In A & A Property Developers Pty Ltd v MCCA Asset Management Ltd [2016] VSC 643 the Supreme Court of Victoria found that GST was not to be added to the purchase price payable under a contract of sale. The decision is a further example of the difficulties that can arise when documenting the contractual position with regards to GST and the sale of real property. This issue is discussed more broadly in a paper I presented in 2013,  GST and Real Estate Contracts – when things go wrong.

In this case the parties entered into the standard form LIV contract of sale which provides for a “tick the box” process with regards to GST. The particulars of sale state that “The price includes GST (if any) unless the words “plus GST” appear in this box”. Clause 13.1 of the General Conditions provides that “The purchaser does not have to pay the vendor any GST payable by the vendor in respect of a taxable supply made under this contract in addition to the price unless the particulars of sale specify that the price is ‘plus GST’.”

The difficulty appears to have arisen because of the way the particulars of sale were completed. The price was $2,900,000 with a deposit of $290,000 but the word “GST”
was included in the box dealing with GST, not the words “plus GST”.

The Court accepted the defendant’s construction of the contract – that the language of clause 13.1 was clear and the purchaser was not required to pay GST unless the Particulars of Sale specified that the price was “plus GST”. The Court found that its should not add words into a written instrument unless it was clear that the words had been omitted and what those omitted words were. The Court observed that the presence of the letters “GST” was capable of a number of interpretations.

The Court observed that the plain meaning of the contract was that the obligation to pay GST lay with the vendor and that the contract provided a clear mechanism for the parties to give effect to an agreement that the purchaser must pay GST on the purchase price – but that it was not employed in this instance.

The Court also observed that the plaintiff did not seek an order for rectification of the contract – and in any event, the evidence suggested that the parties did not have a common intention about their agreement concerning the liability to pay GST.

This decision can be compared with the recent decision of the New South Wales Supreme Court in SSE Corp Pty Ltd v Toongabbie Investments Pty Ltd as Trustee for the Toongabbie Investments Unit Trust [2016] NSWSC 1235 where the plaintiff unsuccessfully applied for rectification of two contracts of sale by inserting the words “plus GST” after the purchase price. The plaintiff contended that by mistake the words “plus GST” had not been added to the statement of the price in each of the contracts before the contracts were exchanged

The Court undertook a detailed review of the evidence and concluded that the parties did not make a common mistake in the recording of the agreement, and that the purchaser entered into the contracts with a definite and clear understanding that the prices were to be inclusive of GST, whatever the subjective understanding of the vendor may have been. The principals of the purchaser were not aware, when the contracts were exchanged, that the contracts did not reflect the vendor’s understanding of the prices to be paid – so this was not a case where the vendor entered into the contracts under a unilateral mistake that was known to the purchaser.

On 4 November 2016 the Treasurer released an Exposure Draft of legislation to give effect of the decision in the 2016/17 Budget to extend GST to low value goods imported by consumers. The amendment will apply for tax periods starting on or after 1 July 2017.

The amendments will make the supplies of goods valued at $1,000 or less at the time of sale “connected with the indirect tax zone” if the goods are brought to Australia with the assistance of the supplier – the aim is to ensure that such supplies are subject to GST in the same way as domestic goods.

The amendments will treat the operators of electronic distribution platforms as the suppliers of the low value goods if they are purchased by consumers and brought to Australia through the platform.

GST will only be payable where the goods are purchased by a consumer. In general, a purchaser can confirm that they are not purchasing the goods as a consumer by providing their ABN and declaring that they acquire the goods for the purpose of their enterprise.

The following documents can be accessed here:

• Exposure Draft Legislation
• Explanatory Memorandum
• Q&A

Submissions are due on the Exposure Draft on 2 December 2016.

In Re Tomker Pty Ltd (in Liquidation) [2016] VSC 656 the Supreme Court of Victoria found that the expiration of the four year limitation period in s 105-50 of Schedule 1 to the TAA went to the substance of the tax liability rather than just to its recoverability. Accordingly, if the four year period had expired, the tax amount was not ‘payable’ and it could be plausibly argued that there was no debt at all. The Court gave leave to the defendant (a director of the taxpayer in liquidation) under s 471A(1A)(d) of the Corporations Act to allow the lodgement of an objection to assessments of net amount lodged by the defendant in the name of the taxpayer on the basis that the assessments were issued outside the four year limitation period.

The decision provides an interesting discussion on the interaction between the taxation regime established by the GST Act and the TAA and the insolvency provisions in the Corporations Act. It should be noted that the assessments were issued under the regime in place prior to the self-assessment regime in operation from 1 July 2012.

The Facts

The facts can be summarised as follows:

• the company was wound up on 22 July 2013 pursuant to a statutory demand issued by the Commissioner in respect of debts totalling $95,482.73.
• the liquidator issued proceedings against the defendant (as a director of the company) for insolvent trading. The primary amount sought by the liquidator at the time was $99,950.80, which was composed entirely of the debt due to the Commissioner.
• the Commissioner had lodged a number of proofs of debt over time, each amending the previous proof of debt. The initial proof of debt was dated 7 October 2013 in the amount of $99,950.80. Further proofs of debt were lodged between December 2015 and May 2016. The proofs of debt appear to have been issued to the company as a partner in a partnership – with the partnership being the taxpayer that lodged BAS statements.
• the Commissioner issued assessments of net amount to the partnership on 29 April 2016 with respect to tax periods 30 September 2010, 31 December 2010, 31 December 2010, 31 March 2011, 30 June 2011, 30 September 2011, 31 December 2011, 31 March 2012 and 30 June 2012 – the assessments sought to recover unpaid net amounts. It appears that the recovery flowed from various revisions made to the partnership’s BASs pursuant to revised BASs lodged in June 2012.
• the defendant sought to object to the assessments on the basis that they were time barred by s 105-50, except for the tax period ended 30 June 2012 – this was because the assessments were issued by the Commissioner more than four years after the lodgement dates for the tax periods in question.

The effect of s 105-50

The Court concluded that the four year period established by s 105-50 could be contrasted to the six year limitation periods established by the liquidation and insolvent trading regimes in the Corporations Act – including s 588(4) which requires that the recovery of loss and damage, as a debt due to the company, must be commenced within six years of the beginning of the winding up.

The Court described the competing contentions as follows:

[44] …The liquidator contends that:

A creditor will have suffered loss and damage in relation to a debt at the moment that debt is incurred because of the company’s insolvency.

The loss and damage does not cease to have been suffered because of the operation of s 105-50 of the TAA. Similarly, the loss and damage does not cease to have been suffered because of the winding up of the company.

[45] That is, loss and damage occurred at the time of incurring the tax liability. That loss and damage is not affected by the expiration of the time period in s 105-50 of the TAA. Rather, it can be recovered at any time within the six years set by s 588M(4).

[46] Against this construction, s 588M(1)(b) also speaks of a person ‘to whom the debt is owed’ (emphasis added). This suggests that if the tax amount is no longer payable by virtue of s 105-50 of the TAA, recovery in the liquidation is not possible: there ‘is’ no longer any debt which is owing to the Commissioner. If this construction is accepted, the four year time limit is determinative.

The Court considered that the conclusion that the four year period in s 105-50 is determinative led to the second issue – whether the four year period was affected by the liquidation of the plaintiff. The liquidator contended the the debt was owing at the relevant date and was therefore provable in the liquidation and that the four year period in s 105-50 had expired had no impact. The Court noted that a debt that was not statute barred at the commencement of a winding up may still be proved in a liquidation, even if it is proved after the debt would ordinarily be statute barred. However, the Court found that this did not assist the liquidator because s 105-50 had substantive operation in relation to a tax amount (and not just an impact on recoverability) – meaning there was no debt on the expiration of four years.

The conclusion of the Court was as follows:

[60] Any assessment made by the Commissioner therefore had to be made within the four year period set by s 105-50. It is only an amount which is the subject of a notice of assessment made within the four year period which is payable after the expiration of the four year period (in the absence of fraud or evasion): s 105-50(3)(a) TAA.

Comment

The Court may well be correct that s 105-50 has substantive operation. That conclusion is consistent with the approach of the AAT in the context of s 105-55, which provides an equivalent four year limitation period on a taxpayer’s entitlement to recover refunds of overpaid net amounts – see Swanbat Pty Ltd and Commissioner of Taxation [2013] AATA 891 at [46]:

…the time limit imposed by this section is not just a procedural nicety. It has a substantive effect, curtailing the rights of a taxpayer to a refund or payment within four years from the end of the relevant tax period.

A similar finding was made by the Tribunal in Australian Leisure Marine Pty Ltd and Commissioner of Taxation [2010] AATA 620 at [17]:

In my view, s 105-55 of Sch 1 to the Act has substantive effect in that the expiry of the four year time limit extinguishes the right of a taxpayer to notify the Commissioner of an entitlement to the input tax credit. As such the provision certainly denies the entitlement of an entity to an input tax credit. The High Court of Australia has also recognised that taxation legislation which imposes time limits on amending an income tax assessment to have substantive rather than procedural operation: see McAndrew v Federal Commissioner of Taxation [1956] HCA 62; (1956) 98 CLR 263.

However, the case appears to have been argued on the premise that s 105-50(1) applies if the Commissioner does not issue an assessment before the expiration of four years. An assessment does operate as a “notification” for the purposes of s 105-50(3) so as to stop the limitation period: Cyonara Snowfox Pty Ltd v Commissioner of Taxation [2012] FCAFC 177 at [173]. However, s 105-50(3)(a) does not require the Commissioner to issue an assessment within 4 years – rather, the Commissioner must have “required payment of the amount or the amount of the excess by giving notice to you”.  In Brookdale Investments Pty Ltd and Commissioner of Taxation [2013] AATA 154 the Tribunal took a broad view as to what constituted a “notice”(at [80]):

(i) Section 105-50 of the TAA does not stipulate that any particular formality is required by a notice under the section, provided the notice brings to the taxpayers attention that the Commissioner claims an entitlement to an unpaid net amount: see Federal Commissioner of Taxation v Prestige Motors Pty Ltd [1994] HCA 39; (1994) 181 CLR 1 at 14;

(ii) Section 105-50 of the TAA is directed at providing notice, not a formal claim or demand. All that is required by s 105-50 of the TAA is to bring to the taxpayer’s attention that the Commissioner is of the view that there is an unpaid net amount. That is, all that s 105-50 of the TAA requires is sufficient information to be given to the recipient of the notice that the Commissioner is claiming an amount is due in respect of a particular tax and for a specified period: see Revlon Manufacturing Ltd v Federal Commissioner of Taxation (1995) 96 ATC 4301 at 4053;

While the Commissioner did not issue an assessment until after the four year period had expired, the Commissioner may have given some other “notice” prior to the expiration of four years that fell within the terms of s 105-50. If that was the case, one would expect the Commissioner to raise that matter in making a decision on the objection.

In FKYL and Commissioner of Taxation [2016] AATA 810 the Tribunal found that the Applicant was liable for GST in respect of the sale of four residential premises as they were “new residential premises” within the meaning of s 40-75 of the GST Act. The Tribunal also found that the Applicant was not entitled to use the margin scheme and that the Applicant was only entitled to a proportion of input tax credits for construction costs because the premises were rented out before they were sold.

New residential premises

The Applicant constructed the premises, some of which were sold more than 5 years after construction was completed. The Applicant contended that the premises were no longer “new residential premises” because they were only used for making input taxed supplies under s 40-35(1)(a) – i.e. they were leased for residential purposes. The Applicant faced a number of difficulties in substantiating its contention, including:

• Some of the premises were sold less than five years after construction was completed (but more than five years after acquisition). The Tribunal found that the time period starts once a person has a right to occupy the premises – which is not necessarily the date of completion of the building and it cannot be during the period when construction continues to take place.
• Some of the premises were not rented until some time after completion. Also, due to difficulties with tenants the premises were vacant for substantial periods of time. In each case the total amount of time of rental was less than 5 years.
• The Applicant required the tenants to also sign an agreement to purchase the house.

The Tribunal found that the Applicant did not satisfy its onus of showing that the 5-year period was satisfied.

Margin scheme

The Applicant contended that it was entitled to utilise the margin scheme for the sale of the residential premises (the Commissioner accepted that the Applicant had purchased the properties under the margin scheme). The Commissioner granted the Applicant an extension of time to obtain written agreements with each purchaser to use the margin scheme. The Applicant did not produce written agreements. The Tribunal found that the Applicant had failed to show that the statutory requirement of a written agreement to use the margin scheme was met.

Input tax credits

The Commissioner contended that because the residential premises were rented out before they were sold, the Applicant was only entitled to claim part of the input tax credits on the construction costs. The Commissioner calculated the apportionment based on the sale price divided by the sum of the sale price and rental income received. The Tribunal found that the basis of the Commissioner’s apportionment was fair and reasonable and it reflected the returns available from sale and rental respectively.

The Commissioner also allowed input tax credits on certain non-construction costs. The Tribunal rejected the application of the Applicant that it was entitled to input tax credits for additional non-construction costs as it could not substantiate those claims.

The Tribunal affirmed the Commissioner’s decision to impose penalties at 25% for failure to take reasonable care.

In Shophold (Mauritius) Ltd v The Assessment Revenue Committee [2016] UKPC 12 the Privy Council allowed the taxpayer’s appeal against the finding of the Supreme Court of Mauritius that the taxpayer was obliged to pay VAT where it waived the enforcement of a contractual right to be paid for services that it provided and neither issued an invoice nor received payment for those services. The decision looks at the meaning of “consideration” in the context of VAT.

The taxpayer had entered into a management services agreement with a related entity in March 2003. In May 2003 the taxpayer resolved to waive its right to be paid the management fee until such time that the entity was in a sufficient profit making position. The management services agreement was not amended to reflect the waiver and the taxpayer continued to provide management services to the entity, albeit at a reduced level. In December 2007 the taxpayer resolved  that the management fee be reinstated. During the period in which the waiver was in effect, the taxpayer did not issue any invoice in respect of its management services or receive any payment for those services.

The Revenue contended that the taxpayer had made taxable supplies by providing the services, whether or not it had submitted invoices or had been paid for the services.

The Supreme Court agreed with the Revenue. In substance, the Supreme Court held that because the taxpayer had only waived its entitlement to receive the Management Fee and had not agreed a variation of the Agreement, the contractual obligation to pay the Management Fee remained. That contractual obligation was the consideration given for the management services, and as a result the services were taxable supplies subject to VAT. Accordingly, the taxpayer ought to have received payment for the service at the end of each month during the relevant period and was liable to VAT as if it had.

The appeal

The Revenue contended that the fundamental error in the taxpayer’s case was that the assumption that because there had been no payment, no consideration passed from the related entity to the taxpayer. The Revenue contended that the continuing contractual obligation to pay the management fee, even if not enforced by the taxpayer, provided the necessary “consideration” to found a taxable supply.

The Privy Council did not agree, observing that the concept of “consideration” in the VAT legislation is quite different from the contractual concept of consideration. In the law of VAT, “consideration” refers to “reciprocal performance”, referring to the following statement of the Court of Justice in Tolsma v Inspector der Omzetbelasting Leewarden [1994] STC 509 (para 14):

…a supply of services is effected ‘for consideration’ …, and hence is taxable only if there is a legal relationship between the provider of the service and the recipient pursuant to which there is reciprocal performance, the remuneration received by the provider of the service constituting the value actually given in return for the service supplied to the recipient.

The Privy Council considered that when the Court of Justice was looking at the matter from the perspective of the supplier. This requires that under the legal arrangement the supplier receives or is to receive remuneration for the service that it has performed, either from the recipient of the service or a third party. That is not the same as the meaning of “consideration” in contract law.

Comment

The approach of the Privy Council is similar to the position in Australia. In Commissioner of Taxation v Qantas Airways Ltd [2012] HCA 41 the majority of the High Court (at [14]) stated that the phrase “the supply for consideration” in the definition of “taxable supply” in s 9-5(a) does not adopt contractual principles, but requires a connection or relationship between supply and consideration. In my view, that connection will likely involve some form of “reciprocal performance”.

It is also interesting to consider this set of facts in light of the decision of the High Court in Commissioner of Taxation v MBI Properties Pty Ltd [2014] HCA 49. In that case the Court found that an executory contract will generally give rise to at least two supplies, a supply on entry into the contract and a further supply on performance of the contract. In this context, the management services agreement would involve a supply by the taxpayer on its execution and further supplies of the provision of management services. These further supplies would be made “for” the management fee. Accordingly, during the period that the taxpayer had waived the right to recover payment it could be said that the supply of management services were not “supplies for consideration”.

In Norseman Gold Plc v Revenue and Customs [2016] UKUT 69 the Upper Tax Tribunal agreed with the finding of the First Tier Tribunal that a UK management company providing management services to overseas subsidiaries was not entitled to input tax credits because it did not make taxable supplies to those subsidiaries. The management company was found to have made supplies to its subsidiaries, but those supplies were not made “for consideration”

The decision illustrates two differences between the UK VAT regime and the GST in Australia. First, the threshold requirement for claiming input tax credits is different. Second, the requisite nexus between “supply” and “consideration” is narrower in the UK.

In the UK, an entitlement to input tax credits arises if acquisitions are made in the course of conducting “economic activity”, meaning the making of taxable supplies (supplies for consideration) or intending to make at some time in the future taxable supplies. The First Tier Tribunal found that the taxpayer had supplied management services to its subsidiaries and that what it supplied was “capable” of amounting to a taxable supply – however, what it had supplied was not in fact supplied for consideration and was therefore not a taxable supply. Any understanding (referred to by the First Tier Tribunal as a “vague intention”) between the taxpayer and its subsidiaries about payment being made for services when the subsidiaries could afford to pay was insufficient to establish that supplied would be made “for consideration”.

On appeal, the Upper Tribunal agreed with the First Tier Tribunal and found that the supplies were not made for consideration, they were made gratuitously. The Upper Tribunal noted (at [126]) that the taxpayer did intend to make supplies to its subsidiaries, but the question was whether the taxpayer intended to make supplies “for consideration”. The answer to this question was no because:

…the direct and immediate link between the supplies and intended supplies on the one hand and any payment in respect of those supplies on the other hand was absent at the time when the input tax was incurred.

The conclusion of the Upper Tribunal was helpfully summarised as follows (at [137]:

Putting the matter in the very briefest of ways, this is a case where one party (Norseman) has supplied services to closely related parties (its subsidiaries) with, at best from Norseman’s point of view, an intention on its part to charge at some unspecified time in the future for its services, but with no agreement with the subsidiaries to that effect (even to the effect that the subsidiaries would pay if an when they had the funds available to do so) and no understanding of the amount or timing of such payment. The charge/payment, if and when introduced, might or might not match or exceed recovery of the costs incurred in providing the services and might or might not include a profit element. It might even be nominal…This is an insufficient basis on which to be able to say, at any time prior or during the relevant period, that the eventual charge and payment would have the immediate and direct link with the services provided which EU law requires. If it is not possible to find the necessary link in relation to future supplies and the intended payments for those supplies, still less is it possible to find a link where there has, as yet, been no payment at all, in particular in relation to services provided during the relevant period.

Comment

The decision illustrates two differences between the UK VAT regime and the GST Act.

Entitlement to claim input tax credit

In the UK the entitlement to claim input tax credits arises where there is a direct connection between the acquisition and the making of taxable supplies (i.e., the making of supplies for consideration). In Australia, the test is one of “creditable purpose” and requires that the entity make the acquisition “in carrying on its enterprise”: s 11-15(1) (subject to the “blocking provision” in s 11-15(2) where the acquisitions relate to making supplies that would be input taxed or where the acquisitions are of a private or domestic nature).

These tests can operate quite differently. In the UK an entity must show that it is, or will be, making taxable supplies (i.e., supplies for consideration). In contrast, in Australia an entity need only show that it is making the acquisitions “in carrying on its enterprise”.  To constitute an enterprise, an entity must carry out an activity, or series of activities, done, inter alia, in the form of a business or in the form of an adventure or concern in the nature of trade: s 9-20(1). Given that the carve-out for activities undertaken without a reasonable expectation of profit or gain is limited to individuals (whether on their own or in partnership), it does not appear necessary that a corporate entity carry out these activities for profit or gain or that it actually make taxable supplies. This raises the question of whether this case would be decided differently in Australia.

Meaning of “for consideration”

The meaning of the words “supply for consideration” is narrower in the UK.The Upper Tribunal observed that the authorities established that a supply is “for consideration” where there is a direct link between the service supplied and the consideration received, although there need not be a legally binding agreement between the parties. The nexus between “supply” and “consideration” is a direct one.

In contrast, the words “supply for consideration” in s 9-5(a) of the GST Act need to be seen in light of the expansive definition of “consideration” in s 9-15. In AP Group Limited v Commissioner of Taxation [2013] FCAFC 105  (Edmonds and Jagot JJ) observed that if the definitions in s 9-15 were inserted in substitution for the defined terms where they appear in s 9-5, the result was as follows:

you make a supply for [any consideration, within the meaning given by sections 9-15 and 9-17 in connection with the supply or acquisition].

In Australia, the nexus between “supply” and “consideration” is broader than the UK.  There will be a “supply for consideration” where the supply is made “in connection with” consideration. This nexus may therefore be direct or indirect, although it would appear that a “trivial” or “remote” connection will not suffice.

On 10 February 2016 the Treasurer introduced Tax and Superannuation Laws Amendment (2016 Measures No.1) Bill 2016 into Parliament. The Explanatory Memorandum to the Bill can be accessed here. The Bill contains measures initially flagged in the Budget. The measures have been the subject of a detailed consultation process and two forms of Exposure Draft have been published for comment.

In summary, the amendments have the following aims:

• to ensure that digital products and other imported services supplied to Australian consumers by foreign entities are subject to goods and services tax in a similar way to equivalent supplies made by Australian entities; and
• to better target the way Australia’s goods and services tax rules apply to cross-border supplies that involve non-resident entities.

A brief outline of the amendments are set out below. The measures are to take effect for tax periods starting on or after 1 July 2017.

Extending GST to imported digital products and other services

Expansion of the concept of “connected with Australia”

Under the existing law, for a supply to fall within the GST net and potentially be a taxable supply it must be “connected with the indirect tax zone” (i.e., connected with Australia) pursuant to s 9-25 of the GST Act. The amendments expand this concept considerably.

Section 9-25 contains the following categories of supplies that may be connected with Australia:

• supplies of goods wholly within Australia – sub-section (1);
• supplies of goods from Australia – sub-section (2);
• supplies of goods to Australia – sub-section (3);
• supplies of real property – sub-section (4); and
• supplies of anything else – sub-section (5).

Section (5) currently makes a supply of “anything else” connected with Australia where one of the following applies:

• the thing is done in Australia;
• the supplier makes the supply through an enterprise carried on in Australia; or
• the supply is a right or option to the supply of a thing that would be connected with Australia.

The amendments expand subsection (5) to provide that a supply of anything other than goods or real property is connected with Australia if “the *recipient is an *Australian consumer“.

An “Australian consumer” is essentially an entity that is an Australian resident who is not registered for GST, or if it is registered, the entity does not acquire the thing supplied solely or partly for the purpose of an enterprise carried on by the entity.

This means that all supplies of intangibles (e.g., digital downloads, professional services etc) to a private consumer, or a registered consumer who acquires it not for the purpose of an enterprise (e.g., in a private capacity), from an overseas entity will be “connected with Australia” and will be potentially subject to GST in the same way as supplies from entities in Australia – i.e., if the other requirements in s 9-5 are satisfied. This also means that overseas suppliers will be required to register for GST if they exceed the GST turnover threshold. The stated aim is for there to be a “level-playing field” where all intangibles acquired by consumers have the same GST treatment, regardless of where the supplier is.

Safeguards for overseas suppliers

The Explanatory Memorandum recognises that in may cases foreign suppliers will have only a limited capacity to investigate the residency and GST registration status of the recipient. The amendments provide a safeguard for supplies, to the effect that the offshore supplier will only be liable for GST in relation to a supply if:

• the supplier takes reasonable steps to obtain information concerning whether the recipient of the supply is an Australian consumer; and
• having taken these steps, reasonably believes that the recipient is not an Australian consumer.

Interestingly, the safeguards do not extend to the reverse situation, where the overseas supplier wrong treats the recipient as a consumer and over-pays GST. The Explanatory Memorandum states that in such case Division 142 of the GST Act would apply and the supplier should generally be required to reimburse the Australian consumer for the GST before being able to claim a refund.

Shift of GST liability to electronic distribution platforms

The amendments shift the liability for GST from the overseas supplier to the operator of an “electronic distribution platform”. This is a platform operating over the internet, but not a physical store or one operated by mail.

The rationale for shifting liability is that the platform operator has most of the information about the recipients of the supplies and is generally larger and better resourced than most of the entities making supplies through the platform.

The parties can agree to shift the liability for GST to the supplier if the parties agree in writing and the recipient is given a document identifying the supply as having been made by the supplier.

GST-free and input taxed supplies

Divisions 38 and 40 are to be amended to allow Legislative Determinations to be made that a specific class of supplies that fall within the amendments to be GST-free or input taxed.

The Explanatory Memorandum states that this power will only be exercised where the current treatment of the supply or class of supply is contrary to Australia’s international trade law obligations and the Treasurer is satisfied that a supply made by a comparable Australian resident entity would receive the same treatment.

Tax invoices

The Amendments provide that the supplier is not obliged to provide a tax invoice or adjustment note at the request of the recipient. The rationale for this is that unlike most other types of taxable supplies, offshore supplies falling within the amendments by definition cannot be made to an entity that is entitled to an ITC in relation to the acquisition of the supply.

The margin scheme in Division 75 operates in the same way. As the purchaser is not entitled to input tax credits where the margin scheme is used, there is no need for a tax invoice to be provided.

GST treatment of B2B cross border transactions

These Amendments are not aimed at altering the tax base. Rather, they are aimed at streamlining the way the GST applies to cross-border supplies between businesses by relieving non-resident suppliers of the obligation to account for GST on certain supplies.

The amendments do this by ensuring that certain supplies made by non-residents are not connected with Australia – those supplies are treated as being “disconnected”. For these supplies, the recipient will be responsible for for determining if they have a GST liability under the reverse charge rules in Division 84 of the GST Act – that liability will arise to the extent that the acquisition is not creditable. If the acquisition is fully creditable in the hands of the recipient, Division 84 does not apply – there is no need to collect the GST revenue where that is fully offset by the claim for input tax credits.

In a decision handed down just before Christmas, the European Court of Justice in Air France – KLM [2015] EUECJ C-250/14 found that Air France was liable to VAT on unused air transport tickets – also described as “no-shows”. The same issue was considered in Australia in 2012 where the High Court in Commissioner of Taxation v Qantas Airways Ltd [2012] HCA 41 found that GST was payable.

The Court approached the question on the basis a supply of services, such as air passenger transport, is subject to VAT where:

• first, the sum paid by a passenger to an airline company, in the context of the legal relationship constituted by the transport contract, is directly linked with an identifiable service for which it constitutes the remuneration; and
• secondly, that service is performed.

In respect of the first dot-point, the Court observed that it had previously found that the services provided in performance of obligations arising from a contract to transport passengers by air are the checking-in and the boarding of passengers, the on-board reception of those passengers at the place of take-off agreed in the transport contract, the departure of the aircraft at the scheduled time, the transport of the passengers and their luggage from the place of departure to the place of arrival, the care of passengers during the flight, and, finally, their disembarkation in conditions of safety at the place of landing and at the time scheduled in that contract.

In respect of the second dot-point, the Court observed that it was  possible to perform those services only if the passenger of the airline company turns up on the agreed date and at the agreed place of boarding, the customer’s right to performance of those services being given by the company until the time of boarding, according to the conditions set out in the contract to transport passengers concluded when the ticket was purchased.

Nevertheless, the Court found that the consideration for the ticket consisted of the passenger’s right to benefit from the performance of obligations arising from the transport contract, regardless of whether the passenger exercises that right, since the airline company fulfilled the service by enabling the passenger to benefit from those services.

The finding of the Court is similar to that of the majority of the High Court in Qantas, where the taxable supply was identified as being “at least a promise to use best endeavours to carry the passenger and baggage, having regard to the circumstances of the business operations of the airline”, with the fare being consideration for that supply. In the context of both decisions it did not matter whether the flight was actually taken by the passenger.

In Crown Estates (Sales) Pty Ltd and Commissioner of Taxation [2015] AATA 949 the Tribunal found that the applicant was not entitled to claim input tax credits in respect of acquisitions made in providing property management services to owner-clients because the applicant was acting as the agent of those owner-clients.

The applicant contended that there were two aspects to the relationship with owner-clients:

• finding and securing clients and collecting rents that were paid into a trust account; and
• managing the property, including its physical state of repair. This included acquiring goods and services from tradespeople.

In respect of the second aspect of the relationship, the applicant contended that while those goods and services were acquired for use in properties owned by the owner-clients, it was acting as a principal when engaging the contractors and that the applicant was liable to the contractors, with the costs then passed-on to the owner-clients (some of whom refused to pay).

The Tribunal was not persuaded that the applicant was acting as a principal. In doing so, the Tribunal made some general observations about the  interaction between the GST and the law of agency:

• you cannot receive an input tax credit in respect of a creditable acquisition made by another – the issue here was whether the applicant acquired anything, or whether the acquisition was made by the property owners;
• an agent is able to create and affect a legally enforceable relationship between the principal and a third party – at least where the agency is disclosed or it is clear from the the terms of the agreement that the agent is acting in that capacity and does not intend to be personally bound;
• where the agent does not disclose the existence of the principal and appears on the face of the relationship to be contracting with the third party in his or her own right, the undisclosed principal will still be liable and may enforce the agreement with the third party – in that event, the (undisclosed) relationship as between principal and agent suggests the acquisition of goods or services from the third party will still amount to a supply of goods or services by the third party to the undisclosed principal, albeit that the agent may also be liable to the third party.

A final comment of the Tribunal was that if the applicant was entitled to input tax credits on the acquisitions from the contractors, any input tax credit that could be claimed would be offset by the GST payable when those costs were passed on to the property-owners.

The recent decision of the First Tier Tribunal in  Adecco Uk Ltd v Revenue & Customs [2015] UKFTT 600 illustrates the difficulties with tripartite agreements (both here and in the UK).

The Tribunal had to decide whether the applicant was liable to pay VAT on the full charge paid by its clients for the services of non-employed temps provided to those clients or only on the element of the charge retained by it (i.e. the commission or gross profit element).

As observed by the Tribunal (at [8]), the question for the Tribunal was simple in essence. What did Adecco supply to its clients?

• A supply of introductory services – the consideration being the commission?; or
• A supply of the temps – the consideration being the entire fee?

The answer was not so easy.

The Tribunal ultimately found that Adecco was liable to pay VAT on the whole charge, but doing so required a decision running to some 314 paragraphs, taking the reader on a detailed journey through the minefield that is the world of tripartite supplies and a consideration of the various decisions of the UK courts and the ECJ that have considered the issue, including Redrow, Loyalty Management, Baxi Group, WHA and Airtours.

In an additional twist that only adds to the confusion surrounding VAT/GST and tripartite agreements, in coming to its conclusion the Tribunal found that it could not follow a decision of the First Tier Tribunal in 2011 that came to the contrary view on the same issue and almost identical facts.

No doubt there will be an appeal – indeed, the Tribunal effectively invited an appeal to allow a higher authority to clarify the VAT issues.

My analysis of the decision can be accessed here.