxable supplies or residual – appeal allowed

European Court of Justice

• Eon Aset Menidjmunt [2012] EUECJ C-118/1 – VAT – Directive 2006/112/EC – Articles 168 and 176 – Right of deduction – Condition relating to use of goods and services for the purposes of taxed transactions – Origin of the right to deduct – Motor vehicle leasing contract – Financial leasing contract – Vehicle used by employer to transport free of charge an employee between his home and his workplace
• Van Laarhoven [2012] EUECJ C-594/10 – Sixth VAT Directive – Right to deduct input tax – Limitation – Use of goods forming part of the assets of a business for the private use of the taxable person – Fiscal treatment of private use of goods that are assets of the business
• Varzim Sol [2012] EUECJ C-25/11 – Sixth VAT Directive – Deduction of input tax – Article 17(2) and (5) and Article 19 – ‘Subsidies’ used for the purchase of goods and services – Restriction of the right to deduct

Today the Indirect Tax Laws Amendment (Assessment) Bill 2012 was introduced into the House of Representatives.  The Bill introduces a self-assessment regime for GST and other indirect taxes.  The legislation is to operate from 1 July 2012.

The Bill can be accessed here.

The Explanatory Memorandum can be accessed here.

Also, the Commissioner published Draft GST Ruling GSTR 2012/D2: GST treatment of fees and charges payable on exit by residents of a retirement village operated on a leasehold or licence basis.  Comments are invited on the draft ruling by 16 April 2012.

The draft ruling states that exit payments are treated as supply of residential premises, except to the extent that an objective assessment in all the circumstances indicates that they are consideration for some other supply or supplies.  Supplies of residential premises in a retirement village by way of lease or licence are input taxed unless the supply of the premises is a supply of services apartments that are GST-free under s 38-25(4A).

An exit payment will be consideration wholly for supplies that would be input taxed where:

• the operator does not provide services other than incidental services; or
• the operator provides non-incidental services, but the resident is liable to provide separate consideration for them and the value of that consideration is not significantly less than the market value of the services.

An exit payment will be treated as consideration wholly or partly for supplies that would be taxable where:

• the operator provides non-incidental services (which are non GST-free), but the resident is not liable to provide any separate consideration for those services; or
• the value of the separate consideration provided is significantly less than the market value of the services.

Where an exit payment is consideration for both non-taxable (input taxed or GST-free) and taxable supplies, or consideration for a mixed supply, the exit payment should be apportioned on a reasonable basis.

The draft ruling also refers to the types of supplies which may be input taxed, GST free or taxable:

• input taxed supplies to the resident may include supplies of the residential premises by way of lease or licence, and services which are integral, ancillary or incidental to the lease or licence – the ruling contains a non-exhaustive list of incidental services
• GST-free supplies include supplies of care services and services apartments by an operator when ss 38-25(3) and 28-24(4A) apply
• taxable supplies may be made to the resident including services which are non incidental services and are not GST-free – this may include optional services which have not necessary connection to the resident’s ability to enjoy residential premises under the lease or licence – the ruling contains a non-exhaustive list of non-incidental services

Yesterday the Commissioner issued ATO ID 2012/11 “Goods and Services Tax: Reduced input tax credit acquisitions and investment banking services acquired by a takeover target.

The issue dealt with in the ID is whether the target entity is acquiring a reduced credit acquisition under item 9 of sub-regulation 70-5.02(2) of the GST regulations when it acquires investment banking services to assist in considering a takeover bid by way of a scheme of arrangement proposal under s 411 of the Corporations Act 2001, and the subsequent implementation of the scheme so that the target entity shareholders dispose of their shares to the bidder entity – the ID considers that the answer is yes.

Under the scenario considered by the ID, the target entity makes ongoing input taxed supplies so that the target entity will be entitled to reduced input tax credits in respect of the acquisition of the services from the investment bank.

Under the scheme of arrangement the disposal of the shares is directly from the shareholder to the bidder and there is no disposal by the target entity.  In considering this issue, the ID considers that Item 9 of the GST regulations only identifies the supplier of the service and it does not identity who the recipient must be – therefore it is not relevant that it is the target entity shareholders, rather than the target entity, who are disposing of the shares.  Rather, it is a question of assessing if the supplier is in fact a financial supply facilitator and if its serviees can be characterised as arranging for the disposal of the target shareholder’s shares.  In the present case, the target entity has engaged the investment bank to assist in the intended disposal of the shareholder’s shares because a takeover bid has commenced and this is sufficient to meet the requirements.

Today the Commissioner issued two GST Determinations and one GST draft ruling – they all deal with residential and commercial premises.  The publications are:

• GSTD 2012/1 – Goods and Services tax: what are the goods and services tax consequences following the sale of residential premises that are subject to a lease?
• GSTD 2012/2 – Goods and Services tax: what are the goods and services tax consequences following the sale of commercial premises that are subject to a lease?
• GSTR 2012/D1 – Goods and Services tax: residential premises and commercial residential premises

GSTD 2012/1

This Determination seeks to confirm the Commissioner’s view in the Decision Impact Statement published following the decision of the Full Federal Court in South Steyne Hotel Pty Ltd v Commissioner of Taxation [2009] FCAFC 155.

The background to the Determination states that it concerns the following issues:

• whether a supply of residential premises by way of lease remains an input taxed supply under s 40-35 of the GST act following the sale of a reversion: the Determination states that following the sale, there is a continued supply of the premises by way of lease which remains an input taxed supply.
• whether the purchaser of the reversion is entitled to input tax credits in connection with their acquisition of the reversion and other acquisitions: the Determination states that the purchaser is not entitled to an input tax credit to the extent that it is intended that the lease will continue following the completion of the sale
• whether the purchaser of a reversion has an increasing adjustment under Division 135 if the sale of the residential premises is, or is part of, the sale of a going concern: the Determination states that the purchaser has an increasing adjustment.

The Determination is interesting because the Commissioner contends that the judgments of the Full Federal Court in South Steyne and in Westley Nominees Pty Ltd v Coles Supermarkets Australia Pty Ltd [2006] FCAFC 115 both indicate that, upon the sale of a reversion, the supply by way of lease continues.  However, the Commissioner acknowledges that he cannot fully reconcile the conclusion in Westley Nominees that the purchaser of the reversion makes a supply by tolerating the lessee’s occupation of the premises with the conclusion in South Steyne that there is no supply by the purchaser of the reversion.

What he does say is:

It would be extraordinarily anomalous if the GST treatment of leases were to change because of a mere change in ownership of the reversion and it would be expected that, if the Court intended such improbable outcomes, it would have referred to them in its judgments.

Having two decisions of the Full Federal Court in apparent conflict on an everyday issue such as the purchase of a reversionary interest in a lease is unfortunate.

GSTD 2012/2

Similarly to GSTD 2012/2, this Determination deals with the GST implications of the sale of a reversionary interest in a lease, but with regards to commercial premises.  The Commissioner’s view is that following the sale of commercial premises that are subject to a lease, the purchaser of the reversion is liable for GST relating to the lease where s 9-5 is satisfied.

Interestingly, in this Determination, the Commissioner relies on the decision of the Full Court in Westley Nominees – whereas in GSTD 2012/1 the Commissioner relies on the decision of the Full Court in South Steyne.  Given the concession by the Commissioner that he cannot reconcile the two decisions, one could be forgiven for thinking that the Commissioner is having “a bit each way”.

Draft GSTR 2012/D1

This is a long ruling (some 82 pages and 325 paragraphs).  Comments are due on the draft by 6 April 2012.

The draft Ruling considers how Subdivisions 40-B, 40-C and Division 87 of the GST Act apply to supplies of residential premises, commercial residential premises and accommodation in commercial residential premises.  The Ruling does not consider the issue of when a sale of real property is a sale of new residential premises – that issue is dealt with in GSTR 2003/3.

The draft Ruling deals with a number of important issues relating to residential premises and commercial premises and it warrants a more detailed analysis.  By way of summary, the draft Ruling deals with the following subjects:

Residential premises to be used predominantly for residential accommodation (regardless of the term of occupation)

• physical characteristics
• living accommodation provided by shelter and basic living facilities
• fit for human habitation
• other premises (including office building, private hospital and residential care facility)
• premises requiring apportionment
• land supplied with a building
• vacant land
• used for residential accommodation before 2 December 1998

Commercial residential premises

• hotel, motel, inn, hostel or boarding house (including bed and breakfast accommodation, single room in a house, farm stays, whole of resort complex, house provided to employee, camp-style accommodation for employees and contractors, accommodation supplied to employees and contractors by third parties, individual holiday apartments, sale of vacant land,supply of a hotel, apartments that are residential premises

Division 87 – long term accommodation in commercial residential premises

• commercial accommodation
• provided to an individual as long-term accommodation
• predominantly for long-term accommodation
• option to input tax supplies of long-term accommodation

In the 2011-12 Budget the Government announced that it would amend the GST Act to clarify that Division 105 operated to the exclusion of Division 58 where a mortgagee in possession or control sold the property of a corporation.  On Tuesday 14 February 2012 an Exposure Draft of the legislation was released for comment.

The Exposure Draft legislation can be accessed here.

The Explanatory Memorandum to the Exposure Draft legislation can be accessed here.

The provisions are to take effect from the start of the first quarterly tax period on or after Royal Assent.

A consultation paper was released on 7 June 2011.  To access the paper press here.

The closing date for submissions is 13 March 2012.

The following GST/VAT cases were handed down in January 2012.  From my research there were no cases handed down in New Zealand or Canada.

United Kingdom

High Court

• Royal Bank of Scotland v Revenue and Customs [2012] EWHC 9 – decision of Tribunal appealed from [2008] UKVAT V20586 – sale of going concern, whether ongoing commission payments consideration for sale of going concern, effect of novation of contracts, whether commission payments exempt as payments for “related services performed by insurance brokers and insurance agents” – appeal dismissed

First Tier Tribunal

• Ist Contact Ltd v Revenue & Customs [2012] UKFTT 84 – recovery of input tax on exempt supplies pursuant to VATA s.26(2)(c) – Exempt supplies under VATA Schedule 9, Group 5, item 1 (“The issue, transfer or receipt of, or any dealing with, money, any security for money or any note or order for the payment of money”) – Supply of foreign exchange services (FOREX) to persons, principally from Australia, New Zealand and South Africa, who are in the United Kingdom on a “working holiday” or “overseas experience” – whether services “supplied to a person who belongs outside the member States”
• Aberdeen Sports Village Ltd v Revenue & Customs [2012] UKFTT 80 – Whether payment was a consideration for a supply of services or donation; amount of consideration; link between payer and payee; appeal against decision that services were supplied; Appeal refused
• Bunning (t/a Stafford Land Rover) v Revenue & Customs [2012] UKFTT 32 – zero-rating of the supply of a qualifying motor vehicle to a handicapped person who usually uses a wheelchair – whether two vehicles supplied were each (a) supplied to a handicapped person who usually uses a wheelchair, and (b) a qualifying motor vehicle – held in both cases both conditions were fulfilled and the supplies fell to be zero-rated – appeal allowed
• Bromley Emergency Training and Development Ltd v Revenue & Customs [2012] UKFT 30 – Registration – Supply of services – Training courses – Advance payments – Threshold for registration – Whether time of supply rules apply when deciding when threshold exceeded
• King v Revenue & Customs [2012] UKFTT 64 – claim for input tax credits for purchase of motor vehicles – whether used in enterprise
• Reddrock Ltd v Revenue & Customs [2012] UKFTT 46 – Input tax deduction claimed – supplies in respect of which input tax was claimed challenged by HMRC as not having taken place and the related 54 invoices as having been manufactured – burden of proof on Appellant to show that invoices were valid – Appellant failing to discharge that burden – Appeal dismissed

European Court of Justice

• Minister Finansow v Kraft Foods Polska (Taxation) [2012] EUECJ C-588/10 – Taxation – VAT – Directive 2006/112/EC – Article 90(1) – Price reduced after the supply has taken place – National legislation which makes the reduction of the taxable amount contingent on the supplier of the goods or services possessing acknowledgment of receipt of a correcting invoice by the purchaser of the goods or services – Principle of VAT neutrality – Principle of proportionality
• ADV Allround v Finanzamt Hamburg – Bergedorf (VAT) [2012] EUECJ C-218/10 – VAT – Sixth Directive – Articles 9, 17 and 18 – Determination of the place where services are supplied – Concept of ‘supply of staff’ – Self-employed persons – Need to ensure that a provision of services is assessed identically in relation to the provider and in relation to the recipient

In January 2012 the ATO published over 80 private rulings dealing with GST issues, a busy month given the holiday period.  The rulings can be accessed here and from the menu on this site.

Discussed below are some of the more interesting rulings.  They are all about real property, which continues to raise difficult issues.

Subdivision of Property and Enterprise

• The Private Rulings Register contains a large number of rulings dealing with the issue of whether a real property owner is required to register for GST where the owner looks to subdivide and sell the property.  There is no easy test to determine which side of the line the entity sits (i.e., whether there is simply the realisation of a capital asset in a profitable way, or the entity changes its purpose and commences to carry on an enterprise).  MT 2006/1 provides a helpful outline of how the Commissioner will approach such issues, but in each case it is a question of fact and degree, and it is something upon minds may differ.
• The following three rulings published in the same month show how difficult the issue is.

GST and subdivision of property – No 1011986198237

• When regard is had to the facts of this ruling, I consider that the matter is close to the line and while the Commissioner considered that an enterprise was carried on, it could well be argued that this was not the case.  The ruling is a good example of how difficult this area of the law can be – not just in GST, but also in the area of income tax.
• The facts can be summarised as follows:

1. the entity acquired the property pre-2000 for the purposes of constructing a family home and since than has used it as the principal place of residence.  Improvements were made to the property, including a family home, tennis court, swimming pool, and barn.  The entity is approaching retirement and is finding the broadacre lifestyle tiring.
2. The property has been recently rezoned from rural to residential and the entity has engaged a consultant to advise how to sell the property and realised the increased value
3. The entity decided to proceed with the subdivision, which will proceed in stages with the entity being required to construct an access road and to connect services to the lots.  Houses will not be constructed on the lots and the entity will not be involved in the sale or marketing of the completed lots.  The entity simply plans to sell the subdivided lots.
4. The entity has no history of property development and does not intend to undertake any further development activities in the future.
5. The entity will preserve the family home on one of the subdivided lots and continue to live there.

• In finding that the entity was carrying on an enterprise, the Commissioner adopted the approach of looking at “the overall impression gained after examining the activities as a whole and the intention of the taxpayer undertaking the activity.  The Commissioner found that it was relevant that the entity had engaged a project manager to oversee the subdivision process and had employed an agent to undertake the sale of the subdivided lots; and that the council had required that certain things be done as part of the subdivision; and that the entity will borrow money to undertake the project.
• It may be that borrowing money to undertake the project may indicate the carrying on of an enterprise, one may have cause to question the relevance of engaging an agent to sell the property or a project manager to assist a person to subdivide the property.  Also, that the council may impose conditions on the subdivision is also arguably of questionable relevance.  Based upon the facts, it would appear that the entity is doing the bare minimum to sell the lots in a subdivided form.  One could argue that the entity was a unlucky.

GST and subdivision of land No.101201445746

• the facts of this private ruling are almost identical with the Commissioner coming to the same finding.  One wonders whether this signals a tightening of approach by the Commissioner on what constitutes an enterprise where real property is subdivided and sold.

GST, taxable supplies and sale of subdivided property – No 1012020785328

• this application involved very similar facts, but the Commissioner found that no enterprise was carried on.  The similar facts are as follows:

1. the premises were used as the main residence and a decision was made to vacate the premises to reside in a smaller home
2. it is intended to submit a development application to the local council seeking permission to subdivide the property and sell as vacant land – nothing will be built on the land or works undertaken beyond the minimum requirements necessary to satisfy the development application
3. consultants and contractors will be engaged to perform the work

GST and attribution of input tax credits – No. 1012014812230

• the question here was whether the purchaser under a purchase of commercial property was entitled to attribute input tax credits on the whole of the purchase price upon the payment of the “deposit” payable under the contract, which was to be paid in two separate instalments
• not surprisingly, on the basis that the amounts constituted a valid deposit, the Commissioner found that Division 99 applied and attribution was deferred until the earlier of settlement or forfeiture
• what is interesting is that the amounts exceeded 10% of the purchase price and the ruling provides a helpful analysis of the Commissioner’s view of what constitutes a valid deposit (particularly where that amount exceeds 10% of the purchase price)
• also, the ruling notes that in GSTR 2000/28, the Commissioner considers that a contract for the sale of land does not constitute an invoice for GST purposes (which would trigger attribution) – this is a somewhat controversial view – now that taxpayers have objection and review rights on private rulings, it may not be too long before this issue is considered at a higher level

Today the Commissioner published two ATO IDs dealing with incapacitated entities and Division 58 of the GST Act.  Division 58 was introduced to replace Division 147 after the Federal Court found in Deputy Commissioner of Taxation v PM Developments Pty Ltd [2008] FCA 1886 that the Division effectively did not work.  The IDs are discussed below and they can also be accessed via the menu on this site.

ATO ID 2012/6 – GST and representative of an incapacitated entity acting as both supplier and recipient of the representative’s administration services

• This ID shows that a single entity may act in more than one capacity for the purposes of the GST Act and that can effectively conduct taxable transactions between itself
• A was acting as administrator for an incapacitated entity and as part of the administration paid administration fees to A in his capacity as the insolvency practitioner.  A is registered twice for GST, once as an entity pursuant to Division 58 and once as an entity pursuant to Division 23 – the incapacitated entity was also registered for GST
• In finding that A was entitled to input tax credits for the payment of the fees, the Commissioner noted that the same legal person acted in two different capacities and was treated as two separate entities for the purposes of the GST Act

ATO ID 2012/7 – GST and liability for a supply made by an incapacitated entity prior to the appointment of a representative

• The Commissioner found that the representative entity was not liable for GST under s 58-10 of the GST Act when it received consideration for a supply that was made by the incapacitated entity prior to the appointment of the representative – it was the incapacitated entity who was liable for GST.
• There is nothing particularly controversial about this conclusion – what may be controversial however is determining whether the supply was “made” prior to the appointment of the representative.  For example, in The Trustee for Naidu Family Trust and Commissioner of Taxation [2011] AATA 909 a mortgagee in possession who completed a contract of sale (which had been executed by the vendor) contended that the supply had been made on contract.  While that case related to s 105-5 of the GST Act, similar timing issues may arise with regard to Division 58.

On 18 January 2012 the Commissioner issued Addendum GSTR 2004/1A3 – reduced credit acquisitions.

The purpose of the Addendum is stated to be as follows:

In the 2010-11 Budget the Government announced that it will amend the financial supply provisions of the GST law to clarify the operation of the legislation and reduce compliance and administrative costs, particularly for many small businesses, with effect from 1 July 2012.

Amendments implementing three of the seven measures agreed to by the Government were contained in Schedule 3 to the Tax Laws Amendment (2011 Measures No. 9) Bill 2011, which was introduced into Parliament on 23 November 2011.

The Assistant Treasurer has now released draft regulations implementing the remaining four measures. These measures are:

• simplifying the treatment of hire purchase transactions by making them fully taxable;
• expanding the range of expenses qualifying for a reduced input tax credit to include superannuation funds providing life insurance products, lenders’ mortgage reinsurance and transactional fraud monitoring;
• changes to the reduced input tax credit for trustee and responsible entity services; and
• clarifying the language used in relation to guarantees and indemnities.

The closing date for submissions is Friday 24 February 2012