ECJ denies refund application for VAT paid between 1973 and 1977

In Grattan plc v The Commissioners of Her Majesty’s Revenue & Customs [2012] EUECJ C-310/11 the European Court of Justice has found that the taxpayer does not have a directly effective right to treat the basis of a VAT assessment as retrospectively reduced where, after the time of the supply, the recipient received a credit from the supplier.  The decision illustrates the scope of VAT refund claims still being agitated in the UK.  These claims were restricted to VAT paid between 1973 and 1977 (as from 1978 the issue was dealt with by adjustment provisions which allowed for a subsequent reduction in assessments).

The decision was in response to the following question referred by the First Tier Tax Tribunal:

In relation to the period before 1 January 1978, does a taxable person have a directly effective right under Article 8(a) of the Second Directive and/or the principles of fiscal neutrality and of equal treatment, to treat the basis of assessment of a supply of goods as retrospectively reduced where, after the time of that supply of goods, the recipient of the supply received a credit from the supplier which the recipient elected either to take as a payment of money, or as a credit against amounts owed to the supplier in respect of goods to the recipient that had already taken place.

The issue before the Tribuanl was whether credits subsequently given to “agents” in respect of goods purchased through mail order companies had the effect of reducing the consideration received by the companies (and therefore the VAT liability previously paid).  The question directed to the ECJ was whether this subsequent credit allowed the company to retrospectively claim a refund of the VAT paid.

The ECJ found that the crucial factor was how much the taxable person has ‘actually received’ at the time when the basis of the assessment is to be determined.  Further, the possibility of repayments of parts of the consideration after the supply has taken place has no bearing on the determination of the assessment and the amount of the tax debt accrued.  Finally, while an adjustment procedure was introduced from 1 January 1978, there is no scope to read such an adjustment procedure into the legislation prior to that time, or to give it a retrospective operation.




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.


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.

Case Analysis in Multiflex – off to the High Court?

The decision of the Full Court in Commissioner of Taxation v Multiflex Pty Ltd [2011] FCAFC 142 has real implications for the Commissioner and how he administers the GST Act.  My analysis of the decision can be accessed here.

Also, colleagues who attended the judgment inform me that Counsel for the Commissioner informed the Court that the Commissioner would look to bring an urgent application for special leave to appeal before the High Court.  The Commissioner has also made an application to stay the judgment (i.e. to stay the order to pay the refund) and this application is to be heard by Justice Edmonds next week.

If the Commissioner does bring an application for special leave, along with the Qantas application, he will have two applications for special leave regarding GST.  So much for GST being a “practical business tax”.

Federal Court forces Commissioner to pay GST refunds “forthwith”

The Federal Court has ordered that the Commissioner must “forthwith” pay refunds of a negative “net amount” to a taxpayer, notwithstanding that the Commissioner was conducting an investigation to establish whether the applicant relied on fraudulent tax invoices to claim input tax credits.

In Multiflex Pty Ltd v Commissioner of Taxation [2011] FCA 112, Jessup J ordered a writ of mandamus directing the Commissioner to comply with s 35-5 of the A New Tax System (Goods and Services Tax) Act 1999 and s 8AAZLF of the Taxation Administration Act 1953 by forthwith paying to the applicant the net amount notified in the GST return for each of the relevant tax periods.

In making the order, the Court rejected the Commissioner’s submission that the obligations to make refunds is subject to an implied proviso that those refunds need not be paid instantly, but must be complied with within a reasonable period.  In this case, the “reasonable period” would take into account the time to conduct an investigation into the tax affairs of the taxpayer, assuming that investigation was progressed with expedition.

The Court also rejected the Commissioner’s submission that the Court should not exercise the discretionary relief of mandamus because of his suspicions as to the fraudulent nature of the tax invoices and also the risks of having to seek to recover those payments from the company through the assessment process.

A more detailed analysis of this important case will follow shortly.

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

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.