International cases update – October 2012: analysis of three decisions with Australian implications

In October the following decisions dealing with VAT and GST were handed down in the UK and Canada.  From my research no decisions were handed down in New Zealand.

This month I have analysed three decisions, each of which has potential interest in the Australian context:

  • Whether a payment received under a Settlement Agreement in respect of the breach/termination of an agreement is taxable in Canada: Surrey City Centre Mall Ltd v The Queen 2012 TCC 346.  The Canadian legislation has a specific deeming provision which treats payments for the breach of an agreement to make a taxable supply to be consideration for that taxable supply.  Australia contains no such provision and whether such a payment is taxable depends on whether it is consideration “in connection with” a supply. Under the current view of the Commissioner in GSTR 2001/4, the payment would not appear to be subject to GST as it is in the nature of damages.  However, the recent decision of the High Court in Qantas gives cause to revisit the issue.  My analysis of the decision can be accessed here.
  • Whether the supply of “hot food” in UK is taxable or zero-rated: Sub One Limited T/A Subway v HMRC [2012] UKUT 34.  The Upper Tribunal found that the subjective test applied by the Courts since 1988 was contrary to EU law, which required that an objective test be applied.  This raises the question of whether the test to be applied in Australia is subjective or objective.  My analysis of the decision can be accessed here.
  • Whether the sale of goods sold online where a charge was imposed for postage involved the single supply of delivered goods (all taxable) or two supplies: Orchardcrown Ltd v Revenue & Customs [2012] UKFTT 608. The Tribunal applied the established principles in Card Protection Plan and found there was a single supply.  In light of the recent decision of the High Court in Qantas, this raises the question of whether that test will continue to be applied here.  My analysis of the decision can be accessed here.

United Kingdom

Upper Taxation Tribunal

  • HMRC v The Rank Group Plc [2012] 347 – whether imposing VAT on gaming machines a breach of the principle of fiscal neutrality
  • Sub One Limited T/A Subway v HMRC [2012] UKUT 34 – Value Added Tax – zero-rating – Value Added Tax Act 1994 Schedule 8 Part II Group 1 Note (3)(b)(i) – food – toasted sandwiches and meatball marinara – whether heated for the purposes of enabling it to be consumed at temperature above ambient air temperature – whether legislation and/or interpretation and/or application thereof infringed principle of fiscal neutrality – whether FTT findings irrational – application to adduce further evidence – for my case analysis click here

Tax Tribunal

  • Damazda International UK Ltd v Revenue & Customs [2012] UKFTT 615 – Value Added Tax Act 1994 sec 84(7B) &  Sch 11 para 6A – Directive 2006/112 Art 273 – Direction to keep records – scope of appeal jurisdiction – proportionality – risk of tax loss – appeal allowed
  • Isle of Wight Council v Revenue & Customs [2012] UKFTT 648 – Value Added Tax – Taxable person – Local authority – Provision of off-street car parking – Impact of exemption on relevant market – Distortion of competition – Whether local authorities taxable persons in respect of provision of such parking – Questions referred to ECJ for determination – Application of ruling of ECJ (Case C-288/07) – EC Council Directive 77/388, art 4(5) (now art 13 of Directive 2006/114)
  • Kandiah Skandamoorthy v Revenue & Customs [2012] UKFTT 638 – VATA 1994 s73 – incomplete records – assessment to ‘best of their judgment’ – whether all relevant evidence taken into account – prolonged delays by taxpayer – appeal dismissed
  • Orchardcrown Ltd v Revenue & Customs [2012] UKFTT 608 – VAT – output tax – supply of goods with charge for postage – whether a single supply – whether supplier acts as agent for customer in contracting with Royal Mail – Customs & Excise Commissioners v Plantiflor Ltd considered – single supply by appellant – no agency established – appeal dismissed
  • Pinevale Ltd v Revenue & Customs [2012] UKFTT 606 – Value Added Tax – Reduced rate supply – Energy saving materials – Insulation for roofs – Polycarbonate panels for conservatories – Panels supplied to create new roof – Panels supplied to replace existing panels – Radiation reflector strips installed in  existing panels – Whether energy saving materials comprising insulation for roofs – Appeal allowed


Tax Court

Commissioner issues ATO ID on whether council rates are an “Australian tax” for the purposes of Division 81 of the GST Act

On Friday the Commissioner issued ATO ID 2012/87 ‘GST and Division 81 of the GST Act: whether payment of general rates imposed by local government is an ‘Australian tax” for Division 81 purposes.  The view of the Commissioner is that general rates are an “Australian tax” for the purposes of s 81-5(1) of the GST Act, so that general rates are not subject to GST.

An “Australian tax” is defined as a tax imposed under an ‘Australian law’, which is defined to be a law of the Commonwealth, State or Territory.  The power to charge rates is found in the Local Government Act (being a legislative act of State Parliament).  Further, the rates as a “tax” because they are “a compulsory exaction of money by a public authority for public purposes, enforceable by law, and is not a payment for services rendered”: referring to Matthews v Chicory Marketing Board (Vict) (1938) 60 CLR 263 per Latham CJ.

The Commissioner also relied on the long-standing High Court decision in The Municipal Council of Sydney v The Commonwealth (1904) 1 CLR 208, where all three judges found that the municipal rates in question were taxes within the meaning of s 114 of the Constitution.

I note with interest that the Commissioner also refers to this decision in GSTR 2006/5 ‘GST: meaning of ‘Commonwealth, a State or a Territory’, where the Commissioner states as follows:

…all three judges found that the Council was the “State” for the purposes of s 114.  The power delegated to the Council, by State legislation, which allowed the Council to levy rates, was the determinative factor in that case.

Somewhat surprisingly, in that ruling the Commissioner contends that there is no general proposition that local governments are “State” for the purposes of s 114 of the Constitution, and that the legislation constituting a particular local government must be considered.  This contention is made notwithstanding the subsequent approval of The Municipal Council of Sydney by the High Court in Essendon v Criterion Theatres Pty Ltd (1947) 72 CLR 1 (per Latham CH at 13, Dixon J at 17, McTiernan J at 27), Deputy Federal Commissioner of Taxation v State Bank of NSW (1992) 174 CLR 219 (per the Court at 25), SGH Ltd v Commissioner of Taxation (2002) 210 CLR 51 (per Gummow J at [47]), Roy Morgan Research Pty Ltd v Commissioner of Taxation [2011] HCA 35 (per the six judge majority at [23]-[24]).

It is difficult to understand the basis for the Commissioner’s contention.  No examples are given where the legislation in question does not constitute local councils as “State”.  It is instructive to consider the following extract from the Court in Deputy Federal Commissioner of Taxation v State Bank of NSW (at [25]):

Indeed, the decision in The Municipal Council of Sydney v The Commonwealth is direct authority for the proposition that a corporation exercising governmental functions is “a State” for the purposes of s 114.  In that case the municipal council, a body corporate, which levied local government rates on property, was held to be the State and its rates were held to be a tax on property for the purposes of that section.

Given the above statement, for the Commissioner’s contention to succeed it would arguably need to be shown that the terms of the legislation constituting a local council were such that the local council was no longer exercising governmental functions.  This would include, presumably, the government function of levying rates on properly held by its constituents.  I am not aware of any of the various State Acts in question being drawn in such terms.


First anniversary – a year in review

Today marks the first anniversary of this site going live.

The past 12 months have been a busy time for GST in Australia.  We have seen a number of decisions by the Courts and Tribunals, significant legislative change and activity by the ATO.  Some of the highlights include:

  • one decision of the High Court (Qantas); two applications for special leave to appeal to the High Court by the Commissioner (Qantas – successful, Multiflex – unsuccessful); four decisions of the Full Federal Court – three in favour of the taxpayer (Unit Trend, MultiflexQantas) and one in favour of the Commissioner (MTAA Superannuation Fund), two decisions of the Federal Court (ECC Southbank, Yacoub), plus multiple decisions of the Tribunal
  • Legislative developments including: self assessment for GST from 1 July 2012; the Commissioner’s ability to retain refunds pending investigation (s 8AAZLG of Schedule 1 to the TAA); exposure draft for new GST refund provisions (proposed Division 36 of the GST Act)
  • The Commissioner has published four GST Rulings, eight GST Determinations, 12 ATO IDs dealing with GST issues, and around 600 private rulings dealing with GST issues have been published on the ATO’s Private Ruling Register

In my view, there will continue to be a lot of activity in the area of GST.  Some things to look forward to over the coming year include:

I would like to thank those people who have supported this site during the last year.  In the past year the site (and its various pages) has received in excess of 18,000 views and 130 people have signed up to receive updates by way of email.  These statistics appear to reflect the level of interest in GST in Australia and the continued activity in the area.

Tribunal affirms 75% penalty and 20% uplift where taxpayer failed to report sales of residential apartments

In Subloo’s Investments Pty Ltd and Commissioner of Taxation [2012] AATA 703 the Tribunal affirmed the Commissioner’s decision to impose penalties of 75% plus an uplift of 20% because of the repetition of the conduct of the taxpayer in failing to report the sales of residential apartments.  In this case, the penalties almost equated to the GST shortfall.

For the first three tax periods in question, the applicant lodged activity statements claiming input tax credits but failed to record the sale of apartments during those periods, resulting in refunds being paid to the applicant.  For the remaining tax periods, the applicant failed to record any of the sales made. An audit by the ATO showed a GST shortfall of $534,018 and a shortfall penalty of $460,447.95 was made.  This was based on a base penalty of 75% (intentional disregard) and, except for the first month, the base penalty be increased by 20% because of the repetition of the conduct.

The applicant did not contest the GST shortfall, nor the characterisation of its conduct as intentional disregard.  The only issue was whether the penalties should be remitted.  The essential argument appeared to be that the applicant’s financier, without their consent, applied the GST component of the sales to reduce the mortgage debt rather than paying the GST and the project then got into financial difficulties.  The Tribunal found no basis for remission, essentially because the applicants chose not to account for GST for 18 months and chose not to contact the Commissioner to explain such difficulties that they may have been experiencing.

Tribunal decision on GST and penalties

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

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

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

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

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

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

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

International cases update – September 2012 – single vs multiple supplies and possible impact of Qantas

In September 2012 the following cases dealing with VAT issues were published in the UK.  From my research there were no significant cases published in New Zealand or Canada.

It is notable that two of the decisions of the Tribunal involved the perennial question of whether a transaction involved a single supply or multiple supplies for VAT purposes.  My analysis of these decisions can be found here.  Also, as discussed in my analysis, one wonders whether the recent decision of the High Court in Qantas will impact on how Australian Courts will approach this question going forward.

United Kingdom

First Tier Tribunal

  • Chipping Sodbury Golf Club v Revenue & Customs [2012] UKFTT 557 – VAT – sporting exemption for golf clubs – Article 13A(1)(m) Sixth Directive – members’ subscriptions – single supply or multiple supplies – Card Protection Plan considered – held single supply – profit making proprietary clubs – whether entitled to exemption – no – appeals dismissed
  • Colin Summers & Christopher Summers v Revenue & Customs [2012] UKFTT 590 – VALUE ADDED TAX — registration — whether appellants trading as single partnership or as two differently constituted partnerships — on the evidence, two separate partnerships — appeal allowed
  • Goals Soccer Centres plc v Revenue & Customs [2012] UKFTT 576 – VAT – Single or multiple supplies; five-a-side football; Pitch hire agreements and management services of sports leagues; whether single supply or multiple supplies, whether artificial to split or artificial to combine; tests to be applied and factors to be taken into account; relevance of the principle of fiscal neutrality
  • Goodman Equine Ltd v Revenue & Customs [2012] UKFTT 565 – VAT – input tax claim refused – horse trading – is business test satisfied – no
  • JIB Group Ltd v Revenue & Customs [2012] UKFTT 547 – VAT – INPUT TAX – was professional independent trustee of pension schemes entitled to deduct VAT on services of third party advisers relating to schemes? – held yes – are amounts paid by schemes in relation to advisers’ services consideration for supplies of services by trustee? – held yes – do principles of legitimate expectation, fiscal neutrality and equal treatment lead to different result? – held no – appeal allowed
  • Lakeside Collector Cards v The Commissioners Revenue & Customs [2012] UKFTT 563 – VALUE ADDED TAX – Input tax – Change from cash accounting – Return submitted 2½ years late – Capping provisions – Whether input tax capped as from time return due or from time received by Respondents – Status of Respondents’ manual published on Internet considered
  • Lok’nstore Group Plc v Revenue & Customs [2012[ UKFTT 589 – VAT – INPUT TAX – partial exemption – whether standard method and special method produce fair and reasonable attribution of input tax – held yes – whether special method proposed by Appellant produces fairer and more reasonable result than standard method – held yes – appeal allowed
  • Nathaniel David Roden and Rebecca Catherine Roden v Revenue & Customs [2012] UKFTT 586 – VAT –  let of hotel accommodation by undisclosed agent – deemed supply by and to agent under s47(3) VATA – whether deemed supply to agent necessarily has same VAT status as deemed  supply by agent – no – whether Item 1(d) of Group 1 to Schedule 9 VATA only exempts supplies to physical user of accommodation – no – appeal allowed in principle
  • Westminster College of Computing Ltd v Revenue & Customs [2012] UKFTT 579 – VAT – EXEMPT SUPPLIES – education – whether appellant school – held no – whether appellant college of institution of UK university– held no – appeal dismissed

High Court allows Commissioner’s appeal in Qantas

Today the High Court handed down its decision in Commissioner of Taxation v Qantas Airways Ltd [2012] HCA 41.  By a majority of 4:1 (Heydon J dissenting) the Court allowed the Commissioner’s appeal and found that Qantas was liable to pay GST with respect to fares for travel which was not taken by passengers.

In summary, the view of the majority was that upon entry into the contract with passengers, Qantas made a taxable supply for consideration (being the fare) and GST was payable and attributable to the tax period in which the fare was received.  At [33] the majority said as follows:

The Qantas conditions and the Jetstar conditions did not provide an unconditional promise to carry the passenger and baggage on a particular flight.  They supplied something less than that.  This was at least a promise to use best endeavourrs to carry the passenger and baggage, having regad to the circumstances of the business operations of the airline.  This was a “taxable supply” for which the consideration, being the fare, was received.

My initial comment is that while this case involved the GST implications of a transaction which did not proceed to completion, the majority’s conclusion would appear to apply to all contracts, regardless of whether those contracts complete or not.  Accordingly, whenever a party enters into a contract and receives consideration (or provides an invoice), that party makes a taxable supply, with the supply being the entry into the obligations and or the provision of rights to the recipient.  This may raise a number of difficulties going forward.

In his dissenting judgment, Heydon J essentially approved of the reasons given by the Full Court.  In doing so, his Honour found that the expression “supply for consideration” connoted a bargained-for exchange of value for performance and identified the flight as what the passenger paid for. His honour also found that an interpretation of s 9-5 fastening on the latter supply (ie, the flight) conforms more closely to practical reality.

News Flash! High Court to hand down Qantas decision on Tuesday morning

The High Court email notification service shows that the Court will hand down its decision in the Qantas case on Tuesday morning at 10.15am.  The decision involves the GST treatment of fares paid by passengers who did not show for the flight.  The Commissioner appealed against the decision of the Full Federal Court that no GST was payable (the Full Federal Court having allowed Qantas’ appeal against the decision of the Tribunal that GST was payable).

The decision should appear on the High Court website and austlii during the day.


Case analysis of Unit Trend Services v COT – Division 165 and anti-avoidance

On 19 August 2012 the Full Federal Court handed down its decision in Unit Trend Services Pty Ltd v Commissioner of Taxation [2012] FCAFC 112.  This was an appeal by the taxpayer from the decision of the Tribunal in The Taxpayer and Commissioner of Taxation [2010] AATA 497. In a majority decision (2:1), the Full Court allowed the taxpayer’s appeal and found that Division 165 did not apply because the GST benefit was “attributable” to a choice, election, application or agreement that is expressly provided for in the GST law.  The taxpayer did not appeal the finding of the Tribunal that obtaining the GST benefit was the dominant purpose (and principal effect) of entering into the scheme.

My analysis of this decision can be found here.

International cases update – August 2012; NZ decision on enterprise; decision of South Africa’s highest court

In August 2012, the following decisions relating to GST and VAT were handed down in New Zealand, the UK and Canada.

A decision of note is XXX and the Commissioner of Inland Revenue [2012] NZTRA 07 where the NZ Tribunal found that the taxpayer was entitled to be registered for GST as a property developer and to claim an input tax credit for the cost of acquiring land and associated costs with respect to a property development which did not proceed.  The decision provides a helpful insight into the approach of the NZ Courts on the difficult question of when an entity will be conducting a “taxable activity” in the context of the subdivision and sale of land. My analysis of the case can be accessed here.

Also, at the end of this post I briefly discuss a decision of the Supreme Court of Appeal of South Africa in Commissioner for South African Revenue Services v De Beers Consolidated Mines Ltd [2012] ZASCA 103 which touched on the difficult issue of the “attribution” of input tax credits in the context of acquisitions directly used for non-taxable purposes but used indirectly for making taxable supplies.  The approach of the Court may have some relevance to the construction of s 11-15 of the GST Act and the meaning of “creditable purpose”.

New Zealand

Taxation Review Authority

United Kingdom

Upper Tax Tribunal

  • HMRC v GMAC UK Plc [2012] UKUT 279 – VAT Bad debt relief – Insolvency Condition, Property Condition – whether valid under EU law – No; whether repayment claim resulted in a windfall contrary to EU law – need for reference – Yes; Time limit for making claims – whether time-barred as a result of overriding provisions of EU law

Tax Tribunal

  • Hope in the Community v Revenue & Customs [2012] UKFTT 499 – VAT – supply – whether funds received by the Appellant were grant monies outside the scope of VAT or consideration for a taxable supply of goods and services within sections 4 and 5 VATA 1994 – held taxable supplies – appeal disallowed
  • Skinner Ltd v Revenue & Customs [2012] UKFTT 525 – VAT – whether appellant’s dog food was pet food – meaning of “meal” in expression “biscuits and meal” in zero rating schedule – appeal allowed in part
  • Ward v Revenue & Customs [2012] UKFTT 499 – VAT  – exemptions – accommodation- whether the appellants supply of studio flats to the local authority was excluded from the exemptions within Group 1 of Schedule 9 of the Value Added Tax Act 1994 because they were operating a hotel or similar establishment – appeal dismissed


South Africa

In June 2012 the South African Supreme Court of Appeal handed down its decision in Commissioner for South African Revenue Services v De Beers Consolidated Mines Ltd [2012] ZASCA 103.  The question in this case was whether the acquisition of foreign advisory services (in respect of a proposed corporate restructure) were consumed by De Beers “for the purpose of making taxable supplies” so that input tax could be claimed.  The Tax Court sitting below found in favour of De Beers on the basis that the services were utilised and consumed by it for the purpose of making taxable supplies (i.e. in the course or furtherance of its enterprise of mining and selling diamonds).

The Supreme Court allowed the appeal by the Revenue.  In doing so, the Court considered the primary question to be whether the services were acquired “for the purpose of making taxable supplies”.

De Beers put its argument in the following way:

It was contended on behalf of DBCM that the provision of the services by NMR were necessarily attached to and according a concomitant of appellant’s mining or commercial enterprise as a public company.  As the appellant had chosen to conduct its business as a public company which, while conducting its operations, had certain statutory obligations, it was submitted that these services were directly linked to its making of ongoing supplies.  Thus, so it was argued, since these supplies can rightly be said to have been wholly utilised or consumed in the making of supplies, in the course or furtherance of appellant’s mining or commercial enterprise, they did not fall within the definition of imported services.  It was submitted that the Commissioner’s attitude embodied a restrictive approach in construing DBCM’s enterprise, limiting it to the nuts and bolds of the operational diamond business and excluding statutory duties imposed on the company in the interest of shareholders.  Put simply it was contended that NMR’s services were acquired in the furtherance of DBCM’s mining and diamond business.

The Revenue argued the following:

On behalf of the Commissioner it was submitted that the purpose in question is the purpose of the acquirer of the service and that, by its nature, the test is subjective.  DBCM’s reason for engaging NMR, so it was contended, was to acquire advice in relation to a take-over by parties to which it was related.  Accordingly, its board had a duty to report to the independent unit holders a to whether the offer was fair and reasonable and to obtain independent legal advice in that regard…The fact that this was the reason for DBCM’s engagement of NMR, rules out, as a relevant purpose, any of the incidental benefits which DBCM thought it might derive from the transaction.  

The Court agreed with the Revenue.  Also, the Court distinguished two tax cases (including the Australian decision in FCT v The Swan Brewery Co Ltd (1991) 22 ATR 295) where it was held that certain expenditure on services relating to corporate restructures was deductible for income tax purposes.