GST private rulings for August 2012 – focus on Executors Commission and GST refunds

In August 2012 the Commissioner published over 40 private rulings on the Private Rulings Register dealing with GST issues.  A list of the rulings can be accessed here.

Of particular interest were private rulings dealing with the GST implications of Executors Commission and the perennial issue of GST refunds.

Private Ruling No.1012201810746 dealt with the question of whether GST was payable on executors commission to be received by an executor appointed to administer an estate. The Private Ruling found that GST was payable because the executor was carrying on an enterprise (he was already registered in respect of a farming business) and GST was payable.  While accepting that the appointment was a “one off”, the ruling found that the activity had the characteristics of a business deal and fell within the definition of “enterprise” in the GST Act.

This ruling has important implications for any person who takes an appointment as executor and seeks to recover executors commission.  Where a person is not registered for GST, there will only be an issue where the turnover threshold of $75,000 is exceeded.  However, where a person is registered (albeit in respect of a totally unrelated enterprise – in the case of the private ruling, the applicant was registered as a farmer), that person will be potentially exposed to a GST liability of 1/11th of the Commission.  This also raises the question of whether the Commission can be “grossed up” for the GST liability and whether the Estate should (or can) be registered for GST so that it can claim an input tax credit in respect of the GST.

Private Ruling No.1012202126278 dealt with the GST treatment of an out of court settlement payment and whether the Commissioner would exercise its discretion in s 105-65 of Schedule 1 to the TAA to refund the overpaid GST.  In the private ruling, the Commissioner confirmed that the payment was not subject to GST and that “on balance” the Commissioner would exercise the discretion to pay a refund of GST because he was satisfied that the settlement amount was set without taking GST into account and the applicant made a later decision to treat the amount as consideration for a taxable supply, meaning that the overpaid GST was not passed on to the recipient and the burden of the GST was borne by the applicant.

Last month the Treasurer released a controversial exposure draft for introduction of Division 36 into the GST Act, which is to replace s 105-65 of Schedule 1 to the TAA.  My post on the exposure draft can be accessed here and my analysis of the new provisions can be accessed here.  Under the new provisions, the same result would occur because the Commissioner accepted that no part of the overpaid GST was passed on to the recipient.

It is interesting that in the private ruling, no tax invoice was given to the recipient.  Under the proposed changes, if a tax invoice had been provided (which the applicant would have been required to do under the GST Act if required by the recipient), this would have provided “prima facie evidence” of the GST being passed on to the other entity.  In these circumstances, it is difficult to see how the mere fact of the provision of a tax invoice can potentially convert a situation where GST is not passed on, to one where GST is passed on.

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

Exposure Draft legislation

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

Comments are due by 12 September 2012.

Links to documents:

The Explanatory Memorandum summarises the legislation as follows:

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

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

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

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


A big day in GST – Division 36 and GST refunds; Full Federal Court decision on Division 165

Last Friday was a big day for GST. The Assistant Treasurer released an Exposure Draft of legislation which will dramatically change the landscape for GST refunds – my analysis of these provisions can be accessed here.

Also, the Full Federal Court handed down its long-awaited decision in Unit Trend Pty Ltd v Commissioner of Taxation [2012] FCAFC 112 dealing with the application of Division 165 of the GST Act. In a 2:1 decision, the Court allowed the taxpayer’s appeal.  I would not be surprised if the matter goes further and a special leave application is filed.

The judgment is very detailed, running to some 247 paragraphs and the decision will take some time to fully digest.  In the interim, my thoughts are set out below.

The Facts

Unit Trend is the representative member of a GST group, including Simnat (Pty Ltd), Belsford (Pty Ltd), Mooreville Investments (Pty Ltd) and Repcivic Contractors (Pty Ltd).

On 14 December 1998 Simnat entered into a contact to purchase land for $30m and the contract settled on 20 April 1999.  Simnat obtained development approval for the construction of three high-rise towers.  On 31 July 2001 Simnat appointed Rapcivic to construct Tower 1 on the site, which was completed by December 2002 and the units were sold to the public.  The margin scheme was used to calculate the GST payable.

Tower II

By contract dated 1 July 2002 Simnat engaged Rapcivic to construct Tower II.  By contract dated 14 April 2004 Tower II was sold to Blesford and the purchase price was to be determined by an independent valuer.  The sale was agreed to be the sale of a going concern and the price was determined by a valuation of $149,800,000. Under the contract of sale, Simnat assigned to Blesford all of its rights under the sale contracts it had entered into with purchasers of the units prior to the sale of the Tower.

The contract settled on 7 May 2004 and Blesford (as the new owner) continued marketing units in the tower and made off the plan sales to the public.

When the construction was completed, Blesford settled the sales contracts (including those assigned from Simnat). Blesford applied the margin scheme for the GST on the sales to the public.  In determining the margin, Blesford adopted the price it paid to Simnat for Tower II and determined the margin between that price and the value of the end sales (applying an apportionment of the acquisition price to each unit).

Tower III

This operated in a similar way to Tower II.  By contract dated 29 January 2003, Simnat engaged Rapcivic to construct Tower III.  By contract dated 15 April 2004, Simnat sold Tower III to Mooreville, with the price to be determined by an independent valuer.  The value was $10,500,000.  The sale was agreed to be a going concern and Simnat assigned the rights to existing sales contracts to Mooreville.  On completion, Mooreville settled contracts (including sales made on its own behalf and sales assigned from Simnat).  Mooreville applied the margin scheme and used the price it paid to Simnat as the consideration for the acquisition of the units.

Grounds of appeal
The taxpayer appealed against the Division 165 finding and also on the grounds that there was no valid valuation for the purposes of Division 75 because Blesford and Mooreville did not hold the land at 1 July 2000.  The Commissioner cross-appealed against a number of findings of the Tribunal about Division 75.  My discussion below if limited to the Division 165 point.
The majority (Bennett and Greenwood JJ) allowed the appeal with regard to Divion 165 by finding that the GST benefit to the taxpayer (i.e., the uplift in value for the margin scheme) was “attributable” to a choice provided for in the GST Act.  The view of the majority can be found in the following extract (at [200]-[202]):
200 The Commissioner correctly observes that the taxpayer’s election or choice to enter into agreements to Transfer Towers II and III from Simnat to Blesford and Mooreville was not itself an election or choice expressly provided for by the GST law.  It was a commercial election or choice that brought about, in effect, an uplift in the intermediate cost base in the hands of Blesford and Mooreville which would diminish the margin on end sales.  However, entry into those intra-group transactions on terms consistent with a sale of a “going concern” in a manner which conformed with s 38-325(1)(c) of the GST Act (as the Commissioner accepts), did involve an election or choice to transfer on terms expressly in conformity with s 38-325 which had the effect that GST would not become payable on settlement of the transfers from Simnat to those entities.
201 If what lies at the heart of the GST benefit obtained from the scheme is the intermediate transaction resulting in an uplift in the transactional cost base (coupled with the application of the margin scheme to end sales) the intermediate transaction within the scheme involved the taxpayer in making a choice or election to enter into a going concern transaction in conformity with s 38-325(1)(c).  But for the making of the choice or election to transfer Towers II and III as a going concern in conformity with s 38-325(1)(c), a GST liability would have arisen by reason of the settlement of each transfer.
202 However, the choice or election to engage in a going concern transaction in conformity with s 38-325(1)(c) was not the only choice.  Put simply, Unit Trend entered into a scheme comprising a number of sequential steps that ultimately gave rise to a GST benefit attributable to (or owing to or produced by) a number of choices, elections or agreements made as expressly provided for by the GST law (as it then stood) given expression in the arrangements comprising the scheme giving rise to that benefit with the result that Division 165 does not apply as s 165-5(1)(b) of Subdivision 165-A is not satisfied.  The fact that it could be said that the benefit is attributable to a “scheme” resulting from a series of such choices etc does not prevent the GST benefit also being attributable to the making of those choices.  This rises from the express use of “attributable to” rather than a narrower or more restrictive test.

And finally, at 205:

If the statutory purpose of s 165-5(1)(b) is to be served of preserving for the taxpayer the choices, elections etc expressly conferred by the GST law, the GST benefit must be answerable to, explained by or belong by those choices.

In dissent, Dowsett J took different view on the meaning of “attributable” (and appeared to adopt the approach of the Tribunal), as can be seen by the following extracts (at [46]-[48]):

46 In any event, Unit Trend’s submission seems to be that the GST benefit should be seen as the product of a number of choices expressly provided for by the GST law, and that the benefit is therefore attributable to them collectively.  I doubt whether s 165-5(1)(b) should be read as authorising such an approach.  The section rather seems to contemplate a direct link between the benefit and the relevant choice…

47 If I am correct in inferring that the inquiry posed by s 165-5(1)(b) is as to whether a GST benefit is attributable to a relevant scheme or to a relevant choice, it is most unlikely that Parliament intended that an outcome attributable to numerous choices would be excluded from the general operation of Div 165.  After all, schemes will frequently involve multiple choices.  Where one benefit is attributable to the interaction of numerous choices, it would be more accurate to attribute such benefit to that interaction, rather than to individual choices, taken discretely.  The position may be otherwise where the scheme yields discrete benefits, each of which is attributable to a different, discrete choice.

48 In any event, in the present case, the scheme which produced the benefit included the intermediate sales by Simnat to Blesford and Mooreville.  Such sales lay at the heart of the scheme, even if the various choices were also necessary integers of it.  In my view, the GST benefit was attributable to the events of which such sales were necessary party, in other words, the scheme.  In those circumstances, the benefit was attributable to the scheme, and not to any particular choice expressly provided for by the GST law.

Closing thoughts

Given the approach of the majority of the Federal Court to the concept of “attribution”, I would expect that the Commissioner will consider lodging an application for special leave to appeal to the High Court and asking that Court to adopt the approach of Dowsett J in dissent. This is an important issue for the ongoing application of Division 165, because the GST Act contains numerous choices and elections which may impact on the very things Division 165 is trying to deal with (e.g., timing differences – electing to be a cash or accruals taxpayer; whether taxable or GST free – agree to sell as a going concern; the amount of GST – agree to use the margin scheme; whether GST at all – electing to form a GST group or a GST joint venture).  Taken to the extreme, many GST benefits will likely have some element of “attribution” to a choice or election available under the GST Act.


Full Federal Court to hand down decision on the anti-avoidance provisions in Division 165 tomorrow

Tomorrow morning Greenwood J is listed to hand down the decision of the Full Federal Court in Unit Trend Services Pty Ltd v Commissioner of Taxation.  This decision provides the first opportunity for the Full Federal Court to consider the anti-avoidance provisions in Division 165 of the GST Act. The matter is an appeal from a decision of the Tribunal, which I believe was reported as The Taxpayer and Commissioner of Taxation [2010] AATA 497 and it involves the application of the margin scheme, grouping and Division 165.

The decision of the Tribunal was discussed in a paper I presented earlier this year dealing with Division 165, which can be accessed here.

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

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

The ruling was previously issued as Draft GST Ruling GSTR 2012/D2: GST treatment of fees and charges payable on exit by residents of a retirement village operated on a leasehold or licence basis.  My post on that draft can be accessed here.  A post analysing the final ruling will be published over the next few days.

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

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

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

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

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

Comments are sought by 29 August 2012.

International Cases update – July 2012

In July 2012 the following cases dealing with GST/VAT were handed down in New Zealand, Canada, the UK and the ECJ.  The most interesting decision is that of New Zealand’s highest court in granting the taxpayer special leave to appeal in a case involving the important issue of liability of receivers to pay GST.

New Zealand 

Supreme Court

United Kingdom

First Tier Tax Tribunal

  • A Soldier v Revenue & Customs [2012] UKFTT 388 – VAT – new means of transport – private motor car supplied for removal to Germany – bought by member of UK armed forces based in Germany and taken there for two days – returned to UK because Appellant on temporary training here before six month operational deployment in Africa – car left in the UK during deployment – during deployment, Appellant notified that his German stationing was being terminated and he was being re-based in the UK – whether Appellant had sufficient intention to remove the vehicle from the UK when initially supplied to him to qualify for UK zero rating on that supply to him – X v Skatteverket (ECJ) considered – held yes – appeal allowed
  • Darragh House Ltd v Revenue & Customs [2012] UKFTT 423 – VAT – disallowance of  input tax claim – question of fact whether expenditure used or to be used for purpose of business – appeal allowed in part
  • Drumtochty Castle Ltd v Revenue & Customs [2012] UKFTT 429 – VAT; use of castle for function such as wedding; additional supplies of  overnight accommodation, afternoon tea and breakfast; single or multiple supplies; whether supplies including use of castle exempt under VATA 1994, Schedule 9 Group 1; whether exemption excluded by item 1(d)

European Court of Justice

  • Deutsche Bank [2012] EUECJ C-33/11 – Sixth Directive – Exemptions – Article 15(6) – Exemption for the supply of aircraft used by airlines operating for reward chiefly on international routes – Supply of aircraft to an operator who makes them available to such an undertaking – Concept of ‘operating for reward on international routes’ – Charter flights
  • J J Komen en Zonen Beheer Heehugowaard [2012] EUECJ-326/11 – Sixth VAT Directive – Article 13B(g), read in conjunction with Article 4(3)(a) – Supply of buildings and land upon which they stand – Supply of a building undergoing work with the view to the creation of a new building by transformation – Continuation and completion of the work by the purchaser after the supply – Exemption from VAT
  • International Bingo Technology [2012] EUEC C-377/11 – Sixth VAT Directive – Articles 11A(1)(a), 17(5) and 19(1) – Organisation of games of bingo – Legal obligation to use part of the card price to pay winnings to players – Calculation of the basis of assessment
  • Littlewoods Retail Ltd and others [2012] EUECJ C-591/10 – Second and Sixth VAT Directives – Input tax – Refund of excess – Payment of interest – Procedures
  • Redlihs [2012] EUECJ C-263/11 – Sixth VAT Directive – Directive 2006/112/EC – Concept of ‘economic activity’ – Deliveries of timber in order to alleviate the damage caused by a storm – Reverse charge procedure – Failure to register in the register of taxable persons – Fine – Principle of proportionality


Tax Court

  • Daruwala v The Queen 2012 TCC 257 – whether purchase of newly constructed home exempt from GST on the basis that the property had previously been used as a residence by the builder – whether property used by builder as residence
  • Scott v The Queen 2012 TCC 274 – Entitlement to rebate of portion of GST paid on the purchase of motor vehicle subsequently sold back to dealership because of persistent problems – whether two separate transactions or the rescission/cancellation of the first transaction
  • Tele-Mobile Company Partnership v The Queen 2012 TCC 256 – Entitlement to input tax credits as a result of Billing Credits and mail-in rebates provided to customers- whether credits and rebates a “coupon” or voucher or simply a discount on the contract
  • Vincent v The Queen 2012 TCC 269 – Entitlement to input tax credits in respect of real estate business – substantiation of claims

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

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

Ruling No 1012169974256 – bare trusts

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

The facts outlined in the ruling were as follows:

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

In the ruling, the applicant asked the following questions:

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

The ruling answers the questions as follows:

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

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

Ruling No.1012171312428 – refunds of GST

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

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

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

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

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