21 November, 2012

 

 

This article outlines Australian GST developments in October 2012, which may impact your business, including:

 

  • Commissioner of Taxation v Qantas Airways Ltd [2012] HCA 41 – the High Court has found by majority that GST is payable when a customer books and pays for domestic air travel, but subsequently cancels the booking or does not turn up for the flight, and does not receive a refund of the unused fare.
  • GST Determination 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 determination that states 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 under Division 66.
  • Tax Laws Amendment (2012 Measures No. 4) Act 2012 – the Tax Laws Amendment (2012 Measures No. 4) Bill 2012, which relates to GST and incapacitated entities, received Royal Assent on 28 September 2012.
  • Hirezi and Ors and Commissioner of Taxation [2012] AATA 688 – the AAT has held that the taxpayer’s circumstances and actions did not warrant a reduction of the penalty rate or a remission of penalties in relation to failing to correctly account for GST on the sale of certain properties.
  • Subloo’s Investments Pty Ltd and Ors and Commissioner of Taxation [2012] AATA 703 – the AAT has upheld the Commissioner’s imposition of penalties to a taxpayer for not remitting the appropriate GST amounts to the Commissioner on the sale of residential apartments.
  • Withdrawal of ATO Interpretative Decision ATO ID 2010/194: GST and supply by way of lease of a building designed to provide tertiary student accommodation – the ATO has withdrawn ATO ID 2010/194 following the decision in ECC Southbank Pty Ltd as trustee for Nest Southbank Unit Trust & Anor v Commissioner of Taxation.
  • ATO Interpretative Decision ATO ID 2012/87: GST and Division 81 of the A New Tax System (Goods and Services Tax) Act 1999: whether payment of general rates imposed by a local government in Australia is an “Australian tax” for Division 81 purposes – the ATO has issued an Interpretative Decision which states that the payment of general rates to the entity constitutes the payment of an “Australian tax”, for the purposes of section 81-5(1) of the GST Act.
  • ATO Practice Statement Law Administration PS LA 2012/6: Exercise of the Commissioner’s discretion under section 8AAZLGA of the Taxation Administration Act 1953 to retain an amount that would otherwise have to be refunded – the ATO has released a Practice Statement which provides guidance to tax officers on when it is reasonable for the Commissioner to exercise his discretion to delay a refund amount pending verification of the taxpayer’s entitlement to the amount.
  • Appeals update: Wynnum Holdings No 1 Pty Ltd and Ors and Commissioner of Taxation [2012] AATA 616; A.P Group Limited and Commissioner of Taxation [2012] AATA 409; Unit Trend Services Pty Ltd v Federal Commissioner of Taxation [2012] FCAFC 112
  • Mid-year economic and fiscal outlook: measures relating to GST – the Government has released its Mid-year Economic and Fiscal Outlook 2012-13 (“MYEFO”). As part of the MYEFO, the government has discussed some measures relating to GST.
  • GST treatment of cross border transport: minor amendments – the consultation period has been extended to 23 November 2012.

 

Relevant area At a glance Relevant to
Section 9-10 Meaning of supply


Commissioner of Taxation v Qantas Airways Ltd [2012] HCA 41

The High Court has found for the Commissioner in Commissioner of Taxation v Qantas (“Qantas“). In a 4:1 majority judgment, the High Court held that GST is payable when a customer books and pays for domestic air travel, but subsequently cancels the booking or does not turn up for the flight, and does not receive a refund of the unused fare.

 

Facts

 

The taxpayer had lodged a notification of an entitlement to a GST refund with the Commissioner on the basis that it incorrectly paid GST in respect of pre-paid fares for travel where the reservation was cancelled, or the passenger failed to present for the flight and the passenger was either not entitled to, or failed to claim a refund.

 

The Commissioner made assessments regarding the refunds and then disallowed the taxpayer’s objection to the assessments. The decision was subsequently confirmed by the Administrative Appeals Tribunal (“AAT“). Reviewing the conditions of carriage, the AAT found that in return for the fare that the passenger has paid, Qantas held itself ready to carry the passenger in accordance with its conditions of carriage. Qantas does not hold itself ready to carry on a particular flight at a particular time or in a particular seat, but it does hold itself ready “to take all reasonable measures necessary to carry you and your baggage and to avoid delay in doing so”.

 

At trial, the Full Court of the Federal Court (“FFC“) reversed the decision of the AAT, and held that the relevant supply was the “contemplated flight, not the reservation or booking”. As actual travel did not eventuate, no GST liability was incurred by the taxpayer. 

 

The Commissioner was granted special leave to appeal to the High Court of Australia (“HCA“).

 

Decision

 

In the majority judgment (Gummow, Hayne, Kiefel and Bell JJ), the Court accepted the Commissioner’s principal submission, that the unused fares were received or invoked in the assessed tax periods on or pursuant to the making of a contract between the airline and the customer under which the airline supplied rights, obligations and services in addition to the proposed flight. 

The majority considered that the conditions of carriage, and concluded that Qantas had made “a promise to use best endeavours to carry the passenger and baggage, having regard to the circumstances of the business operations of the airline”.

 

The HCA found that this promise was a taxable supply for which the consideration (ie, the fare) was received.

 

Heydon J dissented, finding that the fare was paid not to get a conditional promise to supply an air flight (which promise did take place) but to get an actual air journey (which never took place).

All taxpayers (particularly hotels, airlines, theatres and other businesses that take reservation bookings)
Division 66 – Second-hand goods

GST Determination 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 GST Determination GSTD 2012/6 (“GSTD 2012/6”) that states 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 under sections 66-10(1) and 66-15(1) of the A New Tax System (Goods and Services) Tax Act 1999 (“GST Act”).

Dealer’s in second-hand goods
Division 105 – Supplies in satisfaction of debts


Tax Laws Amendment (2012 Measures No. 4) Act 2012

 

The Tax Laws Amendment (2012 Measures No 4) Bill 2012 received Royal Assent on 28 September 2012. The Act amends the GST Act to ensure that where a representative of an incapacitated entity sells assets of the entity as a creditor, Division 105 is applied in preference to Division 58.

Insolvency practitioners
Penalties


Hirezi and Ors and Commissioner of Taxation [2012] AATA 688

The Administrative Appeals Tribunal (“AAT”) in Hirezi and Ors and Commissioner of Taxation regarding the taxpayer’s failure to correctly account for GST on the sale of certain properties, has dismissed the taxpayers’ appeal. The AAT held that a lower rate of penalty should not have applied to the GST shortfall, and that the taxpayer’s circumstances and actions did not warrant a further remission of penalties.

 

Facts

 

The taxpayers were members of a partnership that developed industrial land comprised of a number of lots on the outskirts of Brisbane. The partnership was registered for GST purposes but failed to correctly account for GST on the sales of the lots between April 2005 and January 2010, while still claiming input tax credits.

 

The penalties imposed by the Commissioner were assessed at 50% of the amount of the shortfall that arose out of the transactions on the basis the shortfall was the product of “recklessness” rather than a lack of “reasonable care”. The Commissioner remitted 25% of the penalty.

 

The taxpayers did not object that there was a shortfall but instead disputed the administrative penalties imposed under section 284-75(1) of Schedule 1 of the Taxation Administration Act 1953 (Cth) (“TAA”). The taxpayers submitted that the penalty should have been assessed at 25% and also claimed that the Commissioner should remit a larger part of whatever penalties are assessed.

 

The taxpayers submitted that:

 

a) English was not their first language and they relied on an external account who turned out to be incompetent;

b) they had been the “victim of the tax agent” and could not sue him successfully; and

c) they appointed new agents to assist the Commissioner in sorting out “the mess”.

 

The Commissioner argued that that the failure to account was so obvious “that anyone exercising a modicum of care would have realised the law was not being complied with”.

 

Decision

 

Regarding the penalty rate of 50%, the AAT found that there was clearly some basis for believing there was reckless conduct on the part of the agent, and that the evidence suggested something was seriously wrong with the way in which the taxpayer’s tax affairs were being managed. The taxpayers were unable to produce sufficient evidence to suggest that the Commissioner’s conclusions on this point were wrong.

 

Regarding the remission of penalties, the AAT held that the taxpayers were not “blameless”. The AAT was not persuaded that the partner of the partnership that managed its affairs was blameless, considering that a businessman of his experience and apparent skill would or should have asked some basic questions about what he was signing. If the taxpayer had asked the basic questions, he would have discovered the errors. Failing to do this contributed “to their own misfortune”.

All taxpayers
Penalties


Subloo’s Investments Pty Ltd and Ors and Commissioner of Taxation [2012] AATA 703

 

The AAT in Subloo’s Investments Pty Ltd and Ors and Commissioner of Taxation, regarding the taxpayers’ failure to remit GST on the sale of residential apartments, has dismissed the taxpayers’ appeal and upheld the Commissioner’s imposition of penalties.

 

Facts

 

The taxpayers were members of a partnership that were involved in the development of apartments for sale. Between February 2009 and August 2010, the partnership lodged BASs which claimed input tax credits (“ITCs“) but failed to report the sales of the apartments and account for GST in relation to the sales while still claiming input tax credits.

 

The Commissioner carried out an audit of the partnership’s GST affairs in August 2011 and determined a shortfall amount of $534,018. Penalties of $460,447.95 were subsequently imposed comprising a 75% base penalty for “intentional disregard” plus a 20% uplift.

 

The taxpayers argued that the penalties should be remitted under section 284-90 of Schedule 1 of the TAA. The taxpayers relied on a number of matters which they submitted warranted a favourable exercise of the discretion to remit. These included, among others, that the situation regarding non-remittance of GST arose because the taxpayers’ financier (without their consent) had applied the GST component of the settlement proceeds in reduction of their mortgage debt, rather than paying it to the taxpayers to enable GST to be paid. Another matter was that the project got into financial difficulties through no fault of the taxpayers.

 

Held

 

The AAT said that one of the taxpayers involved was an experienced qualified accountant who was “well familiar with the obligation to account for GST”. It also noted that “over a period of about 18 months, [the taxpayer] chose not to account to the Commissioner for considerable GST and chose not to contact the Commissioner to explain such difficulties they may have been experiencing”. Regarding the application of the GST monies, the AAT held that there was no evidence the taxpayers sought a review of, or took any steps to oppose or reverse, the financier’s actions.

 

The AAT did not consider the penalties imposed as too harsh and affirmed the Commissioner’s decision not to exercise his discretion for the remission of the shortfall penalty.

All taxpayers
Administration

Withdrawal of ATO Interpretative Decision ATO ID 2010/194:

GST and supply by way of lease of a building designed to provide tertiary student accommodation

 

The ATO has withdrawn ATO ID 2010/194 (“ID“) following the decision of the Federal Court in ECC Southbank Pty Ltd as trustee for Nest Soutbank Unit Trust & Anor v Commissioner of Taxation [2012] FCA 795. The ATO notes the issue expressed in the ID will be covered in the rewrite of GSTR 2000/20: commercial residential premises.

Property developers
Administration

ATO Interpretative Decision ATO ID 2012/87: GST and Division 81 of the A New Tax System (Goods and Services Tax) Act 1999: whether payment of general rates imposed by a local government in Australia is an “Australian tax” for Division 81 purposes

 

The ATO has issued ATO ID 2012/87 (“ID”) which states that the payment of general rates to the entity constitutes the payment of an “Australian tax”, for the purposes of section 81-5(1) of the GST Act.

 

As a consequence, the payment is not consideration and general rates are not subject to GST.

All taxpayers
Administration

ATO Practice Statement Law Administration PS LA 2012/6: Exercise of the Commissioner’s discretion under section 8AAZLGA of the Taxation Administration Act 1953 to retain an amount that would otherwise have to be refunded http://law.ato.gov.au/atolaw/view.htm?docid=”PSR/PS20126/NAT/ATO/00001″

 

The ATO has released Practice Statement Law Administration PS LA 2012/6 (“Practice Statement“) which provides guidance to tax officers on when it is reasonable for the Commissioner to exercise his discretion to delay a refund amount pending verification of the taxpayer’s entitlement to the amount.

 

Background

 

Section 8AAZLGA of the TAA provides a discretion to the Commissioner to retain an amount for verification purposes. It was introduced following the Full Federal Court decision in Commissioner of Taxation v Multiflex Pty Ltd [2011] FCAFC 142, where it was held that the Commissioner had to pay refunds notified by taxpayers in business activity statements (“BASs“) “forthwith”.

 

Types of refunds covered

 

The Practice Statement indicates that section 8AAZLGA applies to refunds arising under any taxation law, including GST, income tax, luxury car tax, wine equalisation tax, fuel tax, and resource rent tax.

 

When the Commissioner may retain an amount

 

The Commissioner may retain the amount in two situations:

 

a) where it “would be reasonable to require verification of the information” contained in the notification which relates to the amount to be refunded; and

b) where the taxpayer has requested the Commissioner retain the amount for verification of the notified information, and the request has not been withdrawn.

 

The Commissioner must consider 10 factors in deciding whether or not to retain an amount. These factors are:

 

a) the likely accuracy of the notified information

b) the likelihood that the notified information was affected by:

(i) fraud or evasion; or

(ii) intentional disregard of a taxation law; or

(iii) recklessness as to the operation of a taxation law;

c) the impact of retaining the amount on the taxpayer’s financial position

d) whether retaining the amount is necessary for the protection of the revenue, including the likelihood that the Commissioner could recover any of the amount if the notified information were found to be incorrect after the amount had been refunded

e) any complexity that would be involved in verifying the notified information

f) the time for which the Commissioner has already retained the amount g) what the Commissioner has already done to verify the notified information

h) whether the Commissioner has enough information to make an assessment relating to the amount (including information obtained from making further requests for information)

i) the extent to which the notified information is consistent with information that the taxpayer previously provided; and

j) any other relevant matter.

 

Relevantly, the practice statement provides further explanation regarding the factors and some examples. The practice statement also deals with: 

 

a) the Commissioner’s obligation to inform taxpayers that their refund has been retained;

b) when an amount must be refunded; 

c) and the timeframe for objection and review rights.

 

All taxpayers
Miscellaneous

Appeals update: Wynnum Holdings No 1 Pty Ltd and Ors and Commissioner of Taxation [2012] AATA 616; A.P Group Limited and Commissioner of Taxation [2012] AATA 409; Unit Trend Services Pty Ltd v Federal Commissioner of Taxation [2012] FCAFC 112

 

The taxpayer has lodged a notice of appeal to the Federal Court against the decision in Wynnum Holdings No 1 Pty Ltd and Ors and Commissioner of Taxation where the AAT held that the taxpayer (the nominee and bare trustee of a joint venture trust) was not carrying on an enterprise in relation to the purchase of property.

 

The taxpayer has lodged an appeal against the decision in A.P Group Limited and Commissioner of Taxation to the Federal Court and the Commissioner has cross-appealed. The AAT held that certain incentive payments paid by car manufacturers to car dealers were consideration for supplies made by the dealer.

 

The Commissioner has lodged an application for special leave to appeal to the High Court against the decision in Unit Trend Services Pty Ltd v Federal Commissioner of Taxation. The Full Federal Court held that Division 165 of the GST Act did not apply.

All taxpayers
Reform

Mid-year economic and fiscal outlook: measures relating to GST

 

The Government released its Mid-year Economic and Fiscal Outlook 2012-13 (“MYEFO“). As part of the MYEFO, the government has discussed two measures relating to GST, the margin scheme and refunds.

 

Regarding reforms to the GST margin scheme, the MYEFO confirmed that the proposed restructure of the margin scheme provisions announced in the 2010/2011 Budget will not proceed.

The Government will proceed with the minor technical amendment to ensure that taxpayers are able to use the consideration method, the valuation method or the GST-inclusive market value method, which is appropriate, when calculating the margin on a taxable supply of subdivided land. Exposure draft legislation was introduced on 15 August 2012.

Regarding restrictions on GST refunds, the MYEFO referred to a proposal to allow taxpayers to self-assess their entitlement to a GST refund by reference to particular criteria (including for miscalculations of GST payable on a supply). Exposure draft legislation has been released, and was discussed in our August 2012 GST Bulletin.

All taxpayers
Reform

GST treatment of cross border transport: minor amendments

 

The consultation period for the consultation paper “GST treatment of cross-border transport: minor amendments” (“Consultation Paper”) has been extended to 23 November 2012. The Consultation Paper has been prepared by Treasury to seek feedback on an approach that could be adopted to amend the relevant parts of the GST law to address the compliance difficulties faced by certain segments of the transport industry.

Transport industry

 

 

For further information, please contact:

 

Geoffrey Mann, Partner, Ashurst

geoffrey.mann@ashurst.com

 

Nika Dharmadasa, Ashurst

nika.dharmadasa@ashurst.com

 

 

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