Federal Court dismisses taxpayer’s appeal where Commissioner alleged the arrangements to be a “sham”

In Sunraysia Harvesting Contractors Pty Ltd (Trustee) v Commissioner of Taxation [2017] FCA 694 the Federal Court dismissed the taxpayer’s appeal from the decision of the Tribunal that arrangements entered into between the taxpayer and other entities were a “sham”, with the effect that the taxpayer was not entitled to claim input tax credits on taxable supplies said to have been made by those entities.

The Federal Court agreed with the Tribunal that where the Commissioner contends that particular business structures and transactions were shams, the onus remains on the taxpayer to prove the assessments to be excessive. The Federal Court found that the positions as stated by Lockhart J in Richard Walter Pty Ltd v Commissioner of Taxation (1996) 67 FCR 243 at 245-246:

Use of the word “sham”, in some cases, and this is indeed one of them, obscures the fundamental issue between the parties. Essentially, it is for the taxpayer to prove that an assessment is excessive: …. The onus of proving that the assessment is excessive lies upon the taxpayer; although the evidentiary onus in a particular case may shift from time to time. In this case, the appellant has the burden of establishing that the alleged loans to it by Morlea are not income. It is common ground that if this burden is discharged and it is established that the payments here are in fact loans, then the appellant will succeed, provided it survives the possible application of s 260.
I mention this because it is a misconception in my view to assert that the Commissioner has the burden of establishing that a transaction is a sham. The Commissioner may, as he did in this case, submit that the relevant transactions were a sham and of no force or effect. In some cases the evidentiary onus may shift to the Commissioner to establish what the real transaction is for which the sham transaction is a cloak (assuming there is a real transaction); but at most this is an evidentiary onus which may shift back and forth depending upon the facts of the case and inferences which it is proper for the Court to draw. It remains that the burden of proving that an assessment is excessive lies upon the taxpayer.
[Footnote references omitted]

The facts and the decision by the Tribunal 

An individual had for a number of years operated a business of supplying casual labour to meet the seasonal demands of orchardists and vignerons. Until 2011 he operated through a company which contracted with growers to provide casual labour. The company was paid by the growers and it paid wages to the employees, deducted PAYG and paid payroll tax. In June 2011, the method changed and the applicant was incorporated to act as a trustee of a discretionary trust. Under the new arrangement, the applicant provided casual labour to growers, but it was said to be done through a succession of contracts with other companies, with those companies being obliged to account for PAYG deductions and payroll tax of the workers if necessary.

After an audit, the Commissioner concluded that the arrangements with the other companies were a sham and disallowed input tax credits claimed by the applicant on supplies said to be made to it by the other companies. The Commissioner also disallowed income tax deductions claimed by the applicant.

At the hearing, the applicant contended that where the Commissioner alleges a sham, the onus falls on him to prove the charge. The Tribunal did not agree. Rather, as the Commissioner alleged that the arrangements between the applicant and the other companies were not as they appeared to be, it was for the applicant to show that the assessments were excessive and that the arrangements were genuine and real.

The Tribunal considered that the applicant had failed to discharge that onus, largely because the applicant failed to adduce evidence from the persons said to be centrally involved in the new arrangements.

The Appeal

The Federal Court observed that the Tribunal was correct to take as his touchstone for the concept of sham transactions the following statement of Mustill LJ in Hadijiloucas v Crean [298] 1 WLR 1006 at 1019 which, subject to one qualification, was referred with approval by Gleeson CJ, Gummow and Crennan J in Raftland Pty Ltd v Commissioner of Taxation [2008] HCA 21 at [35]:

… it is necessary to distinguish between three situations in which, aside from any question of rectification, the court may take an agreement otherwise than at its face value. The first exists where the surrounding circumstances show that the arrangement between the parties was never intended to create any legally enforceable obligation. The second is the case of the “sham,” in the sense in which that word has been used in numerous cases, including Snook v London and West Riding Investments Ltd. Correctly employed, this term denotes an agreement or series of agreements which are deliberately framed with the object of deceiving third parties as to the true nature and effect of the legal relations between the parties. The third situation is one in which the document does precisely reflect the true agreement between the parties, but where the language of the document (and in particular its title or description) superficially indicates that it falls into one legal category, whereas when properly analysed in the light of the surrounding circumstances it can be seen to fall into another.
[Footnote reference omitted]

The qualification made in Raftland was that any absence of intention to create legal relations need not necessarily entail fraud.

The Tribunal found that the present matter fell into the first of these categories. The Federal Court found that there were, to say the least, logical and legally permissible bases for the Tribunal’s conclusion. The Federal Court found that the the Tribunal’s reasons were thorough, methodical, relentlessly logical, well grounded in legal principle both as to the operation of the onus of proof and the doctrine of sham and amply explain why the objection decisions were confirmed. The Federal Court concluded that, in design, the structure looked to be but a crude, interposed company of no worth, run by a straw man (a feature reminiscent of the “bottom of the harbour” behaviour of a generation ago) with “phoenix” successors. The taxpayer also failed to show that the key legal elements of the structure were ever intended to take effect.

Tribunal finds option fee did not form part of the consideration for the acquisition of real property

In The Trustee for the Whitby Trust and Commissioner of Taxation [2017] AATA 343 the Tribunal found that an option fee of $2m paid by the taxpayer should not be included in the acquisition cost of real property when applying the margin scheme in Division 75 of the GST Act.

The taxpayer contended that the option fee was provided to obtain an interest in the real property. Further, the Deed of Option stated that the option fee was paid as partial consideration for the property and it was an express them of the Deed of Option that the purchase price was $28m.

The Tribunal agreed with the contention of the Commissioner that there were two separate supplies under the GST Act, the supply of the option (a bundle of rights) from the owner to the taxpayer for consideration of $2m and the supply of the land for consideration of $26m. The Tribunal agreed with the construction adopted by the Commissioner in GSTD 2014/2, being that the supply of an option is a separate supply to the supply of the underlying asset.

The Tribunal agreed with the Commissioner that a plain reading of s 9-17 of the GST Act makes it clear that when there is an option fee paid, the consideration for the supply of the freehold interest in land is limited to the consideration paid in addition to any option fee. The Tribunal also concluded that the fact that the Option Fee provided that the $2m option fee “forms part of the Purchase Price” and that the “Purchase Price” was stated to be $28,000,000 (inclusive of the Option Fee)” was of no moment. The drafting of the Option Deed did not defeat what was occurring, in substance and for the purposes of the GST Act. The taxpayer could not effectively “contract out” of what, as a matter of fact and law, happened.




UK Upper Tax Tribunal hands down two decisions on VAT and tripartite agreements

In December 2015 the UK First Tier Tribunal handed down its decision in  Adecco Uk Ltd v Revenue & Customs [2015] UKFTT 600 – a case that illustrated the difficulties with tripartite agreements both in Australia and in the UK. The Tribunal had to decide whether Adecco was liable to pay VAT on the full charge paid by its clients for the services of non-employed temps provided by Adecco to those clients or only on the element of the charge retained by it (i.e. the commission or gross profit element). At issue was whether Adecco supplied the temps to its clients or only the service of introducing the temps.

My post discussing the decision of the First Tier Tribunal can be accessed here. That decision was also discussed in a paper I presented on tripartite arrangements in February 2016 – my paper can be accessed here.

On Friday 17 March 2017 the Upper Tax Tribunal handed down its decision on the appeal of the decision in Adecco and another decision relating to VAT and tripartite arrangements. In each decision the Tribunal (constituted by the same members) dismissed the taxpayer’s appeal and relied heavily on the decision of the UK Supreme Court in Airtours Holiday Transport Ltd v HMRC [2016] UKSC 21 and the principles outlined in that case (my post on the Airtours decision can be accessed here)

Adecco Uk Ltd & ors v HMRC [2017] UKUT 113.

In dismissing the appeal, the Tribunal observed that its task was made easier by the judgment of Lord Neuberger in Airtours which contained an analysis of the principles to be derived from previous decisions.  The decision of the Supreme Court was handed down after the decision of the First Tier Tribunal, so the primary judge did not have the assistance of that case.

The Tribunal (at [43]) stated that it was clear from Airtours that determining the nature of a supply, and who is making and receiving it, is a two-stage process. The Tribunal observed as follows:

The starting point is to consider the contractual position and then consider whether the contractual analysis reflects the economic reality of the transaction. If, as a matter of contact, a party undertakes to provide services  to another person in return for consideration from the other or a third party then there is, subject to the question of economic reality, a supply to the other person for VAT purposes. If the person who provides the consideration is not entitled under the contractual documentation to receive any services from the supplier then, unless the documentation does not reflect the economic reality, there is no supply to the payer. The contractual position normally reflects the economic reality of the transactions but will not do so where, in particular, the contractual terms constitute a purely artificial arrangement.

In applying these principles, the Upper Tribunal made the following findings:

  • there were contracts between the non-employed temps and Adecco and between Adecco and its clients – there was no contract between a non-employed temp and the client. The temps agreed to perform each assignment in return for payment by Adecco at an agreed hourly rate. There was nothing artificial about the agreements
  • the Upper Tribunal did not accept the argument that the fact that Adecco did not receive and use or consume the services provided by the temps leads to the conclusion that Adecco cannot make a supply of the temps to the clients
  • the economic and commercial reality of the transactions was that Adecco agreed to provide temps, who would carry out work, to the clients – what Adecco was supplying was the provision of a temp to perform an assignment

In a final observation, the Upper Tribunal stated that it hoped that the decision provided some clarification on the VAT obligations of employment bureaux but doubted that it provided guidance – except at a very high level – that will enable the VAT liability of other employment businesses to be determined without a thorough analysis of the contracts and an assessment of the economic reality of particular transactions. That liability will depend on the construction of the contractual provisions and the interpretation of the facts – matters which are always open to debate – and as Lord Reed said in paragraph 26 of WHA [WHA Limited v Her Majesty’s Revenue and Customs [2013] UKSC 24]:

…the decisions about the application of the VAT system are highly dependant upon the factual situations involved. A small modification of the facts can render the legal solution in one case inapplicable to another.

U-Drive Limited v Revenue & Customs [2017] UKUT 112

In U-Drive Limited v Revenue & Customs [2017] UKUT 112 the Upper Tribunal dismissed the taxpayer’s appeal of the decision of the First Tier Tribunal in U-Drive Ltd v Revenue & Customs [2015] UKFTT 667. The taxpayer (a car hire company) arranged for the repair of third party vehicles damaged in collisions with hired cars as an alternative to a claim being made through the third party’s insurance in which case the claim would ultimately be paid by the taxpayer’s self-insurance arrangement. There was no contract between the third party car owner and the repairer and the repairer invoiced the taxpayer for the repairs, which it paid. The taxpayer claimed that it was entitled to recover the VAT on those invoices.

The issue was whether the supplies made by the car repairers were made to the taxpayer or to the third party owners.

The Tribunal reviewed the previous decisions and expressed the same view as in the Adecco appeal, that it was clear from Airtours that determining who is receiving a supply is a two-stage process. The Tribunal (at [38]) outlined similar principles to those outlined in Adecco (at [43]) and extracted above.

Applying these principles to the facts, the Upper Tribunal made the following findings:

  • it was found by the First Tier Tribunal that there was a contract between the taxpayer and each repairer which the repairer agreed to repair the third party owner’s vehicle and, in return, the taxpayer agreed to pay the repairer for the repair. There was no contract (and often no contact) between the third party owner and the repairer and no contract between the taxpayer and the car owner.
    • viewed in isolation, the contracts between the taxpayer and the repairers show that there was a legal relationship between the repairers and the taxpayer pursuant to which there was a reciprocal performance and thus that the repairers supplied services to the taxpayer
  • it was common ground that the contracts were not artificial, but that did not mean that the economic reality of the transactions should not be considered – the Tribunal made the following findings on the economic reality of the transactions:
    • the taxpayer agreed to pay for the repair of the third party owner in order to discharge the liability of the taxpayer’s insurer to indemnify the hirer for the liability to compensate the third party owner for damage to the vehicle
    • the taxpayer did not have any liability to pay for the repair until after the damage had occurred and the third party owner had agreed to use the alternate procedure rather than make an insurance claim
    • the taxpayer agreed to pay for the repairs because it calculated that, by doing so, it would ultimately pay less than if the third party owner made a claim through his or her insurer
    • taking account of all the circumstances, in economic reality, the taxpayer simply agreed to pay for the repair of the third party owner’s vehicle – the taxpayer had no interest in the repairs other than as a means to meet (at reduced cost), a liability that would be incurred through its own insurer (and ultimately the taxpayer through the fact that the premiums were set by references to the claims made – which was in effect, self-insurance).


The decisions illustrate that when characterising the supply (or supplies) made under a tripartite agreement, or indeed any agreement, the first step is generally to analyse the contractual arrangements between the parties. That will often give you the answer – as it did in Adecco. However, that will not always be the case. In some cases a consideration of the economic reality may give you a different answer – as it did in U-Drive.

This approach is consistent with the following comments of Edmonds J (sitting on the Full Federal Court) in ATS Pacific Pty Ltd v Commissioner of Taxation [2014] FCAFC 33 at [29]:

The terms and conditions are the instrumentality through which the supply is made, but the text of these terms and conditions is not conclusive of the character of the supply that is made; that will depend as much on the manner of performance of those terms and conditions as the text of the terms and conditions themselves; it will also depend on the commercial or business purposes, discerned objectively, of those who have entered into the relevant contract.

Tribunal finds taxpayer not entitled to input tax credits for the purchase of scrap gold

In Eastwin Trade Pty Ltd and Commissioner of Taxation [2017] AATA 140 the Tribunal found that the taxpayer did not discharge its onus of showing that it was entitled to input tax credits for the purchase of “scrap gold” from suppliers. The taxpayer held tax invoices that were said to record  the transactions, but the primary issue before the Tribunal was whether the asserted purchases of gold were real transactions and if so, what was purchased and from who – the Tribunal observing that reality was not sufficiently established by the invoices themselves or by the taxpayer’s accounting records.

The purchases and sales of gold by the taxpayer were said to operate as follows:

  • the seller would contact the taxpayer about a delivery of gold in “dore” (taxable) form and the taxpayer would contact potential buyers
  • the taxpayer would take delivery of the gold and would lock in the price when buyers came to pick up the gold
  • the taxpayer would remit payment to the supplier and would receive a purchase invoice from the supplier a few days later
  • the gold was delivered to the taxpayer at night, in car parks

The taxpayer relied on tax invoices dated 13 January 2014 to 25 September 2014 purportedly evidencing expenditure of $143.3m on the purchase of about three tonnes of gold dore and invoices dated 8 January 2014 to 26 September 2014 purportedly evidencing total sales of $143.9m of a similar quantity of gold dore.

The principle matters relied on by the Commissioner in the objection decision were as follows:

  • inconsistent supply information – during interviews with the taxpayer in July and August 2014 the taxpayer had identified one entity as its only supplier (first supplier), but only provided information about another supplier (second supplier) after being told that the initial supplier had been incorporated in April 2014.
  • incorrect or cancelled ABN – the ABN on invoices from the second supplier was that of an apparently unrelated entity, and that had been cancelled on 28 April 2014. The ABN of the first supplier was cancelled in September 2014 with effect from 1 April 2014.
  • no GST registration – neither of the suppliers were registered for GST
  • unrelated payments/absence of consideration – all payments contended to have been made by the taxpayer were to a bank account of a company with no demonstrable connection with either supplier
  • uncorroborated supply – the taxpayer could not provide any contact details for whether supplier – that inability, the “car park” mode of delivery for three tonnes of gold, and the payments to an unrelated recipient, led to an absence of satisfaction that any of the suppliers had in fact supplied the invoiced items to the taxpayer.
  • no basis to treat documents as a tax invoice – in the absence of satisfaction that a “creditable supply” had in fact occurred there was no basis to exercise the discretion conferred by s 29-70(1B) of the GST Act.

The Tribunal observed that there was objective evidence that the taxpayer had sold gold dore and that this fact was at least consistent with the taxpayer also having purchased gold dore. However, this in itself was not relevantly probative of dore purchases. The Commissioner also made the following contentions:

  • the taxpayer’s sales invoicing practices, with their precise statement of gold content, and absence of complaint from customers, indicated an actual gold content knowledge that could only have been possessed by someone who had created the dore bars from bullion;
  • there were practicable means, and a significant commercial incentive, for a person to engage in a practice of purchasing gold bullion and smelting it into dore;
  • the taxpayer’s dore bars had a physical appearance consistent with such an operation having been carried out; and
  • the taxpayer’s various transaction records tended to establish the likelihood that it had possession of the gold for long enough to have undertaken such a smelting process.

The Tribunal observed that the Commissioner’s hypothesis about the commercial motivation to purchase bullion – in a disguised transaction – and then convert it to dore, involved two main assumptions. The first assumption was that the dore is saleable at a GST inclusive price less than 110% of the “spot price” for fine gold. The second assumption was that the disguised transaction involved a bullion purchase being dishonestly presented as a taxable supply, and either the GST component of the sale not reported (by the vendor), or made the subject of a false claim for input tax credits (by the purchaser). Once that assumption was made, the Commissioner’s submissions explained how the smelting of bullion, and its subsequent sale as a taxable supply, could provide a significant commercial benefit to the seller.

The Tribunal noted that the Commissioner’s contention was a hypothesis and there was no direct evidence that the taxpayer carried out any bullion conversion activities and the Tribunal accepted that the taxpayer was right to emphasise the absence of evidence tending to establish its participation in the purchase, and subsequent “conversion”, of bullion. Nevertheless, the Tribunal found that the critical matter that the taxpayer had to establish was what it did in fact acquire.

The Tribunal concluded (at [92]) (after a detailed analysis of the oral and documentary evidence) that they taxpayer had failed to establish the identity and reality of any “supplier” entity. Given this finding, the Tribunal concluded as follows:

My view is that meaningful conclusions about the detailed “registration”, “enterprise” and “consideration” contentions could not be reached where the evidence merely points to the fact of some kind of acquisition, but is devoid of any credible details about the identity and reality of the “supplier” and that entity’s circumstances and activities.


The central issue in this case was whether the taxpayer actually made creditable acquisitions of gold dore – i.e., whether the transactions were real. The approach of the Tribunal to this issue was outlined at [24]:

Eastwin’s submissions accepted that the evidentiary onus imposed on it by TAA 53 s 14ZZK required it to establish, on the balance of probabilities, that its asserted purchases and sales of gold dore were real transactions. That reality is not sufficiently established either by the invoices themselves:- see Bayconnection Property Developments Pty Ltd and Commissioner of Taxation [2013] AATA 40;  (2013) 90 ATR 488 at  [86] and RV Investments (Aust) Pty Ltd as Trustee for the RV Unit Trust and Commissioner of Taxation  [2014] AATA 158;  (2014) 94 ATR 670 at  [72]; or by a taxpayer’s accounting records:- Richard Walter Pty Ltd v Commissioner of Taxation  (1996) 67 FCR 243 at 247 per Lockhart J. Nevertheless, invoices may provide part of the evidence establishing the reality of the underlying transaction, and Eastwin relied on them. This involved Eastwin in grappling with two main factual questions – (i) who was its supplier, and (ii) what was delivered to it.

In this case, the taxpayer actually did sell gold dore. A clear inference is that it must have also purchased gold. The difficulty for the taxpayer was that it could not positively show who it bought the gold from and what it actually bought – in particular whether it bought the gold in dore form (taxable) or as bullion (non-taxable).


Federal Court finds UberX drivers supply “taxi travel” to customers

In Uber BV v Commissioner of Taxation [2017] FCA 110 the Federal Court found that UberX services constituted the supply of “taxi travel” within the meaning in s 144-5(1) of the GST Act. The Court accepted the Commissioner’s submissions that the ordinary meaning of the word “taxi” was a vehicle available for hire by the public which transports a passenger at his or her direction for the payment of a fare that will often, but not always, be calculated by reference to a taximeter. The Court found that the ordinary meaning of “taxi” was sufficiently broad to encompass the UberX service.

Division 144 of the GST Act provides an exception to the general rule that an entity is only required to be registered for GST when its annual turnover meets the statutory threshold – currently $75,000. Under Division 144 an entity is required to register for GST if it supplies “taxi travel” – regardless of its turnover. The words “taxi travel” are defined to mean “travel that involves transporting passengers, by taxi or limousine, for fares”.

Uber submitted that Division 144 was intended to create an exception from the general rules for a specific industry – being taxi operators – and the Division should not be construed as having been intended to extend to some new state of affairs to which it might arguably extend. Uber also  contended that the words “taxi” and “limousine” bore a trade or non-legal meaning, or at least those words bore an ordinary meaning that was best suited to achieving the statutory object of carving out a specific existing industry from the operation of an otherwise universally applicable general (and beneficial) rule. This ordinary meaning had characteristics which were founded on the regulation of the taxi industry one each of the States and Territories, including that they taxi travel must be provided by a registered taxi and a licensed driver, the vehicle must be physically identified as a “taxi”, the vehicle have a light on the roof to show its availability, the vehicle contain a taximeter which calculates and displays to the passenger the progressive fare.

The Commissioner contended that the definition of “taxi travel”  connoted transportation, by a person driving a private vehicle, of a passenger from one point to another at the passenger’s direction and for a fare, irrespective of whether the fare is calculated by reference to a taximeter. The Commissioner also contended that it was wrong for Uber to rely on State and Territory regulatory regimes applying to the taxi industry because the GST Act is a federal statute – also, the GST Act provides in s 9-10(3) that a supply occurs irrespective of whether it is made in compliance with the law.

The Court found that a plain object of Division 144 was to address the difficulties that had arisen in overseas jurisdictions because not all taxi drivers were registered for GST – meaning that GST was not paid by all drivers. The Court accepted the Commissioner’s construction that, in these circumstances, the concept of “taxi travel” as defined in s 195-1 should be construed broadly and not technically. The Court also considered that a practical and common sense approach should be applied and to avoid an approach which was “unduly technical or overly meticulous and literal” – referring to Young J in Saga Holidays.

The Court found that the UberX driver in question (driving a Honda Civic) was supplying “taxi travel” because he was supplying travel that involved transporting passengers by taxi for fares. The Court considered that fact that his car did not have a taximeter installed was not determinative of the question because this was not an essential aspect of the ordinary meaning of the word “taxi” that a vehicle must have such a device.  Nor were the other characteristics advanced by Uber necessary elements of the ordinary meaning of the word “taxi”. The Court did not consider that the vehicle involved travel by a “limousine”, as the vehicle was not a luxury car.

The decision is a further example of the Court applying a practical approach to the application of the GST Act to transactions, in this case “ride sharing” services. The Court accepted the Commissioner’s submission that it was appropriate to regard the relevant provisions of the GST Act as “always speaking” – therefore merely because software technology of the type used in providing the UberX service may not have been known at the time that Div 144 was inserted into Pt 4-5 of the GST Act was not determinative of the question of whether that Division could apply. This approach may give the Commissioner some comfort as to the continued relevance of the GST Act to transactions that develop in the digital economy.


Tribunal finds taxpayer not entitled to input tax credits under an agreement for the purchase of assets

In McKinnon Holdings (NSW) Pty Ltd as Trustee for the McKinnon Equipment Trust and Commissioner of Taxation [2016] AATA 917 the Tribunal found that the applicant was not entitled to input tax credits in respect of the acquisition of plant and equipment from a related entity under an Asset Sale and Purchase Agreement because no consideration (whether monetary or non-monetary) was provided.

The applicant carried on a business of providing excavation and earth moving services. On 1 July 2010 the applicant entered into an Asset Sale and Purchase Agreement with an associated entity. The assets owned by the associated entity were subject to charges held by third party financiers. On 24 September 2010 the associated entity went into liquidation.

No GST was collected or remitted by the associated entity in respect of the agreement, but the applicant subsequently sought to claim input tax credits in respect of the assets said to be acquired under the agreement.

The terms of the agreement were considered by the Tribunal to be important to the resolution of this issue. Essentially, the parties agreed that if the aggregate liabilities of the associated entity exceeded the value of the assets subject to the agreement the consideration payable for the assets would be $1.00. It was common ground at the hearing that the aggregate liabilities exceeded the value of the assets and that no monies were actually paid.

The applicant contended that it provided consideration of:

  • $922,000, being the unencumbered value of the assets; or
  • $1,206,272.70, being the liabilities assumed by the applicant under the agreement.

In respect of the first argument, the Tribunal found that the clear and intended effect of the agreement was that the amount payable was nil or possibly $1.00 if the liability attaching to the assets exceeded the purchase price. As a result, there was no payment made under the agreement in connection with the supply of anything.

In respect of the second argument, the Tribunal observed that no explanation was given as to how the liabilities were assumed by the applicant and how the economic value of those liabilities was determined. The Tribunal identified the following “immediate and seemingly insurmountable problems” for the applicant:

  • the agreement did not in and of itself legally assign the liabilities to the applicant. The most that can be said is that clause 8 of the agreement provided for the associated entity to “use its reasonable endeavours to assist” the applicant to obtain prior to completion or as soon as possible after completion the assignment or novation of each Equipment Lease and consents from other parties as needed;
  • according to the liquidators no such assignment or novation ever occurred;
  • according to the same liquidators, the finance companies did not consent to the transfer of assets and liabilities

The Tribunal concluded that there was neither a legal, nor an effective, assumption of liabilities as suggested was the case by the applicant. This was made demonstrably clear by the fact that the liabilities never in fact moved to the applicant either in a legal sense or in a practical sense. Accordingly, there was no non-monetary consideration provided by the applicant.


The Commissioner contended that there was no evidence to support the contention that the applicant acquired the assets under the agreement. At the highest, the Commissioner appeared to accept that the agreement could be construed on the basis that the associated entity made a supply to the applicant of the right to use the assets. In the end, the argument about what, if any, supply was made under the agreement was academic, as the Tribunal did not accept that the applicant provided any consideration for the supply. Therefore, no taxable supply could be identified to support a claim by the applicant for input tax credits.



Supreme Court of Victoria finds GST not to be added to purchase price

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.


Exposure Draft legislation released on applying GST to low value imports

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:

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

Supreme Court of Victoria finds that the four year limitation period goes to the substance of GST liability

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.


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.


Tribunal finds GST payable on the sale of new residential premises

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.