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Commissioner publishes GST Determination on failed payment fees and draft GST ruling on adjustment notes

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Yesterday the Commissioner published GSTD 2013/1 ‘Goods and services tax: when a payment for a supply fails, is a failed payment fee charged by the supplier consideration for a supply?’ and GSTR 2013/D1 ‘Goods and services tax: adjustment notes’

GSTD 2013/1

In the Determination the Commissioner considers that a failed payment fee (eg, a fee payable by a customer to an internet service provider paying by direct debit if there are insufficient funds in the customer’s account) is not consideration for either a financial supply or another supply (eg, a supply of administrative services). This is a different outcome to the previous published view of the Commissioner in Goods and Services Tax Advice (GSTA) Tax Practitioner Partnership (TPP) 065 which described the failed payment fee as consideration for an input taxed supply – that advice has been withdrawn.

The basis for the Commissioner’s view is that there is insufficient connection between a failed payment fee and anything supplied by the supplier. Whilst a failed payment may result in the supplier having to undertake additional actions, these are not services that are supplied to the recipient – they are simply a necessary part of the supplier ensuring it receives payments for amounts owed.

Further, the Commissioner does not consider that an “interest” in a financial supply is provided or created – this is because the supplier has not received any property in a debt or a new debt from the customer. The original debt never ceased to exist and remained the property of the supplier.

GSTR 2013/D1

The draft ruling sets out the requirements for adjustment notes under Division 29 of the GST Act, including:

  • when a document is in the approved form for an adjustment note
  • the information requirements that the Commissioner has determined under paragraph 29-75(1)(c) and an explanation of how those requirements in the A New Tax System (Goods and Services Tax) Adjustment Note Information Requirements Determination 2012 apply
  • when the Commissioner will treat a particular document as an adjustment note even though that document does not meet all of the adjustment note requirements under subsection 29-75(1)
  • an appendix summarising the circumstances when a decreasing adjustment can be attributed without an adjustment note as determined by the Commissioner under s 29-20(3)

ATO ID 2013/9 published on whether representative of incapacitated entity can register for GST

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On Friday, the ATO published ATO ID 2013/9 “GST and registration of a representative of an incapacitated entity when the incapacitated entity is neither registered nor required to be registered”.

The ID takes the view that a representative of an incapacitated entity cannot register for GST under s 23-10 of the GST Act in that capacity if the incapacitated entity is neither registered nor required to be registered.

Section 58-20 of the GST Act provides that a representative of an incapacitated entity is required to be registered in that capacity if the incapacitated entity is registered or required to be registered. Further, s 58-25(1) provides that the Commissioner must cancel the registration of a representative of an incapacitated entity if the Commissioner is satisfied that the representative is not required to be registered in that capacity. The intent of these provisions appears to be to ensure that the representative entity “stands in the shoes” of the incapacitated entity, so that the representative entity’s obligation to register for GST mirrors those of the incapacitated entity – the representative entity has no independent entitlement to register for GST.

Tribunal finds applicants not entitled to input tax credits as they were not carrying on an enterprise

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In Bayconnection Property Developments Pty Ltd and Ors and Commissioner of Taxation [2013] AATA 40 the Tribunal affirmed the view of the Commissioner that the applicants were not entitled to input tax credits they had claimed.  This was because it was clear that none of the applicants were carrying on an enterprise, even taking into account the extended definition of “carrying on” that includes “doing anything in the course of the commencement or termination of the enterprise”. The Tribunal also upheld the imposition of penalties of 75% for intentional disregard of the taxation laws, plus an increase in penalties by 20%.

The input tax credit claims were made by a number of companies within a group and they related to the controller’s vision to establish an institution for vocational training. However, the applicant provided little, if any, evidence of the roles played by the applicants in the project which might suggest that they were carrying on an enterprise. The Tribunal found that the controller had merely formulated a structure as to where the applicants would “sit” within the structure if the project materialised – and that the applicants had not commenced any activities by the time they became registered for GST and had not done so during the period in which credits were claimed. The Tribunal was also concerned that the applicants had been generating refunds based on credit claims they knew to be unfounded and that the clear implication was that the payment of the credits was needed to assist the cash flow of the companies within the group.

Commissioner publishes three GST rulings on residential premises

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Today the Commissioner finalised its rulings dealing with GST and residential premises.  Instead of one ruling, the Commissioner has helpfully split the ruling into three separate rulings, being GSTR 2012/5 ‘Residential premises’; GSTR 2012/6 ‘Commercial residential premises’ and GSTR 2012/7 ‘Long term accommodation in commercial residential premises’.  The rulings were previously issued in draft form in GSTR 2012/D1 and GSTR 2011/D2.

Each of the rulings is summarised below, with some areas of interest highlighted.

GSTR 2012/5

This ruling deals with the application of Subdivisions 40-B and 40-C of the GST Act apply to supplies of residential premises.  It does not deal with the following issues:

  • when a sale is of “new residential premises” – that is dealt with in GSTR 2003/3
  • when premises are “commercial residential premises” – that is dealt with in GSTR 2006/6

The concept of “residential premises to be used predominantly for residential accommodation

The ruling takes the view that the requirement in section 40-35, 40-65 and 4070 that premises “be premises to be used predominantly for residential accommodation” is to be interpreted as a single test that looks to the physical characteristics of the property – there is no requirement to examine the subjective intention of, or use by, any particular purpose.  The Commissioner relies on the decision of the Full Federal Court in Suncheon Pty Ltd v Federal Commissioner of Taxation [2010] FCAFC 138 where the Court looked at the physical characteristics of the property rather than the intended use of any person.

Where premises include basic living facilities for residential accommodation, but those facilities are incidental or ancillary to the premises primary function which is not to provide residential accommodation (e.g., office buildings and hospitals), those premises are not residential premises to be used predominantly of residential accommodation.

Ancillary supplies with residential accommodation

Where a residential apartment includes a garage, car-parking space or storage area within the complex, the ruling considers that these supplies are ancillary or incidental to the dominant supply of the residential apartment – therefore there is a composite supply of residential premises.  This is the same even if these other items are separately titled, but located within the same complex. These matters may not be ancillary or incidental where they are supplied after the original supply of the residential unit, or they are located in a separate building.

Apportionment

The ruling takes the view that the supply of premises needs to be apportioned to the extent that part of the premises is not residential premises to be used predominantly for residential accommodation.  Foe example, if a house is modified so that part of it is used as a doctor’s surgery.  Looking at the ruling, whether apportionment is required will be a matter of degree in each case, and a question will also be whether the non-residential use is ancillary or incidental to the residential use (and also whether the residential use is ancillary or incidental to the non-residential use).

Vacant land

The ruling considers that vacant land cannot be residential premises.  The Commissioner relies on the decision of the Full Federal Court in Vidler v Federal Commissioner of Taxation [2010] FCAFC 59.

GSTR 2012/6

This ruling deals with the application of Subdivisions 40-B and 40-C of the GST Act apply to supplies of commercial residential premises and supplies of accommodation in commercial residential premises.

Definition of “commercial residential premises”

The ruling provides a detailed analysis of the definition of “commercial residential premises” in s 195-1 of the GST Act.

The ruling accepts that premises may still fall within the definition if they are not operating at the time of the supply – this is because such premises may be classified by their overall physical character, considered with other objective characteristics.  For example, a newly constructed hotel (although vacant) would still be commercial residential premises.

Separately titled rooms, apartments, cottages or villas

The ruling accepts that separately titled rooms, apartments or adjacent cottages or villas on adjoining or abutting land can be combined with sufficient commercial infrastructure so that, as a whole, it can be operated similarly to a hotel, motel, inn or hostel.  Further, a single supply by sale or lease of premises consisting of rooms, apartments, cottages or villas as well as commercial infrastructure, regardless of whether they are separately titled, is a supply of commercial residential premises under paragraph (a) or (f) of the definition.

However, the supply by sale or lease of part of building cannot be characterised by reference to another supply.  For example, a supply by sale of residential apartments without sufficient commercial infrastructure will not be the supply of commercial residential premises. The ruling adopts the analysis of the Full Federal Court in South Steyne Hotel Pty Ltd v Commissioner of Taxation [2009] FCAFC 155.

Employee accommodation

The ruling departs from GSTR 2000/20 on the treatment of accommodation provided by employers.  In GSTR 2000/20 (which was withdrawn today) the Commissioner’s view (at [39]) was that as a general proposition accommodation provided by an employer in premises controlled by them or their associate is usually residential premises.  At [39], this general proposition was modified providing that short-term accommodation provided in specific circumstances was not a supply of residential premises, nor of commercial residential premises, and the supply was subject to the basic rules.  In the current ruling, the Commissioner considers that the supply will be either an input taxed supply of residential premises or a taxable supply of commercial residential premises, depending on the circumstances.

Given this change in view, the Ruling contains transitional provisions to address those circumstances where taxpayers may be financially disadvantaged.

Boarding houses and rooming houses

The Commissioner has adopted a position consistent with the decision of the Federal Court in ECC Southbank Pty Ltd and trustee for the Nest Southbank Unit Trust v Commissioner of Taxation [2012] FCA 795 and notes that he previously issued advice to some members of the boarding house and rooming house industry that supplies of accommodation to residents that do not have the status of guests are input taxed supplies of residential premises.  Further, the Commissioner accepts that this previous advice created a general administrative practice for the purposes of PSLA 2011/27.

To address this change of position, the ruling provides for transitional rules to allow operators to change their systems to correctly account for GST.

GSTR 2012/7

This ruling deals with the application of Division 87 and s 40-35 of the GST Act to supplies of long-term accommodation in commercial residential premises.

The ruling considers that the supply of commercial accommodation does not need to be provided to an individual, allowing corporate entities to acquire long-term accommodation for their employees to benefit from the concessionary treatment.  In such cases, the employee is being provided with the accommodation, but the corporate entity is the recipient of the supply.  The Commissioner accepts that it is only necessary to establish that the supply of commercial accommodation is being made to an entity and is for 28 days or more and the accommodation, under the terms of the agreement, is able to be taken up by an individual.  It is not necessary that the commercial activity is actually taken up by the individual.

Commissioner finalises four GST Determinations on telecommunication supplies

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Yesterday the Commissioner published four GST Determinations on telecommunications.  The determinations deal with four issues considered in the Telecommunications Industry Liason Group – Industry Register.  The views of the Commissioner in the Determinations are consistent with those expressed in the issues register.

While the determinations are specific to telecommunication supplies, one general point of interest flow from the views of the Commissioner is that he considers that the words “supply is provided” in subsection 38-190(3)(b) is to be contrasted with the term “made” in Item 2 of the table.  The Commissioner considers that the word “provided” is used to distinguish between the contractual flow of the supply made to a non-resident recipient and the actual flow of the service or other things provided to another entity.

UK Tax Tribunal finds VAT not payable on retained overpayments

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In Borough Council of King’s Lynn and West Norfolk v Revenue & Customs [2012] UKFTT 671 the UK First Tier Tax Tribunal found that the Council was not liable to pay VAT on overpayments made by members of the public in respect of car parking.  The Council operated ticket vending machines which displayed sliding scale hourly parking charges and indicated that overpayments were accepted but no change was given.  The overpayments occurred where members of the public voluntarily paid more for a parking ticket than they were required to pay (for example if they did not have the correct change), which ranged between 2.25% to 3.46% of total payments per year.

The Revenue submitted that there was a supply of services by the Council and VAT was payable on “the whole consideration paid or payable”.  Further, the parking ticket confirmed the full payment as being made for the supply.

The Council submitted that the payment was ex gratia and the member of the public gets nothing in return for the payment.  There was no link between what is supplied and what is received – in the absence of the nexus, the overpayment cannot be treated as consideration for the the purposes of VAT.

In considering the issue, the Tribunal made the following statement of principle:

There must be a direct link between the supply made and the consideration given.  The supplier would normally expect something in return for a supply and will not fulfil their contractual obligation unless payment is received or forthcoming.  If there is no direct link between the supply which is made and the payment received or if a party was not obliged to pay then it cannot be said that there was consideration for the supply.  There must be some form of reciprocity between the parties.

In finding for the Council, the Tribunal observed that the fact that a party receives a sum of money does not mean that that sum represents consideration.  What was missing in this case was a direct link between what is supplied and what is paid for.

In the Australian context, the “nexus” is broader (being “in connection with” rather than a direct nexus between supply and consideration).  The question would be whether the overpayment was received “in connection with” the supply of car parking – or to use the approach adopted by the Commissioner – whether there was “a substantial relation, in a practical business sense”, between the overpayment and the supply.  The application of the nexus was recently considered by the Tribunal in AP Group Limited and Commissioner of Taxation [2012] AATA 409 dealing with the GST implications of various motor vehicle incentive payments.  The pending appeal of that decision to the Federal Court may well provide some guidance as to how the issue considered in the UK Tribunal should be dealt with in the Australian context.

Tribunal decision on GST and penalties

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Yesterday the Tribunal handed down its decision in Hirezi and Ors and Commissioner of Taxation [2012] AATA 688 where it affirmed the Commissioner’s decision to impose penalties in respect of the applicant’s GST shortfall.  The applicant unsuccessfully contended that he was blameless in the management of his affairs and that he was a victim of his tax agent who was incompetent.

The applicant was a member of a partnership which developed an industrial estate for sale.  The partnership did not correctly account for GST on the lots sold and there was no dispute that there was a GST shortfall.  The Commissioner imposed penalties at 50% (on the basis of reckless conduct) but remitted that penalty to 25% because of the applicant’s good compliance record.  The applicant contended that the penalty should have been imposed at a lower rate and also remitted further.

The Tribunal found that the applicant’s argument on the imposition of the penalty could not succeed.  There was clearly a basis for a finding of reckless conduct by the tax agent.

The Tribunal also found that the penalties should not be remitted further. The applicant argued as follows:

  • the applicant was essentially blameless for what occurred and it would be harsh to make them responsible for the consequences of their tax agent’s failings; and
  • even if the Commissioner was not inclined to provide relief for taxpayers from the sins of their agents in the ordinary course, it would be harsh to take that approach in this case because the agent was uninsured and had few assets to satisfy a judgment.

The Tribunal accepted that the applicant was not aware of any of the mismanagement by his tax agent and was not being wilfully blind to what was going on.  However, the Tribunal was not satisfied that the applicant was blameless – this is because he signed whatever was put in front of him without asking some basic questions about what he was signing.  Accordingly, the applicant did contribute, albeit in a small way, to his own misfortune.

Interestingly, the Tribunal found that remittal of penalty might be considered where it served no purpose to visit a penalty on the taxpayer – referring to a recent decision of the Tribunal in Johnson and Commissioner of Taxation [2011] AATA 20. The Commissioner did not concede that it was generally appropriate to remit a penalty where the taxpayer is blameless in the face of an incompetent tax agent. Those considerations did not apply here as the applicant did contribute to events and there would be a purpose in the penalty as it would reflect the applicant’s failure to be more diligent in his dealings with his tax agent.

ATO ID issued on charitable institutions making GST-free supplies

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On Friday the ATO published ATO ID 2012/78 ‘GST and supplies made by endorsed charitable institutions for nominal consideration’ which determined that an endorsed charitable institution can include the cost of acquiring capital items when calculating the cost of making a supply under sub-paragraph 38-250(2)(b)(ii) of the GST Act, being a supply (other than of accommodation) that is for consideration less than 75% of the consideration provided for acquiring the thing supplied.

The facts used in the ID relate to an entity which operates a zoo and makes supplies of zoo admissions for consideration.  The entity acquires a number of things such as the animals, the enclosures, the parks and gardens.

The ID acknowledges that the section has an easy operation where the entity supplies the same thing as acquired (eg, a blanket).  However, it is more difficult where the entity “uses” acquisitions in making supplies, including capital items.  On “a strict literal interpretation” the sub-paragraph would only apply where the same thing is supplied as was acquired, however the ID accepts that the phrase “acquiring the thing supplied” should be interpreted to include both things acquired and on-supplied and things that are acquired and ‘used’ in combination in making a supply of something else.

In the context of the zoo, the things used to make the supply include recurring (revenue) items such as animal feed and the services of zoo keepers, and capital items such as buildings, or plant and equipment.

A further issue with capital items is that they are not generally consumed in making supplies in the period in which they are acquired – they have an effective life and are used by the entity to make supplies over a number of periods.  To reflect this, the ID takes the view that the consideration used to make supplies is a proportion of the price paid, generally equal to the portion of the effective life of the item. The ID considers that entities must use methodology outlined in the Goods and Services tax Industry Issues: Charities Consultative Committee Resolved Issues Document (the consideration provided for the capital item in that period) or an amount equivalent to the decline in value for the capital item for that period consistent with Division 40 of the ITAA 1997.

Tribunal decision re GST substantiation; Tribunal decision re whether primary production business carried on

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On Friday the Tribunal handed down two decisions, Siddiqi and Commissioner of Taxation [2012] AATA 589 and Nelson and Commissioner of Taxation [2012] AATA 579.  The first decision deals with whether the taxpayer could establish that certain cash deposits were not business receipts.  The second decision deals with whether the applicant was carrying on a primary production business so as to claim income tax deductions. While dealing with income tax, the case raises an interesting question of whether a different result would arise in the context of GST.

In Siddiqi the taxpayer was assessed for income tax and GST in respect of his business operations where the taxpayer did not keep business records and most of the transactions involved cash.  An audit revealed discrepancies between the BASs and income tax returns and the Commissioner identified a number of deposits into bank accounts for which there was no satisfactory explanation.  In these circumstances, the taxpayer faced the difficult task of discharging the onus of providing that the unexplained deposits were not the result of payments received in the course of conducting his business activities.  Save for some deposits which were conceded by the Commissioner, the taxpayer was unsuccessful.

In Nelson the question was whether the applicant was carrying on a business of primary production.  The applicant did not make any income during the relevant period, but sought to claim deductions in respect of improvements made to the property and other expenses incurred, including depreciation of assets.  The Commissioner concede that the applicant did carry out a number of improvements, but contended that the operation had not reached the point where it could be characterised as a primary production business.  The Tribunal agreed with the Commissioner and found that the applicant was still in the preparatory stages of the business.

I accept the taxpayer has made a number of improvements to the property.  He has cleared parts of the property and laid down or improved vehicular access routes.  He has built fences out of harvested timber.  He has planted trees in test orchards and established farm outbuildings, including a hen house and nursery.  He has installed irrigation pipes.  He has a large machinery shed adjoining the residential accommodation he shares with his family.  All of these things are consistent with the operation being characterised as a business.

And yet I am not satisfied that the taxpayer was engaged in a business during the years in question.  None of the activities identified by the taxpayer had advanced much beyond the planning stage.  Some of the activities had not even gone that far; they remained glimmers in the taxpayer’s eye during the period in question.  He has certainly put a lot of thought into the various activities he would like to undertake, and he has taken some steps towards achieving those plans.  He may yet manage to make a success of some of the proposals, but the link between the activities he has already undertaken and the production of income at some future point in time is too tenuous during the years of income in question.

This decision raises the question of how the matter would be seen in a GST context.  In the GST Act, “carrying on an enterprise” is defined to “include doing anything in the course of the commencement or termination of the enterprise”.  In MT 2006/1  the Commissioner accepts that it follows from this definition that activities done by an entity that are part of a process of beginning or bringing into existence an enterprise are activities in carrying on an enterprise.  Given this broad definition, it may well be that the applicant in this case would have been “carrying on an enterprise” within the meaning of the GST Act, thereby being entitled to register for GST and claim input tax credits, but not entitled to claim an income tax deduction.

 

Tribunal decision on undeclared GST; Commissioner issues Addendum to GSTR 2000/24

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Yesterday the Tribunal handed down its decision in Vita Hot Bread Pty Ltd and Commissioner of Taxation [2012] AATA 570 where the Tribunal found that the applicant had understated his income and GST in respect of a bakery and bread shop.  The Tribunal did partially allow the GST objection to take into account errors made by the Commissioner.  The decision is another example of the onus imposed on taxpayers to establish that GST assessments are excessive.  One additional point of  interest in the case flows from the following arguments raised by the taxpayer:

  • During the hearing counsel for the Commissioner cross-examined the applicant about certain loan applications and the income levels stated therein.  Counsel for the applicant submitted that the Tribunal should infer from the failure of the Commissioner to call the broker who acted for the Applicant that the evidence would not have assisted (relying on the principles in Jones v Dunkel (1959) 101 CLR 298.  The Tribunal noted the argument, but made no decision the issue.  This appears to be because the applicant accepted that he lied to the bank about his income when applying for a loan.

Also, earlier this week the Commissioner issued Addendum GSTR 2000/24A2 ‘Goods and Services Tax; Division 129 – making adjustments for changes in extent of creditable purpose’.  The Addendum amends GSTR 2000/24 to reflect the inclusion of Divisions 133 and 134 into the GST Act.  Division 133 provides for a special decreasing adjustment for an acquisition where you provide additional consideration at a time when you can no longer claim an input tax credit.  Division 134 relates to the GST treatment of certain third party payments (sometimes described as manufacturers rebates) made on or after 1 July 2010.