In Baini and Commissioner of Taxation [2012] AATA 440 the Tribunal has found that the taxpayer failed to substantiate his claims that GST assessments issued by the Commissioner in respect of his taxi business were excessive.  The assessments were issued on the basis that the taxpayer had understated the amount of GST and income tax payable.  The activity statements lodged by the taxpayer contained figures less than those predicted by the benchmark figure for taxi enterprises.  The case provides an example of the operation of the onus provisions.  It is not sufficient for the taxpayer to establish that the Commissioner made an error in making the assessment.  The taxpayer must also establish, by reference to the evidence, what the correct assessment should have been.  The case is also unusual because the Commissioner put on evidence, which also included expert evidence.

Also, in June 2012 the Commissioner published over 40 private rulings dealing with GST issues on the Private Rulings Register.  My list of the rulings can be accessed here.  As usual, real property issues and refunds of overpaid GST feature heavily.

In Yacoub v Commissioner of Taxation [2012] FCA 678 the Federal Court found that the applicants were liable for pay the whole GST liability for a property development on the basis that the entity was a partnership rather than a joint venture.  The applicants contended that they were only liable to a share of the GST liability on the basis that the entity was a joint venture.  The Court rejected this contention and as the other participant had gone into external administration, the applicants were left with the entire GST debt. The decision provides an important discussion between what constitutes a partnership and what constitutes a joint venture – as this decision shows, it is often a difficult distinction to make and getting it right (or wrong) has significant implications for the participants.

The applicants had entered into a “Syndicate Agreement” in 2005 with another entity (without legal assistance). In 2007, the parties entered a further agreement, this time with legal assistance.  In August 2007, an entity (ML) was registered for GST.  Construction of the development occurred between October 2007 and June 2009 and over that time ML lodged activity statements.  The Commissioner issued a notice of assessment to ML for the GST owing in respect of the sale of the development and the applicants paid 50% of the assessments in discharge of what they believed to be their liability.  The other entity did not pay the remaining 50% and was placed into external administration.  The Commissioner then commenced recovery proceedings against the applicants for the balance on the basis that the 2007 agreement superseded all previous agreements and made the applicants and the other entity partners for tax purposes, even if not partners in general law.

In deciding that there was a partnership, the Court looked at the “substance and reality” of the transaction. The agreements expressly stated that no partnership was being carried on, but the Court noted that while the existence of such a statement may be relevant, it did not determine the issue.  The Court found that the proper construction of the 2007 agreement was that the parties had replaced the 2005 agreement with one in which they expressly agreed to “share equally all costs, liabilities, mortgages and proceeds derived from any sale arising from the property”.  Accordingly, as a matter of substance the parties created between themselves both a partnership at general law and a tax law partnership.

Today the Commissioner issued PSLA 2012/2 ‘Change of Trustee’ outlining the approach to be taken by the Commissioner in recovering income tax and GST liabilities of a trust where there is a change of trustee following a income tax year or a tax period.  This Practice Statement has important ramifications for any trustee that ceases that role given that the Commissioner takes the view that any liability to income tax and GST remains a personal liability of the retiring trustee (although the retiring trustee may have rights to seek indemnity from the assets of the trust – to the extent that there are such assets).

In the context of GST, the Practice Statement takes the following view:

• the trustee of a trust is taken to be an entity consisting of the person or persons who are the trustees at any given time
• although GST is payable on taxable supplies, a discrete liability is not fixed each time a taxable supply is made.  Rather, the sum of the GST payable on all taxable supplies for a tax period is a component of the formula for working out the ‘net amount’ under s 17-5 of the GST Act – this net amount will be either a liability or an entitlement to a refund
• it is only at the close of the tax period that amounts of GST on taxable supplies and input tax credits can be netted off so as to determine what the net amount for that period is – a liability for the net amount thereby arises at the end of the tax period and liability attaches to a trustee at that time
• there is no basis to impose liability for GST on a trustee at a later time, e.g. at the time of assessment – the Commissioner has no rights to impose liability on the new trustee directly
• while the matter is not free from doubt, the trust entity provisions in s 184 of the GST Act do not confer rights against a new trustee who has replaced a liable trustee

The Practice Statement refers to the following example in a GST context:

The Arnold Family Trust accounts for GST on a quarterly basis.  For the tax period ended 30 June 2011 it has a net amount payable and accordingly a tax-related liability arises at that time.  Ants Pty Ltd is the trustee of the trust at the end of the tax period, but retires on 1 July 2011, and is replaced by Aardvark Pty Ltd.  Ants Pty Ltd is the trustee liable for the net amount for the tax period ending 30 June 2011, even though the net amount is not due and payable until 28 July 2011.

The above example shows that the Commissioner considers that the liability to pay a net amount arises at the end of the tax period (presumably midnight on the night of the last day), notwithstanding that the quantum of that net amount is not determined until an activity statement is filed in the following month (s 17-5) and the net amount does not become payable until that later time (s 33-5).

This is bound to be a controversial area which will likely give rise to disputes, both between the Commissioner and trustees and also between trustees.

Some of the areas of difficulties may include the following:

• Using the Commissioner’s example, the trustee retires on 30 June 2011 rather than 1 July 2011.  The outgoing trustee would not be liable for the net amount during that tax period notwithstanding that it was the trustee for all of those transactions – similarly, the incoming trustee would be liable for all those transactions.  Arguably a harsh result.
• Incoming trustees would not appear to not have rights to object to assessments issued to the trust for previous tax periods, notwithstanding that the Commissioner will be seeking to effectively recover the unpaid GST from the assets of the trust (through the previous trustee’s rights of subrogation)
• In many cases the outgoing trustee will have no assets

Earlier this week the Full Federal Court handed down judgment in LVR (WA) Pty Ltd v Administrative Appeals Tribunal [2012] FCAFC 90 where the Court allowed the taxpayer’s appeal against the decision of the Tribunal to dismiss the application because the applicant failed to comply with a direction of the Tribunal.

The issue in the substantive dispute involved GST and concerned contentions by the Commissioner that the taxpayer carried on the enterprise of property subdivision and sale, was required to be registered as it exceeded the registration threshold and penalties.  The Tribunal found that the applicant had failed “within a reasonable time” to comply with the Tribunal’s directions.

What makes this case particularly unusual is that only days before the hearing of the appeal before the Full Court, the Court drew to the attention of the parties that the Tribunal’s reasons were largely copied from the Commissioner’s submissions without attribution.  This issue was not addressed before the Federal Court on the initial appeal and was not raised in submissions before the Full Court.  The judgment states and approximately 95% of the paragraphs of the reasons were taken from the Commissioner’s written submissions filed in the Tribunal and a further three or four paragraphs of the reasons were taken from the Commissioner’s reply submissions.  While the Full Court did not decide the matter on this point, it noted the following:

Of themselves, these circumstances would give rise to a serious concern that the Tribunal had failed to bring its own mind to bear on the issues before it and thus that it had constructively failed to exercise its jurisdiction.  That jurisdiction in the present circumstances would include whether or not to exercise the discretion conferred on the Tribunal by s 42A(5)(b) of the AAT  Act to dismiss the applications without proceeding to review the Commissioner’s decisions.

The Full Court was also gravely concerned that this matter was not raised with the primary judge and that the case was presented on the basis that the reasons for decision reflected the Tribunal’s own thought processes.

The Full Court allowed the appeal because it did not accept that the Tribunal had taken into account a responsive affidavit filed by the taxpayer which went to compliance with the relevant directions of the Tribunal.  The Court ordered that the matter be remitted to the Tribunal for further consideration.

In Global Cash Access (Canada) Inc v The Queen 2012 TCC 173 the Tax Court of Canada considered the question of characterising a bundle of supplies in the context where at least one of those supplies was an input taxed financial supply.  While the Canadian GST legislation is different, the approach adopted by the Court was similar to what one would expect from the Federal Court here – i.e., looking at the “substance and reality” of the transaction to identity whether there is a single supply or multiple supplies.  What is interesting from the judgment is that the Court was required to undertake this process in the context of financial transactions.

The facts of the case can be shortly stated:

• Global provided a service to patrons of a Casino whereby they were able to use their credit cards to obtain cash for gaming purposes.  Patrons paid a fee to Global for this service (“Global Fee”) and Global in turn paid a fee to the casinos for facilitating the service (“Casino Fee”).  The question was whether the Casino Fee was consideration for an exempt (input taxed) financial service by the Casinos.
• Under the arrangement, Global “sells” cheques to patrons which are then exchanged with the Casino for cash.  From the standpoint of patrons, the transaction is similar to a credit card used to purchase goods, save that a fee is charged (in the range of $17 per $100).
• In a typical case, a transaction is initiated at one of several unmanned “kiosks” belonging to Global which are placed on the floor of the Casino.  Once approved, the transaction is completed at one of the Casino’s cashier cages.  Alternatively, a patron may initiate and complete the transaction at the cashier cage.
• After the transaction is approved, the cashier prints a cheque payable by Global to the Casino, the cashier negotiates the cheque and provides cash (or gaming chips) to the patron.  The cheques are subsequently deposited by the Casinos into their bank accounts.
• Settlement of the transactions takes place a few days later.  The card issuing bank remits to Global the amount of the cash advance inclusive of the Global Fee.  Global then settles the cheque deposited by the Casino and pays the Casino Fee separately.

Global submitted that the Casinos made only one supply, constituted by two parts, arranging for the issuance of Global’s cheques and cashing the cheques.  Each part falls within the definition of financial service.  The Revenue contended that the Casinos did not supply any financial services to Global, but rather made a bundle of supplies all of which were excluded from the definition of financial services.

The Court did not agree with either party, but found that Casinos made a bundle of supplies, and part were financial services (being the cashing of the cheques) and part were not. Further, the appropriate apportionment of the consideration applicable to the cashing of the cheques was 25%.

The Court found that there were three main aspects to the bundle of supplies made by the Casinos to Global:

• allowing kiosks on the premises
• providing support services at the cashier cages such as transaction procedures and initiating transactions on behalf of patrons; and
• cashing Global’s cheques

The Court found that each of these activities fell within the definition of “financial services”.  This was because the definition extended to “the arranging for” services what are financial services (somewhat similar to Item 13 of the table under s 40-5(2) of the GST Act).  In doing so, the Court adopted a broad view of the term “arrange for”.

The Court found that the first two activities were excluded from the definition of financial services through specific exclusions which were introduced into the Act in 2010 (on a retroactive basis in response to judicial decisions).  The activity of cashing cheques was held to be a financial service.  This required the Court to consider whether the “bundle of supplies” should be viewed as a single supply or multiple supplies.  In concluding that there were multiple supplies, the Court found as follows:

• the supplies were not so interdependent that they could be considered a single supply
• it rejected Global’s submission that there was only one supply because each part of the supply is of no use on its own
• none of the elements were a minor part of the supply so as to be incidental to the major supply
• an allocation of the consideration to taxable and exempt supplies was therefore appropriate.  The cashing of cheques was an essential supply, but not the predominant supplies (which where the other activities).  Accordingly, 25 per cent of the consideration should be allocated to the cashing of cheques.

In the 2012-13 Budget, the Government announced that it would amend the GST law to ensure that credit unions do not lose access to a reduced input tax credit for credit union services when they rebrand as banks but otherwise do not change their corporate structure.

Today the Commissioner issued two ATO IDs on GST issues, one relating to supplies sold independently from supplies of  going concerns and the other relating to Division 81

ATO ID 2012/54 – Supplies of things being used in an enterprise that are not necessary for the continued operation of that enterprise, and which do not form part of the ‘supply of a going concern’.

The Commissioner considers that an entity can supply something that is being utilised in its enterprise, which is not necessary for the continued operation of the enterprise, independently of the supply of the going concern, notwithstanding that both supplies are to the same recipient.

ATO ID 2012/55 – Goods and services tax and Division 81: registration of a community plan, deposited plan or strata plan

The Commissioner considers that the payment to an Australian government agency for a pre-examination of a community plan, deposited plan or strata plan is the provision of consideration under s 81-10(2) because it is a fee that is prescribed by paragraph 81-10.01(e) of the GST Regulations.

Yesterday the Tribunal handed down its decision in Climo and Commissioner of Taxation [2012] AATA 350. The Tribunal found that the applicant was liable to pay GST in respect of consideration received for the supply of the introduction of would-be purchasers of the services of a company operated by the applicant’s wife.  The applicant was unable to produce sufficient evidence to substantiate his claims that he carried out his activities without any reward but purely to assist companies associated with his wife.

The applicant presented at “seminars” for members of the public who wished to invest in property.  The applicant would then introduce those investors to companies associated with the applicant’s wife and those companies would be engaged to construct property on land purchased by the investors.  The applicant engaged people to assist him in his activities and rented rooms to hold the seminars.  There was no documentary evidence to support the applicant’s assertion that he was reimbursed for this expenditure.  Also, the Tribunal was not satisfied that the payments made to the applicant by the companies did not pass to the applicant rather than, as maintained by the applicant, passed to companies associated with his wife.

The decision is an example of the difficulties faced by taxpayers, in the absence of documentary evidence, in discharging the onus of showing that a GST assessment is excessive.

In May 2012 the Commissioner published over 30 private rulings on the Register dealing with GST issues.  A full listing of the rulings can be accessed here and through the menu on this site.

This month I focus on a private ruling which finds that the sale of farming land to a property developer will be GST-free pursuant to s 38-480 of the GST Act, notwithstanding that the purchaser’s intention was to develop the land.

Private Ruling No.1012128336865 – GST and the sale of farm land

The facts of the application can be shortly stated:

• the vendor entered into a contract of sale to sell its farming property to the purchaser.  The vendor acquired the land prior to 1 July 2000 and carried on a farming business for the land five years and will continue to carry on the farming business until completion of the sale.
• the purchaser is a property developer and the contract of sale is dependent upon Council’s approval of the purchaser’s subdivision plans.  Completion of the sale is 14 days after the plan of subdivision is registered
• the purchaser is required under the contract of sale to grant to the vendors a licence to allow the vendors to continue to occupy the property after completion of the sale and to continue their farming business.  Either party may terminate (for any reason) the licence by giving 60 days notice in writing.

The private ruling finds that the sale will be GST-free because “the recipient of the supply intends that a farming business be carried on, on the land”.  The ruling found that the licence agreement indicates the purchaser’s intention to continue the farming business (it not being necessary that the purchaser carry on the farming business themselves).

The ruling is interesting because it accepts that it is sufficient that the purchaser’s intention to carry on farming need only be one of a number of concurrent intentions, and arguably a secondary intention (to the purchaser’s main intention of developing the property).  There is also no timing requirement in s 38-480. Accordingly, taken to its extreme, it would arguably be sufficient that the vendor have a licence agreement to carry on farming for one day after settlement. Of course, the anti-avoidance provisions in Division 165 may have a role to play in such circumstances.  Nevertheless, the stamp duty savings to the purchaser under this arrangement would likely be significant (as well as potential reductions in finance costs of the GST component of the price).

The ruling does note the potential scope of the adjustment provisions in Division 129 and Division 135 if the purchaser ultimately uses the land for input taxed purposes (i.e., residential leases).  However, if the land is developed for sale, those adjustment provisions should not arise.

International Cases Update – May 2012

In May, the following decisions relating to GST/VAT were published in New Zealand, the UK and Canada.

New Zealand

Court of Appeal

• Commissioner of Inland Revenue v Stiassny [2012] NZCA 93 – claim for refund of GST by receivers – to see my post of the decision click here
• Lewis G H Thompson v Commissioner of Inland Revenue [2012] NZSC 36 – re-registration of entity – turnover test

United Kingdom

Upper Tax Tribunal

• Benridge Care Homes Ltd v HMRC [2012] UKUT 132 – VAT returns lodged claiming refund of input tax but understating output tax – whether open to Revenue to reduce the input tax to nil in the returns
• Matthew Davies Special Occasions 2XL Limos v HMRC [2012] UKUT 130 – Value Added Tax – whether transport supplies rendered with stretched limousines, originally designed to carry 10 people, but adapted to carry only 9 people, were zero-rated – Appeal dismissed
• Vehicle Control Services v HMRC [2012] UKUT 130b – VALUE ADDED TAX – supply of parking control services – whether parking charges collected and retained by operator were consideration for a supply – whether outside the scope of VAT as damages for trespass or damages for breach of a contract between the operator and the motorist – whether additional consideration payable by landowner for provision of parking control services – appeal dismissed
• Wrag Barn Golf and Country Club v HMRC [2012] UKUT – VALUE ADDED TAX — option to tax land — whether option survived partnership changes — whether one partnership or two — First-tier Tribunal apparently decided only one — whether tribunal’s findings of fact supported by evidence — unclear — appeal remitted to First-tier Tribunal for re-hearing

Tax Tribunal

• Martisan Developments Ltd v Revenue & Customs [2012] UKFTT 283 – VAT;  joint venture;  written agreement;  whether written agreement truly reflected arrangements between individuals and companies they controlled;  acquisition and sale of development land;  supply of services;  identification of supplier;  nature of services;  whether activities of joint venturers constituted supply of services;  contribution to capital of joint venture; consideration;  nature of consideration; whether distribution of one half share of net profits amounted to consideration for supply of services; no;  appeal allowed.
• Norwich Airport Ltd v Revenue & Customs [2012] UKFTT 277 – VAT – fee paid by passengers to appellant – whether consideration for a supply – yes – whether supply zero rated as “making of arrangements” for the supply of transport of passengers in an aircraft designed to carry at least 10 passengers – no – whether exempt as a supply to meet the direct needs of aircraft or its cargo – no – appeal dismissed

Yesterday the Commissioner issued a final GST Determination on retail foreign exchange transactions and four draft GST Determinations on telecommunications supplies.

In GSTD 2012/5 Goods and Services tax: are acquisitions related to an entity’s retail foreign currency exchange transactions with customers in Australia made solely for a creditable purpose under section 11-5 of the GST Act, the Commissioner has retreated from his draft position that suppliers of currency on “outbound transactions” would only be entitled to partial input tax credits.

The Determination provides guidance on the creditable purpose of acquisitions relating to currency exchange transactions, in light of the decision of the High Court in Travelex Ltd v Commissioner of Taxation [2010] HCA 33.

The Determination distinguishes between “outbound transactions” (where the the currency is intended for use outside Australia) and “inbound transactions” (where the currency is intended for use in Australia).  For both transactions, the entity is regarding has having made two supplies, being currency in exchange for currency (FX in exchange for AUD – outbound; AUD in exchange for FX – inbound) and also an input taxed financial supply (an acquisition supply) of the interest in the AUD and FX respectively.

The treatment of each transaction is outlined as follows:

Outbound transactions

4. The entity’s supply of FX is a financial supply, and is also a supply that is made in relation to rights.  Hence, the supply is GST-free where the customer’s intention is to use the FX outside Australia.

5. When the entity supplies FX in exchange for AUD, it also makes an input taxed financial supply (an acquisition-supply) of the interest in the AUD.

6. To the extent that acquisitions made by the entity relate to outbound transactions, they relate solely to the GST-free supply of the FX.  Consequently, to this extent, these acquisitions are made solely for a creditable purpose.

Inbound transactions

7. The entity’s supply of AUD is an input taxed financial supply.  It is also a supply made in relation to rights, but to the extent that the rights are not intended for use outside Australia, it will not have the additional character of a GST-free supply.

8. When the entity supplies AUD in exchange for FX, it also makes a financial supply (an acquisition supply) of the interest in the FX.

9. To the extent that acquisitions made by the entity relate to inbound transactions, they relate solely to the input taxed supply of the AUD.  Consequently these acquisitions are not made for a creditable purpose.

The Determination was issued in draft as GSTD 2011/D5 and my post on that draft can be accessed here.  Importantly, the Commissioner has retreated from his draft view that for outbound transactions, acquisitions by the supplier relating to those transactions “relate equally” to the GST-free supply of the foreign currency and input taxed “acquisition supply” of the interest the AUD.  The effect of this view was that suppliers’ input tax recovery on foreign exchange transactions of the type considered in Travelex would have been halved.  Those suppliers will now get a full recovery of credits.

Draft determinations on telecommunication supplies

The Commissioner has issued four draft Determinations involving telecommunication supplies:

• GSTD 2012/D1 Goods and Services tax: when are supplies of interconnection services made by an Australian resident telecommunication supplier GST-free under item 2 in thet able in subsection 38-190(1) of the GST Act
• GSTD 2012/D2 Goods and Services tax: when are telecommunication supplies made under arrangements for global roaming outside Australia by an Australian resident telecommunication supplier GST-free under item 3 in the table in subsection 38-190(1) of the GST Act
• GSTD 2012/D3 Goods and Services tax: is the supply of a right to capacity in an international telecommunication network made by an Australian resident telecommunication supplier GST-free under item 4 in the table in subsection 38-190(1) of the GST Act
• GSTD 2012/D4 Goods and Services tax: when are telecommunication supplies made under arrangements for global roaming in Australia by an Australian resident telecommunication supplier GST-free under subsection 38-570(1) and subsection 38-570(3) of the GST Act