In January 2012 the ATO published the GST Property Tool on its website – the tool can be accessed here.

The website describes the tool as follows:

The interaction between GST and real property continues to pose real difficulties for clients and practitioners, and one can hope that a resource such as this may serve to alleviate some of those difficulties.

This is my last post for 2011.  I want to thank all of you who have supported this site and wish you all a great holiday.  I will be back on line in January 2012, which should be another big year for GST – starting with the Qantas special leave application.

Summary of the year

This year was all about GST refunds.  The Multiflex case is a great example – the Commissioner went all the way to the High Court in a frantic effort to justify his refusal to comply with the mandatory language of s 35-5 of the GST Act and pay a refund of input tax credits to the taxpayer.  We also had Qantas, International All Sports  and Central Equity plus some Tribunal cases all seeking GST refunds.  It remains to be seen whether this activity continues in 2012.

We are all waiting to see what the High Court does in Qantas.  Is it just another characterisation case or does it go to the very fabric of the GST system?

2011 also saw a lot of activity with respect to GST and government.  At least two Court proceedings were issued by government entities (including State and local government) against the Commissioner.  These cases did not proceed to hearing, but they serve to illustrate some of the flaws in the way the GST Law (which includes the GST Act and the TAA) may (or may not) apply to particular layers of government and particular types of government transactions.

On 1 July 2011 GST entered into the general private ruling regime, with objection and review rights, which has brought its own controversies.  Probably the most controversial is the capacity of the Commissioner to effectively legislate by ruling.

On 1 July 2012 GST enters into the realm of self-assessment.  No doubt there will be teething issues, but hopefully that will reduce some of the confusion which has stemmed from the disconnect between Business Activity Statements, assessments and time limits in Schedule 1 to the TAA.

The GST continues to develop and I expect that 2012 will bring a broad range of new and interesting issues.

Case Highlights 

High Court

• Commissioner of Taxation v American Express Wholesale Currency Services Pty Ltd – the High Court refused the Commissioner’s special leave application denied, but only after a full day’s hearing before an extended bench.
• Lansell House Pty Ltd v Commissioner of Taxation – the High Court refused the taxpayer’s special leave application – this was probably the first time the High Court has had to look at the taxable treatment of crackers!
• Commissioner of Taxation v Multiflex Pty Ltd – the High Court refused the Commissioner’s special leave application – another GST refund case – the whole process from judgment of the trial judge in the Federal Court (30 September 2011) to the hearing of the special leave application (9 December 2011) took about 10 weeks!

• Commissioner of Taxation v Luxottica Retail Australia Ltd – the Full Federal Court dismissed the Commissioner’s appeal and found that the formula in s 9-80 of the GST simply did not work.  Arguably the most disappointing aspect of this case is that the Commissioner did not appeal the Tribunal’s decision on s 105-65 of Schedule 1 to the TAA, thus depriving the Full Court the opportunity to make some definitive statements about the operation of this difficult section
• Qantas Airways Limited v Commissioner of Taxation – the Full Federal Court allowed the taxpayer’s appeal in full in a landmark decision – not surprisingly, the Commissioner has filed an application for special leave to appeal to the High Court, which should be heard early in 2012

• Reglon Pty Ltd v Commissioner of Taxation – the first real GST on the treatment of damages – the Commissioner did file an appeal, but it was discontinued
• International All Sports v Commissioner of Taxation – another GST refund case, this time about gambling supplies.  The Court also awarded indemnity costs against the Commissioner, which illustrated the potential scope for offers of compromise in the tax arena.
• Central Equity Limited v Commissioner of Taxation – a case about the time of supply of real property and the transitional rules.  The taxpayer has appealed.  The Court also found that the refund notification was valid for the purposes of s 105-55 of Schedule 1 to the TAA.

Tribunal

• MTAA Superannuation Fund (RG Casey) Property Pty Ltd and Commissioner of Taxation and National Jet Systems Pty Ltd and Commissioner of Taxation – another GST refund case, this time about s 13 of the GST transition Act and the scope of the Commissioner’s discretion in s 105-65 of Schedule 1 to the TAA where there is a “windfall gain” to the taxpayer or the recipient of the supply – both taxpayers have filed appeals to the Full Federal Court

Big issues for 2012?

Looking into my crystal ball, I see the major issues for 2012 to include:

• GST refunds and s 105-65
• The introduction of the self-assessment regime
• Input tax credit recoveries for financial institutions
• Transactions with government entities – the virtual world of the “notional” GST
• Real property (as always)
• The impact of the decision in Qantas (whichever way it goes)
• An increase in the GST rate??

On 21 December 2011 the Commissioner issued the following Rulings and Determinations – in an unwelcome Christmas present for financial suppliers, the Commissioner’s draft view effectively halves entitlements to input tax credits for acquisitions made in respect of foreign currency transactions which were found to be GST-free by the High Court in Travelex.

GSTD 2011/D5 – Goods and services tax: Are acquisitions related to an entity’s retail foreign currency exchange transactions with customers in Australia made solely for a creditable purpose under section 11-15 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

• the draft Determination provides guidance on the creditable purpose of acquisitions relating to currency exchange transactions, in light of the decision of the High Court in Travelex Ltd v Commissioner of Taxation [2010] HCA 33.  I imagine that the draft Determination will cause much discussion because it effectively halves the input tax credit entitlement of suppliers.
• The Determination distinguishes between “outbound transactions” (where the the currency is intended for use outside Australia) and “inbound transactions” (where the currency is intended for use in Australia).  For both transactions, the entity is regarding has having made two supplies, being currency in exchange for currency (FX in exchange for AUD – outbound; AUD in exchange for FX – inbound) and also an input taxed financial supply (an acquisition supply) of the interest in the AUD and FX respectively
• For “outbound transactions”, acquisitions by the supplier relating to those transactions “relate equally” to the GST-free supply of the foreign currency and input taxed “acquisition supply” of the interest the AUD.  This acquisition supply is seen as a supply made in relation to rights, but that supply is not GST-free as the rights are for use in Australia
• The effect of this determination is that suppliers input tax recovery on foreign exchange transactions of the type considered in Travelex will be halved – the Commissioner acknowledges a number of alternative views (all of which result in a complete, or higher, input tax recovery) but rejects them in favour of his “preferred view” – the rejected alternative arguments include:

1. acquisitions relate more directly to the supply of the currency than the acquisition supply, as the acquisition supply is merely the means of payment or that is the purpose from the customer’s point of view;
2. there is no acquisition supply because there is no related ‘provision’ financial supply
3. the acquisition supply is part of a composite supply, being incidental to the supply of the FX
4. the acquisition supply is a supply in relation to the rights attaching to the FX and is GST-free
5. The fully of FX is always a supply in relation to rights for use outside Australia

GST Ruling GSTR 2002/2DA – Goods and services tax:  GST treatment of financial supplies and related supplies and acquisitions

• This draft addendum seeks to amend GSTR 2002/2 to reflect the decision of the High Court in Travelex

GST Ruling GSTR 2003/8A2 – Goods and services tax: supply of rights for use outside Australia – subsection 38-190(1), item 4, paragraph (a) and subsection 38-190(2)

• This addendum amends GSTR 2003/8 to reflect the Commissioner’s view on the types of supplies that fall within the expression ‘a supply that is made in relation to rights’ in item 4 of the table in ss 38-190(1) of the GST Act.
• Following the decision in Travelex, the Commissioner considers  that Item 4 is capable of covering the following three categories of supplies:

1. supplies identified in paragraph 9-10(2)(e);
2. supplies of things that derive their value exclusively, or almost exclusively, from rights; and
3. supplies of services directly connected with rights.

• with regards to (3) above, notwithstanding the broad scope of the words “in relation to”, the Commissioner considers that a “direct connection” is required – this may be a controversial approach.  The basis for the Commissioner’s view appears to be that “the context and the broad policy to tax domestic consumption expenditure both suggest that a reasonably close relationship must exist between a service and a right for the service to be covered by Item 4.  If this were not the case, and a more remote connection were sufficient, services supplied between Australian residents that would ordinarily be thought of as being consumed in Australia could, because of the remote connection, be rendered GST-free.”

On 7 December 2011 the Commissioner issued Addendum GSTR 2000/19A4 and Addendum GSTR 2001/2A1.

The effect is to amend Rulings GSTR 2000/19 and GSTR 2001/2 to reflect the changes to the rules relating to tax invoices made by Schedule 3 to the Tax Laws Amendment (2010 GST Administration Measure N0.2) Act 2010 and the repeal of the regulations 29.70.01 and 29.70.02 of the GST Regulations.

In November the ATO published over 70 GST private rulings on the Private Rulings Register.  Those rulings can be accessed from the new drop down menu item on the site and here.

Many of the rulings deal with “run of the mill” issues such as registration, real property sales and going concerns, however there are some interesting questions raised.  In particular, I refer to the following rulings:

11011962220496 – GST and credit cards annual fees

The question in this ruling request was whether a credit card annual fee represented consideration for a supply that was partly input taxed and partly GST under item 4 of sub-section 38-190(1) of the GST Act.  The ATO accepted that the fee may be partly GST-free, to the extent that the cardholder intends to use the credit card facility outside Australia.

The applicant’s contentions were as follows:

• The findings of the High Court in Travelex Ltd v Commissioner of Taxation [2010] HCA 333 should be extended to credit card annual fees. The supply of banknotes was found by the High Court to be “in relation to rights” because it is the rights attaching to the physical banknotes that gave them their value and that this principle applied equally to credit cards, because the, too, have a physical aspect of negligible value without the attached rights (i.e., the plastic card).
• Whilst the payment of the annual fee is for the issue of the credit card, the annual fee is not consideration for the provision of an interest in or under a credit arrangement.  Rather, it was contended that what the customer obtained when paying the fee was the right to use the credit card, which was  right to credit.  This supply of  aright to credit is GST-free under item 4(a) of subsection 38-190(1) of the GST Act.

With regards to the applicant’s contentions re the decision in Travelex, the ATO considered that the plastic card was clearly distinguishable from foreign currency banknotes – the cardholder acquired no proprietary interest in the card and the card was much less of a token of value and rights than banknotes because it is not, of itself, a negotiable instrument – the card itself has not rights attached to it and it is not money in any form.

The ATO accepted that the credit card facility is a supply that may be additionally characterised as a supply of rights and that the supply may be GST-free as a supply to which s 38-190(1) applied.  For the annual fee to be party GST-free, it would need to be shown that the credit arrangement is specifically intended to be used outside Australia – that is, the cardholder intends to use the credit card facility outside Australia.

101192440447 – GST and Electricity Rebate Agreement

The question here was whether a government entity made a creditable acquisition where it paid money to retailers under an agreement whereby electricity retailers gave a rebate to eligible persons.

Not surprisingly, the ruling agreed that a creditable acquisition was made.  While the basis for this view was GSTR 2006/9 (the Ruling on “supplies”), such a conclusion would appear to be irresistible given the decision of the Full Federal Court in Commissioner of Taxation v Secretary to the Department of Transport (Victoria) [2010] FCAFC 84, which found that the Department was entitled to input tax credits for payments made to taxi cab operators under a program where taxi services were provided to people with disabilities.

More surprisingly, the ruling denied the existence of a creditable acquisition for rebates paid “retrospectively” to rebate customers (being claims for 12 months or more prior to the customer making a separate application for the rebate).  The basis for this view was that the Electricity Retailer had not made a supply to the government entity and the payment for the retrospective rebate was a third party payment.  Rather, the payment to the Retailer was an administrative arrangement to pay on behalf of the customer for a liability owed by the customer to the Retailer.

Given that both the rebate and the Retrospective rebate are payment under the same arrangement between the government entity and the Electricity Rebate, one may have cause to doubt the existence of a real distinction between those payments.  The decision may also show that the Commissioner is still not comfortable with the decision in Department of Transport and is seeking to give that decision a narrow compass.

On 1 December 2011 the Commissioner issued GSTD 2011/3 ‘Goods and services tax: do the acquisitions of the services provided under the arrangement described in Taxpayer Alert TA 2010/1 form part of a reduced credit acquisition made by the financial supply provider under item 9 of the table in in sub regulation 70-5.02(2) of the A New Tax System (Goods and Services Tax) Regulations 1999?’

The Determination was previously issued as draft GSTD 2011/D2 and is based upon the arrangement outlined in Taxpayer Alert TA 2010/1.

My comments on the Determination can be found here.

On 18 November 2011 the Tribunal handed down its decision in Mold and Commissioner of Taxation [2011] AATA 823.  The case essentially involved the issue of whether the applicant could substantiate input tax credits in the absence of tax invoices, but the decision does provide an interesting insight into the capacity of the Tribunal (while sitting in the shoes of the Commissioner) to step outside the somewhat prescriptive rules in which the Commissioner sometimes operates when conducting investigations into the affairs of taxpayers.

The applicant was a cabinet maker who the subject of an audit.  During the periods in questions the applicant suffered periods of ill-health, which meant that the business was not as profitable as it might have been.  Following the audit, the taxpayer was assessed for GST shortfalls on the basis that claims for input tax credits could not be substantiated.  The applicant claimed that he posted the relevant tax invoices to the Commissioner, who says they were not received.  This left the applicant in the difficult position of not being able to substantiate those input tax credits.

The applicant was able to provide some information to substantiate the credit claims, including tax invoices from previous periods and bank statements.  The Commissioner accepted that the applicant was entitled to some of the input tax credits, but only to the upper extent of the industry standard for cabinet makers.

Senior Member O’Loughlin accepted that the applicant did have a significant amount of documentation of the expenditures associated with the business and that he no longer had it as a consequence of at least attempting to provide it to the Commissioner.  The Tribunal also accepted that some “surrogate” information was provided, but not enough to substantiate all the claims. The Tribunal found that a balance needed to be struck between the onus on the applicant to prove his assessments are excessive and where the applicant experiences difficulties because his attempts to do so rendered him unable to do so.

In determining this balance, the Tribunal found that the industry range was not appropriate, in circumstances where the applicant had suffered a serious illness that undoubtedly impacted his business activities and it can readily be concluded that he may not be within industry norms.  Accordingly, something more than the industry average was appropriate.  Instead of the upper range of the industry average of 44% of the GST on sales revenue, the Tribunal awarded credits of 72.87%.

This decision is a good example of how the Tribunal is often in a better position to consider the particular circumstances of a case, as opposed to the Commissioner who is sometimes distracted by things such as industry standards.  It is also clear that the Tribunal found the applicant to be an honest and credible witness, which is always a good start.

On 24 November 2011 the Commissioner issued the following draft Law Administration Practice Statements:

• PSLA 3550 ‘Administration of penalties for making false or misleading statements that do not result in shortfall amounts’
• PSLA 3551 ‘Administration of penalties for false or misleading statements that result in shortfall amounts’

The essential difference between the two practice statements appears to be that where there is a shortfall amount, the penalty is imposed by reference to a percentage of the shortfall (i.e., 75% for intentional disregard, 50% for reckless and 25% for failure to take reasonable care); and where there is no shortfall amount, the penalty is imposed by reference to “penalty units” (currently $110 to 1 penalty unit) – being 60 units for intentional disregard, 40 units for reckless and 20 units for failure to take reasonable care.

A more detailed analysis of these statements will follow in the next few days, but my initial concern is that the scope to apply penalties where there is no shortfall is very wide and, in the GST space, could apply to things such as:

• BAS statements
• “stop the clock” notifications pursuant to s 105-55 of Schedule 1 to the Taxation Administration Act
• Objections

Indeed, the writer is aware of the ATO imposing penalties on taxpayers who lodged “stop the clock notices” to protect their rights to claim GST refunds – those penalties were subsequently remitted on the basis that the taxpayers took reasonable care, but it does illustrate the potential scope for the application of this penalty regime.

The potential broad scope of these penalties appears to be accepted in the draft Practice Statement, when regard is had to statements such as:

• “The penalty law, on its face, has a broad application to written and verbal statements made relating to all taxes, and could apply to compliance, objection, advice, debt, lodgement and registration activities” [at 14]
• “Statements which do not result in a shortfall amount will be examined (including for the purposes of assessing penalty) where ATO action is required to investigate or mitigate a risk.” [at 17]

Where a misstatement leads to a GST shortfall, one can understand the risk of penalties being imposed by reference to the amount of that shortfall.  However, where one forms the view that GST has been overpaid, it is another thing to be potentially exposed to a financial penalty where steps are taken to claim that refund from the ATO or to initiate the review procedure in Part IVC of the Taxation Administration Act.

Comments on the draft Practice Statements are due by 27 January 2012.

At 2.15pm the Full Federal Court handed down judgment dismissing the Commissioner’s appeal.

Judgment is not yet available, but a report on the decision will follow shortly.