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Australia – October 2014 GST Developments.

25 November, 2014

 

Legal News & Analysis ā€“ Asia Pacific – Australia ā€“ Tax

 

Guru 4U V Commissioner of Taxation [2014] AATA 740

 
The Tribunal in Guru 4U v Commissioner of Taxation [2014] AATA 740 has affirmed the decision of the Commissioner to cancel the GST registration of the taxpayer company, finding that the taxpayer was not carrying on an enterprise. Consequently, the taxpayer was denied input tax credits (ITCs) claimed for the relevant period.

 
Facts

 
The taxpayer, a “lifestyle counselling and advisory services” company, had registered for GST from 1 December 2010 and lodged Business Activity Statements (BASs) on a quarterly basis between 1 October 2013 and 30 June 2012 (the relevant period). The taxpayer’s net amounts for each of the quarterly tax periods was less than zero as the amounts of GST refundable exceeded GST payable. The taxpayer claimed a total of $9,678 in GST refunds for the quarterly tax periods in the relevant period.

 
The Commissioner advised the taxpayer that it was subject to an audit of its BAS for the quarter ending 30 June 2012. Based on this audit, the Commissioner decided, among other things, that:

 
(a) the taxpayer was not carrying on an enterprise during the relevant period;

 
(b) the GST registration of the taxpayer was cancelled with effect from 30 June 2012;

 
(c) the taxpayer was not entitled to claim ITCs for the relevant period; and

 
(d) the taxpayer was liable to pay an administrative penalty based on 50% of the shortfall amount of ITCs that could not be claimed, due to recklessness as to the operation of the tax laws.

 
The taxpayer objected to the cancellation of the GST registration, the assessments of the net amount and the assessment of penalty.

 
Held

 
The Tribunal found that while that the taxpayer clearly intended to carry on an enterprise in the future and had taken preliminary steps to do so, the taxpayer was not carrying on an enterprise in the relevant period. Specifically, the promotional activities undertaken in the relevant period, including the uploading of a video on a YouTube channel about the taxpayer’s plans, and the establishment of a website, did not demonstrate that these steps were done “in the course of the commencement…of the enterprise”. These were merely preparatory steps to advertise and showcase the taxpayer, and the enterprise had not commenced by June 2012. As the taxpayer was not carrying on an enterprise in the relevant period, the Tribunal held that the Commissioner was correct in cancelling the taxpayer’s GST registration.

 
The Tribunal also found that the taxpayer was not entitled to claim ITCs as it did not have a creditable purpose in making the relevant acquisitions, and therefore did not make creditable acquisitions during the relevant period. The taxpayer’s net amount could only be zero for each of the tax periods in the relevant period. Note that the Tribunal held that the Commissioner’s notices of assessments issued to the taxpayer were incorrect (the Commissioner had assessed the taxpayer to a positive net amount for each tax period).

 
Lastly, the Tribunal concluded that the taxpayer was liable to an administrative penalty as the taxpayer had made false and misleading statements to the Commissioner and agreed with the Commissioner’s finding that a penalty of 50% for recklessness should be imposed. However, the Tribunal held that the administrative penalty should only be applied to the tax shortfall amount which in this case was the amount refunded by the Commissioner to the taxpayer, rather than the “difference” between the taxpayer’s previous assessed net amount and amended assessed net amount for the relevant period(which should have been zero).

 

Cronan v Commissioner Of Taxation [2014] AATA 745

 
The Tribunal in Cronan v Commissioner of Taxation [2014] AATA 745 has held that default assessments of GST issued to a taxpayer, which the Commissioner assessed based on industry standards, were not excessive.

 
Facts

 
The taxpayer regularly used eBay to purchase and sell coins, banknotes, telephone cards, postage stamps and miscellaneous electronics. The taxpayer did not receive invoices for most of the purchases that he made on eBay, nor did he issue invoices to customers who bought from him. Profit and loss statements and balance sheets were not maintained. The taxpayer contended the laptop, on which he contended he maintained records of the quantity and purchase price of items in stock, was stolen. The taxpayer made no attempt to calculate whether he might need to pay tax on the earnings that he made from his trading activities on eBay.

 
In about July 2011, the Commissioner commenced an audit of the taxpayer’s tax affairs, triggered in part by the receipt of sales data from eBay concerning the taxpayer’s total sales in the 2009 and 2010 income years. The Commissioner sent the taxpayer a final audit report and notification of assessments. The audit report stated that the Commissioner:

 
(a) formed the view that the taxpayer’s trading activities on eBay amounted to carrying on a business;

 
(b) as a consequence of the taxpayer’s failure to keep proper business records and lodge returns and BASs as requested, assessed the taxpayer’s GST liabilities by default by reference to sales data from eBay and industry benchmarks;

 
(c) determined that the taxpayer was required to be registered for GST by virtue of having met the turnover threshold of AUD 75k for both the 2009 and 2010 income years; and

 
(d) decided to impose administrative penalties.

 
The Commissioner assessed the taxpayer’s GST liability for the periods between 1 July 2008 and 30 June 2010 to be AUD 8,233 and imposed a 75% penalty.

 
The taxpayer lodged an objection to the GST assessment and penalty. The Commissioner disallowed the taxpayer’s objection in full.

 
Held

 
The Tribunal held that the taxpayer was carrying on an enterprise for GST purposes. The evidence showed, among other things, that:

 
(a) the taxpayer had a clear commercial objective in that he intended to make a profit from selling his “investment portfolio” of coins, banknotes, telephone cards and postage stamps;

 
(b) the taxpayer’s trading activities were not a private recreational pursuit or hobby; and

 
(c) the taxpayer conducted his eBay trading activities in a commercial or business-like manner and on a commercial scale (his sales were well in excess of the AUD 75k turnover threshold for the 2009 and 2010 income years).

 
The Tribunal also found that the Commissioner was correct in assessing the taxpayer’s GST liabilities by reference to industry benchmark. This conclusion was particularly reinforced by reference to the fact that the taxpayer had consistently failed to comply with his obligations to keep business records that could enable his taxation liabilities to be readily ascertained. Accordingly, the taxpayer failed to discharge his burden of proof in demonstrating that the assessments were excessive and what the correct assessments of GST liabilities should be. Therefore, the Tribunal affirmed the decision of the Commissioner to disallow the taxpayer’s objection in full. The penalties imposed were also upheld.

 

Decision Impact Statement: Re The Taxpayers v Commissioner Of Taxation [2014] AATA 572

 
The ATO has issued a Decision Impact Statement following the decision of the Tribunal in Re The Taxpayers v Commissioner of Taxation [2014] AATA 572.

 
In that case, the Tribunal agreed with the submissions of the taxpayer, finding that its assessments of GST were excessive as they were based on amounts that exceeded the actual amounts that were paid to the taxpayer. The Tribunal also found that there was no “intentional disregard” by the taxpayers but rather “recklessness” in relation to any false or misleading statements contained in its income tax returns and BASs. Consequently, the penalty of 75% assessed by the Commissioner was held to be excessive. The Tribunal also found that the penalties imposed ought to be remitted to reflect the extent to which any one entity’s “shortfall amount” did not actually result in a loss to revenue.

 
Broadly, the ATO has stated that it accepted that the decision of the Tribunal, in finding that the GST assessments were excessive, was reasonably open on the facts as found. However, the ATO stated that it was not clear whether the Tribunal’s decision to reduce all the penalties to nil was influenced by a conclusion that there was no loss to the revenue, noting that the Full Federal Court in Dixon v FCT (2008) 167 FCR 287 made it clear that absence of loss of revenue is not a relevant consideration in relation to the exercise of the discretion to remit a penalty for a false statement.

 
Addendum To GSTR 2001/1

 
The Commissioner has issued an addendum to GSTR 2001/1: GST ā€“ supplies that are GST-free for tertiary education services to:

 

  • reflect the withdrawal and replacement of Goods and Services Tax Ruling GSTR 2000/20: GST- commercial residential premises; 
  • reflect amendments made by the Tax Laws Amendment (2010 GST Administration Measures No. 2) Act 2010 in relation to Division 29-C of the GST Act; 
  • reflect changes made by the Tax Laws Amendment (2007 Measures No. 4) Act 2007 to omit references to “Masters or Doctoral Course” throughout the GST Act; 
  • reflect the latest Education Minister’s Determination made under sections 3(1) and 5D(1) of the Student Assistance Act 1973, the Student Assistance (Education Institutions and Courses) Determination 2009 (No. 2); and 
  • reflect the Education Minister’s Determination made under paragraph (b) of the definition of “tertiary course” in section 195-1 of the GST Act, the A New Tax System (Goods and Services Tax) (Tertiary Courses) Determination 2014.

 
Appeal Update: ATS Pacific Pty Ltd v Commissioner Of Taxation [2014] FCAFC 33

 
The High Court has refused the taxpayer’s application for special leave to appeal the decision in ATS Pacific Pty Ltd v Commissioner of Taxation [2014] FCAFC 33, finding that the case turned on the characterisation, for GST purposes, of particular commercial arrangements which did not raise any issue of general importance sufficient to warrant a grant of special leave to appeal. In that case, the Full Federal Court dismissed the taxpayer’s appeal against the Federal Court judge’s earlier finding that certain supplies it made as an Australian tour operator were not GST-free. The Commissioner’s cross appeal challenging the primary judge’s decision that certain supplies made by the taxpayer were GST-free was also allowed.

 
The ATO finalised its Decision Impact Statement regarding the Full Federal Court’s decision in ATS Pacific Pty Ltd v Federal Commissioner of Taxation [2014] FCAFC 33, following the refusal by the High Court to grant special leave to appeal. 

 
Although the ATO states that the decision relates to specific facts, the ATO remains of the view (for the reasons set out in the Decision Impact Statement issued in response to the primary judge’s decision) that the decision applies to all inbound tour operators which:

 

  • transact as principal (and not as an agent of a non-resident travel agent);
  • are engaged by non-resident travel agents, to enter into contracts with Australian-based entities for the provision of components of a tour package non-resident tourist clients of the non-resident travel agents.

 
The Commissioner has requested that all inbound tour operators that have transacted as principal and have outstanding amounts due to the ATO as a result of treating their margin or entire supply as GST-free, to contact the ATO by 10 December 2014 to discuss payment of the amount owed.

 
Draft GST Determination GSTD 2014/D4: Brokerage Services

 
The ATO has issued Draft GST Determination GSTD 2014/D4 on 29 October 2014, which outlines whether the supply of brokerage services that facilitate the sale or purchase of financial products on overseas securities or futures exchanges is a GST-free supply for the purposes of item 4(a) in the table of section 38-190(1) of the GST Act. The Commissioner’s view is that such supplies of brokerage services do constitute a GST-free supply.

 
For the purposes of the Draft Determination:

 

  • the broker supplies services to clients that facilitate the sale or purchase of financial products on overseas securities or futures exchanges;
  • the terms “sale or purchase” and “traded” includes equivalent dealings in financial products that require brokerage services, such as opening, closing-out, cash settling, or exercising a right in relation to a financial product; and
  • financial products are tradable rights having a financial character and include shares, debt instruments, options, warrants, derivatives, futures contracts, exchange traded funds, and interests in unit trusts. They do not include products involving supplies of goods or real property.

 
Once issued, the Final Determination is proposed to apply both before and after its date of issue. However, the Final Determination will not apply to taxpayers to the extent that it conflicts with the terms of settlement of a dispute agreed to before the date of issue of the Final Determination.

 
Dewheath Pty Ltd v Commissioner of Taxation [2014] AATA 543

 
The Tribunal in Dewheath Pty Ltd [2014] AATA 543 has refused to exercise its discretion to remit a 75% administrative penalty imposed on a taxpayer for unpaid taxes in relation to its failure to lodge BASs and income tax returns in a number of years.

 
Facts

 
The taxpayer, a property development company, failed to lodge BASs for the quarters ending 31 March 2008 to 30 June 2012, and income tax returns for the years ending 2007 to 2010 inclusive. The Commissioner issued default assessments with respect to each matter and in turn, the taxpayer lodged objections. Each was refused by the Commissioner.

 
After negotiation, the Commissioner and taxpayer were able to agree on the amounts of tax liability owned by the taxpayer. The Commissioner applied a 75% administrative penalty to the net shortfall in taxes unpaid. The taxpayer did not dispute the amount of tax and the imposition of the penalty. Rather, the taxpayer sought for the Tribunal to review the decision of the Commissioner not to remit the penalty in whole or part. The taxpayer argued that its failure to lodge BASs and relevant income tax returns was a result of a dispute with its previous accountant/tax agent who wrongfully retained and refused to return the taxpayer’s books and records without which the taxpayer could not prepare its BASs and tax returns. The taxpayer submitted that its failure to do so should not result in a penalty.

 

Held

 
The Tribunal found that the taxpayer’s failure to lodge returns was not an isolated instance. The taxpayer had continually failed to lodge returns on time or at all between 2000 to 2014, and before and after the period 2007 to 2010, had failed to meet its tax obligations. This demonstrated not only an absence of reasonable care, but a lack of genuine attempt to comply with its tax obligations.

 
The Tribunal also found that the taxpayer had failed to show individual mitigating circumstances lessening the culpability for its repeated failures to comply with taxation law requirements for the lodgement of BASs and income tax returns. In fact, the Tribunal found any excuses put forth by the taxpayer to be false or unproven.

 
Accordingly, the Tribunal held that the taxpayer had failed to discharge its onus of proof and chose not to exercise its discretion in favour of the taxpayer for any remission of penalty.

 
UK VAT cases

 
Consideration of Skandia America Corp. (USA), filial Sverige -v- Skatteverket (Case C-7/13) (Skandia):

 
In that case, the Court of Justice of the European Union (CJEU) held that VAT was due on cross-border payments between an overseas company and its own branch where that branch forms part of a VAT group. The overseas company in question was a US corporation, Skandia America Corp. (SAC), which sourced IT services from outside the EU for the Skandia group. After purchasing these IT services, SAC would supply these IT services to its Swedish branch (separately registered as a member of a VAT group in Sweden) at a 5% mark-up, which would process the IT services into a final product. These final products were then supplied to various companies in the Skandia group, both within and outside the VAT group. The Swedish tax authority considered that the intra-entity provision of services was a taxable supply where the branch was a member of a VAT group.

 
The CJEU distinguished the case from the decision in FCE Bank (Case Cā€‘210/04), which held that services provided between parts of the same legal entity (eg a head office and a branch) should be disregarded for the purposes of VAT. The basis of that decision was that a branch cannot be a “taxable person” as it does not independently carry on an economic activity. In Skandia, the CJEU noted that the effect of a VAT group is that the services are treated as having been supplied to the independent VAT group of which the branch forms part, rather than the branch itself. A VAT group is treated as a separate taxable person and therefore, there is the required reciprocal performance between the supplier and the VAT group to ensure that the intra-entity transaction may be a taxable supply. Accordingly, the Swedish VAT group was required to account for Swedish VAT by way of reverse charge in respect of the IT supplies made by SAC to its Swedish branch.

 
In Australia the GST rules regarding the treatment of branches is not the same as in the EU. As a general rule, no GST is payable on transactions between a head office and a branch as they are generally treated as a single entity.

 
However, in certain circumstances, the head office and the branch may be treated as separate entities. If the branch is registered separately for GST, the branch effectively operates as a distinct entity for GST reporting purposes. Transfers of anything between the head office and the GST branch are treated as supplies made by a separate entity, and could be taxable supplies. Further, market value substitution rules which apply to supplies between separate entities which are associates in certain circumstances (namely, where no or inadequate consideration is provided, and where the thing supplied is not acquired solely for a creditable purpose), can also apply to GST branches of an entity as if the GST branch were an associate.

 
Additionally, where a branch is located outside Australia, there may be circumstances where the reverse charge of GST will apply to acquisitions of supplies (other than goods or real property) by the head office located in Australia under Division 84 of the GST Act. Even if the branch is not separately registered for GST, the transfer of anything to the enterprise from the foreign branch is taken to be a supply that is not connected with Australia. If the relevant requirements in Division 84 are satisfied, importantly, including that the recipient acquires the thing for the purpose of an enterprise carried on in Australia that is not solely for a creditable purpose, the transfer is a taxable supply. Certain suppliesof management and support services by an enterprise outside Australia (eg, a foreign branch) to an enterprise in Australia can be treated as reduced credit acquisitions, providing an entitlement to the Australian enterprise to obtain a reduced input taxed credit.

 

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For further information, please contact:

 

Geoffrey Mann, Partner, Ashurst 
geoffrey.mann@ashurst.com

 

Nika Dharmadasa, Ashurst
nika.dharmadasa@ashurst.com

 

Kristina Popova, Ashurst
kristina.popova@ashurst.com

 

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