19 September, 2012

 

This Bulletin outlines Australian GST developments in August 2012 which may impact your business, including: 

 

  • Trnka and Commissioner of Taxation – the AAT has refused a taxpayer’s ITC claims because he failed to prove that he was carrying on an enterprise.
  • Exposure draft legislation: refunding excess GST – Treasury has released draft legislation which clarifies the circumstances in which the restriction on GST refunds applies to overpayments of GST and allows taxpayers to self-assess their entitlement to a GST refund by reference to ascertainable criteria.
  • GSTR 2012/4: GST treatment of fees and charges payable on exit by residents of a retirement village operated on leasehold or licence basis – the ATO has released a Tax Ruling which 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.
  • Goods and Services Tax Determination GSTD 2012/6: 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 A New Tax System (Goods and Services) Tax Act 1999? – the ATO has released a Tax Determination that states when an entity acquires second-hand goods it makes a taxable supply of the goods by way of lease before making a taxable supply of the goods by way of sale (or exchange).
  • Exposure draft legislation: GST margin scheme and subdivided land – Treasury has released exposure draft legislation outlining proposed changes to the margin scheme provisions of the GST Act.
  • Addendum to GST Ruling GSTR 2000/24 – the ATO has issued an Addendum “Goods and Services Tax; Division 129 – making adjustments for changes in extent of creditable purpose”.
  • ATO Taxpayer Alert TA 2012/5 – the ATO has released a Tax Alert cautioning taxpayers of non-commercial arrangements where an entity claims an ITC on the acquisition (on non-commercial terms) of intangible items (eg, rights) at inflated prices.
  • Unit Trend Services Pty Ltd v Federal Commissioner of Taxation – the Full Federal Court in a majority decision has held that Division 165 of the GST Act did not apply to certain arrangements involving the margin scheme and going concern provisions because the GST benefit was attributable to choices expressly provided for by the GST Act.
  • Vita Hot Bread Pty Ltd and Commissioner of Taxation – the AAT has held that a taxpayer operating a bakery and hot bread shop understated its income with the result that the GST declared was also incorrect.
  • ATO Technical Discussion Paper TDP 2012/1 – the ATO has released a Technical Discussion Paper that considers the GST treatment of recovered dishonoured payment costs.

 

Relevant are At a glance Relevant to
Division 9 – Taxable supplies

 

Trnka and Commissioner of Taxation [2012] AATA 492

 

The Administrative Appeals Tribunal in Trnka and Commissioner of Taxation refused claims made by the taxpayer that certain assessments were excessive, due to input tax credits being disallowed by the Commissioner on the basis of insufficient evidence that the taxpayer was carrying on an enterprise, among other matters. The AAT also reduced the base penalty to 50% rather than the 75% initially imposed by the Commissioner.

 

Facts

 

The taxpayer claimed that the input tax credits claimed by it should not have been disallowed. The taxpayer claimed it carried on a thoroughbred horse racing and breeding business, and claimed input tax credits for the acquisition of 12 horses from an associated company.

 

Following an audit, the Commissioner disallowed the input tax credits claimed and issued assessments. A penalty representing 75% of the assessments with an increase of 20% on the base penalty for obstruction, was imposed. The taxpayer objected to the penalty and subsequently the assessments, and the Commissioner disallowed the objections in full, after which the taxpayer applied for a review of each decision. Given the penalty is based on the tax assessments, the parties agreed that both reviews should be heard concurrently, with evidence in one proceeding being evidence in the other.

 

Decision

 

The taxpayer bore the onus of establishing that the assessments were excessive. The AAT held that on the evidence, it was not satisfied that there was an acquisition or that the taxpayer paid any consideration for the alleged sale of horses. Therefore, the taxpayer was not entitled to claim the input tax credits. Notably, no tax invoice was produced, nor was any document produced that could have been treated as a tax invoice. Having made this finding, it was not necessary for the Tribunal to consider the other issues. For completeness, the Tribunal stated that it was not satisfied that either the taxpayer or the associated company carried on an enterprise at the relevant time.

 

The Tribunal accepted the Commissioner’s submissions that the conduct in lodging the Business Activity Statements with claims for input tax credits that could not be substantiated, was reckless and a base penalty of 50% was appropriate. The Tribunal also accepted the Commissioner’s concession that a 20% increase in the penalty should not be imposed, as there was no evidence of deliberate action to obstruct ATO officers. However, there were no exceptional circumstances or injustice in the present case that warranted remission of the penalty.

 

All taxpayers
Division 36 – Excess GST

 

Exposure draft legislation: refunding excess GST

 

The Treasury has released Exposure draft legislation regarding refunding excess GST which is intended to clarify the circumstances in which the restriction on GST refunds applies to overpayments of GST and allows taxpayers to self-assess their entitlement to a GST refund by reference to ascertainable criteria. It is also intended that the draft legislation address a gap in the existing law dealing with refunds associated with the miscalculations of GST payable on supply.

 

The draft legislation is said to implement recommendation 45 of the Board of Taxation’s Review of the Legal Framework for the Administration of the GST, announced by the Government in the 2009/10 Budget.

 

The draft legislation repeals the discretion in section 105-65 of Schedule 1 to the Tax Administration Act and introduces Division 36 into the GST Act which does not provide any discretion but provides when refunds will (and will not) be payable, which will allow taxpayers to self-assess their entitlements to refunds. 

 

The draft legislation provides that the excess GST is taken to have always been payable except for:

 

(a) so much of the excess GST as you have not passed on to any other entity; and

 

(a) if:

 

(i) you have passed on some or all of the excess GST to another entity; and

(ii) that entity is neither registered nor required to registered;

 

so much of that passed-on amount for which that entity has been reimbursed.

 

“Passed on” or “passed-on amount” are not separately defined in the draft legislation.

 

The amendments will apply in relation to working out net amounts for tax periods commencing on or after 17 August 2012.

 

The closing date for submissions is 14 September 2012.

 

All taxpayers
Division 38-F – Supplies of retirement village accommodation

 

GSTR 2012/4: GST treatment of fees and charges payable on exit by residents of a retirement village operated on leasehold or licence basis

 

Goods and Services Tax Ruling GSTR 2012/4 explains the GST treatment of amounts that a resident becomes liable to pay the operator of a retirement village when the resident’s interest in the village terminates (“exit payments”).

 

The relevant “interest” is the resident’s right to possession of the premises under a lease or a licence with a right to use the communal facilities in the village. The ruling does not deal with the treatment of exit payments where the resident holds a freehold interest.

 

The ruling describes an exit payment as one generally made by a resident of a retirement village to the village operator on exit from the village (known as deferred management fee, exit or termination fee). Other payments may include selling fees, capital improvement fees, renovation fees and cleaning fees.

 

GST treatment of exit fees

 

To determine the GST treatment of the payment, it is necessary to consider the nature of any supplies made by the village operator and the extent of the connection (if any) between those supplies and the exit payment.

 

The legal arrangements between the parties are the starting point when determining both the entity making a particular supply, and the entity which is the recipient of that supply. A nexus expressed in the legal arrangements between consideration and a particular supply may not always be conclusive. However, it is a factor taken into account in determining whether the consideration is provided for that particular supply.

 

Subject to contrary indications within the legal arrangements, an exit payment is consideration wholly for supplies that would be input taxed where:  

 

(a) the operator does not provide services other than incidental services (ie, services which are integral, ancillary or incidental to the lease or licence); or

 

(b) the operator provides non-incidental services but:

 

(i) the resident is liable to provide separate consideration for them; and 

(ii) the value of that consideration is not less than the market value of the services.

 

By way of contrast, an exit payment is to be treated as consideration wholly or partly for supplies that would be taxable or GST-free where the operator provides non-incidental services and:

 

(a) the resident is not liable to provide any separate consideration for those services; or

 

(b) the value of the separate consideration they provide is less than the market value of the services.

 

Capital appreciation or depreciation amounts 

 

Capital appreciation (or depreciation) amounts, which refer to the increase (or decrease) in the market value of the residential unit, relate to the supply of the residential premises and are either a reduction (capital appreciation amounts) or an addition (capital depreciation amounts) to the consideration for the supply of the residential premises, regardless of whether they are set-off or exist as a separate entitlement (or obligation).

 

Apportionment

 

The ruling considers that where an exit payment is consideration for taxable and non-taxable supplies, there should be an apportionment between those supplies. The apportionment method must be reasonable.

 

Operators of retirement villages
Division 66 – Input tax credits for acquiring second-hand goods

 

Goods and Services Tax Determination GSTD 2012/6:

 

when an entity makes a taxable supply of second-hand goods 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 A New Tax System (Goods and Services) Tax Act 1999?

 

Goods and Services Tax Determination 2012/6 states that when an entity acquires second-hand goods and makes a taxable supply of the goods by way of lease before making a taxable supply of the goods by way of sale (or exchange), both taxable supplies are taken into account in quantifying and attributing input tax credits (“ITC”) under section 66-10(1) and 66-15(1) of the GST Act.

 

In these circumstances, the amount of ITC under section 66-10(1) will:

 

(a) be an amount equal to 1/11th of the consideration the entity provided; or

 

(b) if that amount is more than the aggregate of the GST payable on the taxable supply of the goods made by way of lease and GST payable on the taxable supply of the goods made by way of sale (or exchange), the total amount of GST on those taxable supplies.

 

Under section 66-15(1) the input tax credit, to the extent of an amount equal to 1/11th of the consideration for the taxable supply of the goods made by way of lease, is attributed to:

 

(a) the tax period in which any consideration is received for that supply; or

 

(b) if the invoice issues before consideration is received, the tax period an invoice relating to that supply is issued.

 

Any remaining amount of the input tax credit as quantified in accordance with section 66-10(1), is attributed under section 66-15(1) to:

 

(a) the tax period any consideration for the taxable supply of the goods made by way of sale (or exchange) is received; or 

 

(b) if an invoice issues before consideration is received, the tax period an invoice relating to that supply is issued.

 

If the second-hand goods are not the subject of a taxable supply by way of sale (or exchange), the acquisition of the goods may not satisfy the conditions of section 66-5, in which case no input tax credit is available under Division 66.

 

Dealers in second-hand goods
Division 75 – Sale of freehold interests etc.

 

Exposure draft legislation: GST margin scheme and subdivided land

 

Treasury has released Exposure draft legislation – GST margin scheme and subdivided land outlining proposed changes to the margin scheme provisions contained in Division 75 of the GST Act. The draft legislation applies to taxpayers who make taxable supplies of real property that relates only to part of the land or premises in which they acquired an interest, unit or lease.

 

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

 

A consultation paper relating to the policy design and implementation of the proposed amendments was released on 10 December 2010. The exposure draft material relating to the subdivided land provision has now been developed, taking into account comments made by stakeholders. The closing date for submissions on the draft legislation is 12 September 2012.

 

Taxpayers that use the GST margin scheme
Division 129 – Changes in the extent of a creditable purpose

 

Addendum to GST Ruling GSTR 2000/24

 

The ATO has issued Addendum GSTR 2000/24A2 to GSTR 2000/4 “Goods and Services Tax; Division 129 – making adjustments for changes in extent of creditable purpose” . The addendum deals with:

 

a) the addition of Division 133 to the GST Act (special decreasing adjustments for an acquisition that you made if, to take account of a GST liability that the supplier is subsequently found to have, you provide additional consideration at a time when you can no longer claim an input tax credit) 

 

b) the insertion of Division 134 to the GST Act (GST treatment of certain third party payments, referred to as manufacturer’s rebates, made on or after 1 July 2010); and

 

c) the withdrawal and replacement of GST Rulings GSTR 2000/22, GSTR 2000/15 and GST Bulletin GSTB 2000, with, respectively, Goods and Services Tax Ruling GSTR 2006/3, Goods and Services Tax Ruling GSTR 2006/4, and Goods and Services Tax Bulletin GSTB 2006/1.

 

All taxpayers
Division 165 – Anti-avoidance

 

ATO Taxpayer Alert TA 2012/5

 

The ATO has issued Taxpayer Alert TA 2012/5 advising that the ATO is reviewing arrangements with the following features (or features which are substantially equivalent to the following):

 

(a) A GST registered vendor purports to make a supply of an intangible right to a GST registered purchaser.

 

(b) The stated price appears to be inflated and commercially unrealistic, and the price is either substantially or wholly subject to vendor finance.

 

(c) The terms of the purported vendor finance are such that any payment is contingent (eg on profits being made from exploiting the right, with payments limited to a proportion of the profits).

 

(d) The vendor issues a tax invoice to the purchaser for the stated purchase price stipulated under the agreement, irrespective of whether the conditions for requiring the purchaser to make payment have been met at that time.

 

(e) The purchaser contends that it is entitled to an input tax credit on the acquisition in the tax period in which the tax invoice is received, either on the basis that an invoice has been issued to them or that consideration has been provided.

 

(f) The vendor accounts on a cash basis and does not remit the GST.

 

The ATO considers that arrangements outlined above give rise to taxation issues that include whether:

(a) the purchaser has made a creditable acquisition at all;

 

(b) the purchaser is entitled to attribute any input tax credits before the contingency for payment is satisfied;

 

(c) the anti-avoidance provisions of Division 165 of the A New Tax System (Goods and Services Tax) Act 1999 apply to the arrangement; and the arrangement, or certain steps within it, may constitute a sham at general law.

 

All taxpayers
Division 165 – Anti-avoidance

 

Unit Trend Services Pty Ltd v Federal Commissioner of Taxation 2012 [2012] FCAFC

 

In a majority 2:1 decision, the Full Federal Court has held in Unit Trend Services Pty Ltd v Federal Commissioner of Taxation that Division 165 of the GST Act regarding anti-avoidance, did not apply to certain arrangements involving the margin scheme and going concern provisions, because the GST benefit was “attributable” to a choice, or series of choices, expressly provided for by the GST Act.

 

In doing so, the Court partially allowed both the taxpayer’s appeal and Commissioner’s cross-appeal from the AAT in The Taxpayer and Commissioner of Taxation [2010] AATA 497 (2 July 2010).

 

Facts

 

The taxpayer was a publically listed company which developed commercial and residential property. It was also the representative member of a GST group which included three wholly-owned subsidiaries (Simnat Pty Ltd (“Simnat”), Blesford Pty Ltd (“Blesford”) and Mooreville Investments Pty Ltd (“Mooreville”)).

 

In 1998, Simnat purchased land for $30 million and commenced development of a three tower high rise building. Simnat dealt with the towers as follows:

 

(a) December 2002 – Tower One completed, apartments in Tower One were sold “off the plan”, applying the margin scheme.

 

(b) 14 April 2004 – Tower Two sold by Simnat to Blesford by way of GST- free going concern for $149.8m (Simnat and Blesford were also members of the same GST group). Simnat had, prior to the sale, entered into contracts for the sale of some of the units in Tower 2. Simnat assigned to Blesford all of its rights under such contracts and under the construction contract.

 

(c) 15 April 2004 – Tower Three sold by Simnat to Mooreville by way of GST-free going concern for $109.5m. Simnat and Mooreville were also in the same GST group. Similar to Tower Two, Simnat had, prior to the sale, entered into contracts for the sale of some of the units in Tower Three. Simnat assigned to Mooresville all of its rights under such contracts and under the construction contract.

 

(d) June 2004 – Tower Two completed.The contract for the sale of Tower 2 by Simnat to Blesford was settled on 7 May 2004. Thereafter, Blesford sold the remaining units. Blesford completed all contracts of sale which it had entered into and those entered into by Simnat. Under section 75-5 of the GST Act, it chose to apply the margin scheme to those supplies.

 

(e) December 2004 – Tower Three completed. Settlement of the contract for sale to Mooreville was delayed, but Mooreville eventually obtained title on 23 November 2004. It then began to sell units. Commencing on 8 December 2004 Mooreville settled the contracts for sale entered into by it and Simnat. Mooreville chose to apply the margin scheme to such supplies.

 

(f) 2004-2006 – ATO audit.

 

Simnat applied the margin scheme in calculating its GST liability on the sale of residential units, using the purchase price paid by Blesford and Mooreville to Simnat as consideration for the acquisition.

 

Following the audit, the Commissioner assessed the taxpayer to over $21 million in GST and $5.4 million in shortfall penalties. The Commissioner assessed the GST on the sale of the towers on the basis of calculating the margin using Simnat’s acquisition cost. The Commissioner also made a declaration under Division 165 negating benefits in excess of $21 million and imposed shortfall penalties.

 

AAT decision

 

At first instance, the Administrative Appeals Tribunal divided the supplies made by Blesford and Mooreville into two categories:

 

(a) supplies made before 17 March 2005; and

 

(b) supplies made on and after 17 March 2005.

 

The AAT separated these two categories because the GST Act was amended to allow a “look through approach” with effect from 17 March 2005 by the Tax Laws Amendment (2005 Measures No 2) Act 2000, thereby negating any benefit under the margin scheme.

 

Subject to Division 165, the AAT concluded that, in relation to supplies made before 17 March 2005 by Blesford or Mooreville to end purchasers, the margin scheme can be applied using the price paid to Simnat when the land was transferred to Blesford or Mooreville.

 

In relation to sales settled on and after 17 March 2005, the calculation of the margin must be based on an acceptable valuation. In this case, the AAT found that there was no acceptable valuation for either Tower Two or Tower Three. The parties agreed that the matters be reconsidered upon provision of acceptable valuations.

 

After analysing the relevant matters for Division 165, the AAT concluded that the dominant purpose of the supplies made by Simnat to Blesford and Mooreville in relation to sales contracts entered into by Simnat was to secure the GST benefit generated by the scheme. The AAT was satisfied that the dominant purpose and principal effect of the supplies where Blesford and Mooreville entered into sales contracts was asset protection.

 

The Tribunal did not find against the Commissioner with regard to the imposition of shortfall penalties.

 

The AAT sets out its decision in the following terms:

 

(a) The AAT affirmed the decisions, including decisions on shortfall penalty and remission, relating to supplies made before 17 March 2005 pursuant to contracts originally entered into by Simnat.

 

(b) The AAT set aside and remitted to the respondent with a direction to allow the objection in full, decisions, including decisions on shortfall penalty and remission, relating to supplies made before 17 March 2005 pursuant to contracts originally entered into by Blesford and Mooreville.

 

(c) The AAT set aside and remitted with directions, the decisions, including decisions on shortfall penalty and remission) that relate to supplies made on or after 17 March 2005. The directions were that any valuation of the freehold interest in Tower Two and Three (as at 1 July 2000) which complies with the relevant Margin Scheme Valuation Requirements Determination, provided to the respondent should be considered in his reconsideration; and that if no valuation is provided then the respondent could proceed on the basis that the applicant is not entitled to use the margin scheme in relation to the supplies made on or after 17 March 2005 that relate to Tower Two or Three.

 

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 concerning Division 75.

 

Held

 

The Full Federal Court in the majority judgment of Bennett and Greenwood JJ, held that for all settlements up to and including 16 March 2005, Division 165 did not operate because it was excluded as the GST benefit on the end purchaser transactions was attributable to the choices etc made by Unit Trend.

 

Had these choices not been made to apply the margin scheme to end purchaser transactions, together with the choices made in the antecedent arrangements or transactions all forming part of the scheme from which the GST benefit arose, as found, the GST benefit calculated on the end purchaser transactions would not have arisen. The GST benefit was therefore attributable to the choices, elections and agreements made by the taxpayer in the sense that the GST benefit is explained by those choices etc as expressly provided for by the GST Act.

 

It also followed that the Tribunal’s decision affirming the Commissioner’s objection decision in relation to settlements by Simnat of Simnat contracts up to and including 16 March 2005 must be set aside.

 

In dissent, Dowsett J stated that 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 Dowsett J’s view, the GST benefit was attributable to the events of which such sales were necessary parts, 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.

 

Note that from 9 December 2008, section 165-5 of the GST Act was amended to provide that a GST benefit that the avoider gets or got from a scheme is not taken, for the purposes of paragraph (1)(b), to be attributable to a choice, election, application or agreement of a kind referred to in that paragraph if:

 

(a) the scheme, or part of the scheme, was entered into or carried out for the sole or dominant purpose of creating a circumstance or state of affairs; and

 

(b) the existence of the circumstance or state of affairs is necessary to enable the choice, election, application or agreement to be made.

 

All taxpayers
Administration

 

Vita Hot Bread Pty Ltd and Commissioner of Taxation [2012] AATA 570

 

The AAT has held in Vita Hot Bread Pty Ltd and Commissioner of Taxation that a taxpayer understated its income and GST in respect of a bakery and bread shop it operated. The AAT varied the decision under the review to take into account revised figures due to certain errors in the Commissioner’s calculations.

 

Facts

 

The taxpayer operated a bakery and hot bread shop. The Commissioner audited the taxpayer for the 2007/2008 year and determined that the taxpayer had understated its income, as a result of which the GST declared was incorrect. Penalties were also imposed. On review before the AAT, the Commissioner submitted revised figures for the calculation of the income tax assessment and GST due to errors in his calculations.

 

Evidence was led that showed the taxpayer signed loan documents for two financial institutions which provided income figures that were greater than the amounts declared to the Commissioner. There was also evidence that the taxpayer failed to include staff and family takings in his daily calculations of takings and that the taxpayer’s cost to sales ratio varied significantly from the ATO’s industry benchmarks.

 

Decision

 

The AAT held that the taxpayer had failed to discharge the onus of providing that the assessments were excessive. The evidence led by the Commissioner was enough to show that the taxpayer had understated income for the 2007/08 year. The administrative penalty of 50% for recklessness as imposed was the correct or preferable one.

 

All taxpayers
Administration

 

ATO Technical Discussion Paper TDP 2012/1

 

The ATO released Technical Discussion Paper TDP 2012/1 (“TDP 2012/1”) which 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, sometimes with other costs incurred from the dishonoured payment.

 

The ATO sought comments on how dishonoured payment fees that are recovered by a supplier from their customer are treated for GST purposes.

 

The current ATO view in GSTA TPP 065 (Goods and services tax: Is GST payable on a dishonoured cheque fee?) provides the recovery of dishonoured payment fees may be a financial supply. For reasons discussed in TDP 2012/1, the ATO considers that this view may not be entirely correct nor complete. For example, it does not consider dishonour fees arising from a failed debit transaction, which differs from a dishonoured cheque.

 

TDP 2012/1 does not consider the GST treatment of the dishonour fee imposed at first instance by a financial institution on a supplier, that is specifically dealt with under Division 40-A of the GST Act.

 

The discussion paper discusses the following:

 

(a) ATO’s understanding of the payment processes by way of cheque and direct debit, and the dishonouring of payments;

 

(b) the relevant GST provisions and whether recouped dishonoured payment fees are consideration for an “interest” within Division 40 of the A New Tax System (Goods and Services Tax) Regulations (“GST Regulations”); and

 

(c) possible alternative GST treatments of dishonour fees recovered from the customer by the supplier including:

 

(i) the provision of stand-alone facilitation services;

(ii) damages for contractual breaches; and

(iii) additional consideration for underlying supplies. 

 

The final date for comments was 29 August 2012

 

All taxpayers

 

 

For further information, please contact:

 

Geoffrey Mann, Partner, Ashurst

geoffrey.mann@ashurst.com

 

Nika Dharmadasa, Ashurst

nika.dharmadasa@ashurst.com

 

 

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