Category Archives: Uncategorized

Commissioner issues PSLA on penalties; Addendum to MT 2006/1 re Enterprise.

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On 23 August 2012 the Commissioner published PSLA 2012/5 ‘Administration of penalties for making false or misleading statements that result in shortfall amounts.  This replaces PSLA 2006/2 effective 23 August 2012 and it explains how the Commissioner administers the penalty for making a false or misleading statement made on or after 1 April 2004 where the statement results in a shortfall amount.  The PSLA discusses when such a statement will give rise to the administrative penalty and how the penalty is assessed, including any remission of the penalty.  This covers all taxes, including GST.

On 22 August 2012 the Commissioner published Addendum MT2006/1A1 to MT 2006/1 ‘The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number’.  The Addendum updates references to legislation and cases, in particular the decision of the Federal Court in FCT v Swansea Services Pty Ltd [2009] FCA 402.  In doing so, the Ruling incorporates the following aspects from that decision:

  • The words ‘in the form of’ do not support a suggestion that form alone may prevail over substance.  However, those words ‘have the effect of extending the reach of ‘enterprise’ to those activities which are in the form of a business but would not, in the ordinary meaning of ‘business’ be considered such.  But the activity must still be reasonably intended to be profit making in the case of an individual and cannot for any entity simply be a private recreational pursuit or hobby’: paragraph 170A
  • Whether the passive nature of an activity affects the characterisation (of carrying on a business) will turn on the particular context: footnote 68
  • The GST legislation does not preclude investment activities from amounting to the carrying on of an enterprise: footnote 70

Treasury releases Exposure Draft legislation for Margin Scheme and Subdivided land; Analysis of GSTR 2012/4

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Following on from my post on Monday about the events of last Friday, I note that that on the same day Treasury released an Exposure Draft of legislation intended to clarify the operation of the margin scheme, including a technical amendment to the provision dealing with subdivided land.  Also, to cap off a busy week, the Commissioner published GSTR 2012/4 GST treatment of fees and charges payable on exit by residents of a retirement village operated on a leasehold or licence basis.  My analysis of the Ruling can be accessed here.

Exposure Draft legislation

The legislation seeks to ensure that taxpayers are able to use the consideration method, the valuation method, or the GST-inclusive market value method, whichever is appropriate, when calculating the margin on a taxable supply of subdivided land.

Comments are due by 12 September 2012.

Links to documents:

The Explanatory Memorandum summarises the legislation as follows:

This Schedule removes doubt as to the use of an approved valuation o[f] GST inclusive market value to determine the margin for a taxable supply of a subdivided interest, unit or lease in real property.  This is achieved by amended section 75-15 to expressly allow taxpayers, where relevant, to use a corresponding propotion of (as applicable):

  • the consideration provided for the relevant acquisition of the land or premises from which the interest, unit or lease was subdivided;
  • an approved valuation of the land or premises from which the interest, unit or lease was subdivided as at a specified date;
  • the GST inclusive market value of the land or premises from which the interest, unit or lease was subdivided at a specified time;

to calculate the margin for a taxable supply of a subdivided interest, unit or lease in real property.

A consultation paper was released on 10 December 2010 and 12 submissions were received.  These documents can be accessed below

 

Commissioner publishes Final Ruling on Retirement Villages; Technical Discussion Paper on GST treatment of recovered dishonoured payment costs

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Yesterday the Commissioner published GSTR 2012/4 GST treatment of fees and charges payable on exit by residents of a retirement village operated on a leasehold or licence basis.  The ruling explains the GST treatment of amounts which a resident becomes liable to pay the operator of a retirement village when the resident’s interest in the village terminates (referred to as “exit payments”).  The ruling is limited to where the resident’s interest is a right to possession of residential premises under a lease or licence with a right to use the communal facilities of the village.

The ruling was previously issued as 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.  My post on that draft can be accessed here.  A post analysing the final ruling will be published over the next few days.

Also, on 1 August 2012 the Commissioner released Technical Discussion Paper TDP 2012/1 ‘GST treatment of recovered dishonoured payment costs’.  This is the first TDP dealing with GST that I am aware of, and the aim is to facilitate consultation between the ATO and the community as part of the process of developing a potential ATO view on the application of the GST law. The ATO is seeking comments on its views outlined in the TDP.

The TDP discusses the different possible GST treatments when a dishonour fee incurred by a supplier (after their customer’s payment for supply is dishonoured) is recovered from their customer.  It is noted that publicly available information indicates that Australian businesses are adopting different GST treatments when recovering dishonoured payment fees from their customers, with some appearing to be contrary to the current ATO view – found in GSTA TPP 065 which provides that recovery of dishonoured payment fees may be a financial supply.

The TDP does not consider the GST treatment of the dishonour fee imposed at first instance by a financial institution on a supplier (that is dealt with by the GST Act and GST Regulations).

The TDP is quite extensive, running to some 104 paragraphs, and it deals with questions including:

  • whether dishonour fees are consideration for an interest in a debt;
  • whether dishonour fees are consideration for an interest in credit;
  • whether dishonour fees are consideration for an indemnity interest;
  • whether the recoverable dishonour fees are for the provision of a stand alone facilitation service;
  • whether the recoverable dishonour fees are for a contractual breach;
  • whether the recoverable dishonour fees are additional consideration for an underlying supply.

Comments are sought by 29 August 2012.

GST Private Rulings for July 2012, focus on bare trusts and GST refunds

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In July 2012 the ATO published over 70 private rulings on the Private Rulings Register dealing with GST Issues.  A list of the rulings can be accessed here.  Two rulings stood out as justifying some discussion, one dealing with bare trusts and the other with refunds of GST and the Commissioner’s discretion in s 105-65 of the TAA.

Ruling No 1012169974256 – bare trusts

An interesting ruling dealt with the issue of bare trusts in the context of real property.  The views of the ATO on bare trusts are found in GSTR 2008/3 and Ruling No. 1012169974256 provides a helpful application of those views.

The facts outlined in the ruling were as follows:

  • a SMSF owned residential land which was leased plus listed securities.  The SMSF voluntarily registered for GST
  • the trustees of the SMSF determined to acquire commercial property for rental, but the rental would be less than $75,000 per year
  • prior to the acquisition, a separate trust would be created to hold legal ownership of the commercial property on behalf of the SMSF as sole beneficiary until such time as the SMSF had repaid the loan used to acquire the property.  Once the loan was paid off, the property would be transferred to the SMSF
  • the SMSF would conduct all the transactions relating to the property, including the borrowing and the leasing, plus pay all the rates and outgoings on the property.

In the ruling, the applicant asked the following questions:

  • is it the trust or the beneficiary that is carrying on the enterprise
  • when the trust purchases commercial property which is subject to a lease, should the trust or the beneficiary be registered in order to satisfy the ‘going concern’ exemption
  • when legal ownership transfers from the trust to the beneficiary, is it a taxable supply

The ruling answers the questions as follows:

  • the beneficiary is carrying on the enterprise and can voluntary register for GST
  • the beneficiary should be registered in order to satisfy the going concern exemption
  • the transfer from the trustee to the beneficiary is not a taxable supply

The basis for the view is that the trustee is a bare trust and it effectively ignored for GST purposes.

Ruling No.1012171312428 – refunds of GST

A consistent area of controversy is the Commissioner’s application of the discretion in s 105-65 in Schedule 1 to the TAA as to whether or not to pay GST refunds.  In Ruling No.1012171312428 the determination of the Commissioner not to exercise the discretion where a charity overpaid GST illustrates the arguably harsh impact of this provision, and also the difficulties faced by taxpayers in recovering refunds of GST.

The applicant was a Public Benevolent Institution which sold tickets to the public for certain events.  Until 2011 the applicant charged GST on the tickets but then was advised that the tickets were GST-free under s 38-250 of the GST Act as the ticket price was less than 75% of the cost to the supplier.

The Commissioner refused to exercise the discretion to refund the GST because the applicant had not demonstrated that it had borne the cost of the GST in relation to the supplies made, rather the GST had been “passed on” to the customers (who were not registered or required to be registered).  The Ruling provides an insight into the way the Commissioner appears to be applying the discretion, and the following points were made in the context of the application:

  • the underlying premise of the GST is that GST is payable by suppliers but is ultimately borne by consumers.  Therefore in normal circumstances the GST is passed on to the end consumer such that the supplier who remits the tax is not bearing the cost of the tax
  • at the time of making the supplies, the applicant was not aware of the GST-free concession and GST was understood to be a cost to the applicant.  Also, simply because some tickets have been sold at less than cost, it does not necessarily follow that the price that was charged did not include GST
  • the ATO does not accept that pricing to a market price (or using other pricing mechanisms such as fixed prices, price points etc) means that the supplier has necessarily borne the cost of the GST at the time of pricing or thereafter
  • there is a presumption that the cost of any GST liability is a foreseeable cost that will be passed on as part of the cost recovery and pricing structure of the supplier.
  • while for ‘not for profit’ entities there may not be a general presumption that entities set prices to recover costs, each case must be assessed on its merits and it is appropriate to approach the question with reference to the supplier’s conduct in setting prices based on its knowledge and belief at the time that GST was a cost (even if it is later determined that GST was not payable)
  • the applicant increased its prices each year in line with increasing running costs and the ATO considered that the applicant’s aim was to meet its costs as far as possible
  • while the terms of the sale were that the price was GST inclusive, it is reasonable to conclude that the customers would form the opinion that the amount they paid included GST
  • the ATO considered that there was a GST component in the price advertised to customers and the cost of the GST had been passed on to customers.

The above analysis illustrates the difficulties faced by taxpayers in showing that they have not “passed on” the GST to customers.  Even, as in this case, the supplier is selling the tickets at a loss.

Commissioner issues Taxpayer Alert on acquisition of intangible right for inflated consideration

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Today the Commissioner issued Taxpayer Alert TA 2012/5 ‘Acquisition of intangible right for inflated consideration which is financed by supplier’.  The arrangement described in the Alert is where an entity claims an input tax credit on a purported acquisition (on non-commercial terms which has an inflated or commercially unrealistic price) of an intangible right from a supplier, with the provision of vendor finance under which payments are contingent on a future event.  The vendor issues a tax invoice for the stated purchase price, irrespective of whether the conditions requiring payment have been met.  The purchaser accounts on an accruals basis and claims an input tax credit.  The vendor accounts on a cash basis and does not remit GST.

The aspects of the arrangements which concern the Commissioner are stated to be:

  • whether the purchaser has made a creditable acquisition at all;
  • whether the purchaser is entitled to attribute any input tax credits before the contingency for payment is satisfied – this raises the question of whether the purchaser is “liable to pay” consideration at this time;
  • whether the anti-avoidance provisions in Division 165 of the GST Act apply, as it appears artificial and contrived in its design;
  • whether the arrangement, or certain steps within it,  constitute a sham at general law.

The Alert also states that the Commissioner will consider the income tax and GST implications for the vendor.

My thanks to Rhys Penning of Greenwoods & Freehills for alerting me to the publication.

Federal Court finds student accommodation is the supply of “commercial residential premises”

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In ECC Southbank Pty Ltd as trustee for Nest Southbank Unit Trust v Commissioner of Taxation [2012] FCA 795 the Federal Court accepted the taxpayer’s contention that the supply of shared and studio style apartments was the supply of “commercial residential premises” and therefore taxable, rather than the input taxed supply of residential premises (as contended by the Commissioner).

The central question was whether the complex, as a whole, fell within paragraph (a) of the definition of “commercial residential premises”, being “a hotel, motel, inn, hostel or boarding house” or paragraph (f) as “anything similar to residential premises described in paragraph (a)”.

The Commissioner contended that none of the words “hotel”, “motel”, “inn”, “hostel” or “boarding house” described accommodation “similar to that which would be expected for those who own or rent a house or apartment”.  The Commissioner contended that a resident of the premises in question rented his or her accommodation in much the same way as a person would rent any apartment for the purpose of exclusive or shared residence.  The policy of the GST legislation was that “those renting a house or apartment are to be on the same footing as person who own their own homes – neither is to pay GST in connection with such occupation”.

The Court considered whether the premises in question were similar to each of the types of establishment referred to in the definition of commercial residential premises.  The Court found as follows:

  • there were a number of features which distinguished the premises from a hotel or motel
  • the premises bear a much closer resemblance to a hostel than a hotel.  While meals were not provided to residents as they might be in the case of a more traditional hostel, the Court found that this did not mean that the premises could still be fairly described as a hostel, or at least similar to a hostel.
  • the premises were not similar to an inn or boarding house.

The Court also placed weight on the attributes specified at para 15.12 of the Explanatory Memorandum to the 2006 amendments to the definition as normally found in commercial residential premises (the Court also noted that Greenwood J referred to these attributed in Meridien Marinas Horizon Shores Pty Limited v Commissioner of Taxation [2009] FCA 1594 at [74]):

  • are run by a controller for a commercial purpose;
  • have multiple occupancy;
  • are held out to the public as such;
  • have a central management;
  • provides services in addition too commercial accommodation;
  • are used for the main purpose of accommodation.

The Court found that the premises met all of these requirements.  In doing so, the Court noted as follows:

It is true that in comparison with some other types of establishment referred to in the relevant definition, the level of services provided in addition to accommodation may seem slight.  But the services provided by staff to residents through the reception desk are by no means insignificant and, considered along with all other relevant matters, confirm my view that the Urbanest premises are properly regarded as commercial residential premises for the purposes of the GST Act.

The Court also noted that the fact that accommodation is the principal place of residence of the individual concerns does not mean that the supply is not taxable as commercial residential premises.  In such circumstances, the Court noted that the value of the supply may be substantially reduced for GST purposes by Division 87.

It will be interesting to see whether the Commissioner appeals the decision to the Full Federal Court.

GST Determination issued on second hand goods

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Yesterday the Commissioner published GSTD 2012/6 ‘Goods and Services tax: when an entity makes a taxable supply of second hand goods by way of lease before making a taxable supply of the goods by way of sale (or exchange), are both taxable supplies taken into account to quantify and attribute input tax credits under Subdivision 66-A of the GST Act’.

The Commissioner’s view is yes, with the effect that both taxable supplies (i.e., the lease and the sale) are taken into account in quantifying and attributing input tax credits under s 66-10(1) and 66-15(1) of the GST Act.  This is a view beneficial to taxpayer as it ensures that the entitlement to credits is not unduly limited to the GST payable on the sale of the asset where that asset is first subject to a lease.

Division 66 applies where second hand goods are acquired for the purposes of sale or exchange (but not manufacture) in the ordinary course of business: s 66-5.  The Division was considered by the Federal Court in Leaseplan Australia Limited v Commissioner of Taxation [2009] FCA 1309 and it is now settled that the provision can apply where the purpose of sale or exchange is one of a number of concurrent purposes – for example, where goods are purchased for the dual purpose of lease followed by sale at the expiration of the lease.  See also the ATO Decision Impact Statement here.

The effect of the Determination is as follows:

  • The amount of the input tax credit is limited to the lower of 1/11th of the consideration for the goods and the aggregate of the GST payable on the taxable supply of the goods through the lease and the subsequent sale of the goods: 66-10(1)
  • An input tax credit will be attributable in respect of the taxable supply of the lease to the tax period in which consideration is received or an invoice is issued: s 66-15(1)
  • Any remaining input tax credit will be attributable in respect of the taxable supply of the sale to the tax period in which consideration is received or an invoice is issued.

The Determination includes the following helpful example:

  • Finance Co makes a creditable acquisition of  second-hand vehicle from an unregistered vendor for the cost of $5,500.
  • Finance Co then leases the vehicle for a total consideration of $4,400, including GST of $400
  • After the lease expires, Finance Co sells the vehicle for $2,200, including GST of $200.
  • Finance Co can claim input tax credits for the acquisition of the vehicle capped at $500 (being 1/11th of the acquisition cost) – as this is less than the total GST on taxable supplies of $600.
  • Finance Co attributes $400 of the credits to the tax period in which any consideration is received for the lease.  The balance of $100 is attributed in the tax period in which any consideration is received for the sale of the lease.

The Commissioner applies a construction of paragraph 66-10(1)(b) which would appear to benefit taxpayers.  That paragraph refers to “the amount of the GST payable on a taxable supply of the goods that you make”.  The Commissioner acknowledges that the word “taxable supply” is singular but takes the view that the context of the legislation supports the conclusion that the words should be read plurally so as to encompass situations where more than one taxable supply is made (e.g., a supply by lease and by sale).

The contrary construction would arguably be that the words “a taxable supply” refer to the “sale or exchange” of the goods envisaged in the threshold test in s 66-5 – i.e., the amount of the credit is limited to the GST payable on the taxable supply of the eventual sale of the goods and any other taxable supplies are disregarded.  Using the example outlined above, that construction would mean that Finance Co would only be entitled to an input tax credit of $200 (being the GST payable on the sale of the vehicle) and also that the credit would not become attributable until the vehicle was sold.

While the matter is not free from doubt, I feel the the Commissioner’s construction is consistent with the context and purpose of Division 66, which is to recognise that there is GST embedded in the cost of acquiring the second hand goods.  The Commissioner’s construction ensures that taxpayers can recover full credits on those acquisitions, albeit remaining subject to the limitation that the amount of the credits cannot exceed 1/11th of the cost of acquiring the goods in the first place.

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Commissioner publishes new draft Ruling on Tax Invoices

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Today the Commissioner published Draft GSTR 2012/D3 ‘Tax invoices”.  This draft ruling replaces Draft GSTR 2011/D1, which has been withdrawn.

The draft Ruling sets out the minimum requirements for a tax invoice under ss 29-70(1) of the GST Act and explains the circumstances under ss 29-70(1A) when a recipient can treat a document as a tax invoice even though it does not meet all of the tax invoice requirements.

When finalised, the Ruling is proposed to apply from 1 July 2010.

Commissioner issues final PSLA on GST classification of food and beverage

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Last week the Commissioner issued PSLA 2012/2 (GA) – ‘GST classification of food and beverage items’.  The Practice Statement sets out the following matters:

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

The ATO had previously entered into an arrangement with GS1 Australia, which ensured that food and beverage items were correctly classified for GST (see Fact Sheet NAT 7162 ‘Simpler GST accounting for the food and grocery industry) which apple from 1 July 2002.  This Practice Statement outlines the Commissioner’s administrative approach in respect of that arrangement from 1 July 2010.

GS1 Australia is an organisation that administers a system of number, bar coding and electronic messaging.  GS1 Australia numbers and barcodes are on most food and beverage items sold in retail stores.  Manufacturers and other suppliers register with GS1 Australia.

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

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

The PSLA was issued in draft form as Draft PSLA 3541: GST classification of food and beverage items and my post on the draft can be accessed here.

The Practice Statement must be followed by tax officers unless doing so creates unintended consequences or is considered incorrect, upon which tax officers must follow their business line’s escalation process.

Commissioner issues ATO ID on GST and redemption of redeemable preference shares

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On Friday the Commissioner published ATO ID 2012/66 ‘GST and redemption of redeemable preference shares’ where he confirmed that an entity makes a financial supply when it redeems redeemable preference shares from its shareholders.

The view in the ATOID does not appear controversial.  The basis for the view is that redeemable preference shares are “securities” for the purposes of Item 10 in the table under sub regulation 40-5.09(3) of the GST Regulations so that the acquisition of an interest in redeemable preference shares (an acquisition-supply) is a financial supply.  Further, the ATOID considers that the GST Regulations do not require that, following the acquisition, the interest must be enduring and it is not relevant that the entity cancels the shares after it acquires them.