Tag Archives: gst

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

GST Determination issued on second hand goods

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

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

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

The effect of the Determination is as follows:

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

The Determination includes the following helpful example:

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

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

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

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

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Qantas wins Full Federal Court appeal on “no-shows”

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In a dramatic development, the Full Federal Court has allowed the appeal by Qantas with respect to its liability to pay GST on forfeited airfares.

In Qantas Airways Limited v Commissioner of Taxation [2011] FCAFC 113, the Court (Edmonds and Perram JJ, with Stone J agreeing) allowed the appeal from the decision of the Tribunal and found that GST was not payable by Qantas where the passenger had paid the far, but cancelled or did not show for the fare and no refund was available or claimed.  The Court identified the air travel as the taxable supply, and as no travel took place there was no taxable supply.

The Court also found that there was no relevant distinction between fares which were non-refundable and fares which were fully refundable (but no claim for a refund was ever made).

This decision is arguably the most important GST case to date and the decision has ramifications far beyond the airline industry, with implications for all suppliers who may enter into transactions that do not complete.  Further, the decision is in direct conflict with the views of the Commissioner in GSTR 2009/3 ‘Goods and services tax: cancellation fees’.

The Commissioner has lodged an application for Special Leave to appeal to the High Court.