Jurisdiction - Australia
Australia – June 2014 GST Developments.

7 July, 2014


Legal News & Analysis – Asia Pacific – Australia – Tax


Dotrac Pty Ltd And Anor v Commissioner Of Taxation [2014] AATA 336

The Tribunal in Dotrac and Anor v Commissioner of Taxation [2014] AATA 336 has affirmed the Commissioner’s objection decision regarding the input tax credit claims of two taxpayers in relation to their involvement in two property developments. The Tribunal also affirmed the Commissioner’s decision to impose a penalty of 50% of the shortfall amount for recklessness.


The taxpayers were a company and the members of a partnership which, together, labelled themselves as the principal contractors of two property developments. The parcels of land the subject of the two property developments were each owned by different companies, whom the taxpayers claimed had engaged them as the principal contractors of each development. The taxpayers, in turn, engaged a number of subcontractors to perform the physical work of developing the properties. The subcontractors would invoice the taxpayer principal contractors, who would then bundle the charges and mark them up 20 per cent before on-charging them to the landowners.

The taxpayers claimed input tax credits on certain acquisitions supposedly made in relation to the development of the properties. The Commissioner formed the view that the input tax credit claims could not be supported and issued assessments to both taxpayers for differing but overlapping tax periods that included the imposition of an administrative penalty on each taxpayer of 50% of the shortfall amount.

The taxpayers’ objections were disallowed. The taxpayers appealed to the Tribunal, challenging the Commissioner’s objection and penalty decisions.


The Tribunal rejected the taxpayers’ input tax credit claims because they failed at the most basic level. The Tribunal also affirmed the Commissioner’s decision to impose an administrative penalty of 50% for recklessness.

In determining whether the taxpayers were entitled to the input tax credits, the Tribunal considered whether they had made creditable acquisitions. To that end, the Tribunal looked at whether:


  • the taxpayers’ activities in relation to the property developments constituted an enterprise; 
  • the taxpayers acquired taxable supplies from suppliers; 
  • the taxpayers’ acquisitions were made in “carrying on” an enterprise; and 
  • the taxpayers provided (or were liable to provide) consideration for any such supplies.

The Tribunal could not identify any “activity” undertaken by the taxpayers in relation to the property developments. The Tribunal rejected the taxpayers’ contention that receiving invoices from subcontractors constituted a relevant activity. The Tribunal also considered it significant that the taxpayers had difficulty articulating their own activities beyond labelling themselves as “principal contractors”.

The Tribunal rejected that the taxpayers’ involvement in the property developments constituted an enterprise because their activities were not “in the form of a business”. There were no identifiable indicators of a business to be found in the taxpayers’ activities (as distinct from the activities of the landowners in developing the properties).

Regarding whether the taxpayers had relevantly acquired something giving rise to a creditable acquisition, the Tribunal could not see how the taxpayers’ receipt of things invoiced to them by the subcontractors constituted an acquisition given that the taxpayers had no interest in the land on which the works were undertaken. The Tribunal considered that the subcontractors in fact made supplies to the landowners rather than the taxpayers.

The Tribunal found that the taxpayers’ use of promissory notes to pay the subcontractors’ invoices did not represent the payment of consideration at the time they were issued. The Tribunal considered that the provision of a promise to provide consideration in the future is not the same as the provision of consideration today, and agreed that the former cannot be read into the definition of “consideration” in the GST Act.

On the question of penalty, the Tribunal considered that the arrangement between the taxpayers and other related entities called out for independent advice. In addition to employing one member of the taxpayer partnership, the tax agent nominated as having provided advice to the tax payer company was also the sole director of that taxpayer company. Accordingly, the Tribunal found no suggestion that anybody truly independent gave advice to the taxpayers, and further observed that the accountants involved in the taxpayers’ affairs were too close to the arrangement to give it the proper degree of consideration and dispassionate analysis. This constituted gross carelessness warranting the imposition of a 50% administrative penalty on the shortfall amount for recklessness.

Advent 7 Pty Ltd v Commissioner Of Taxation [2014] AATA 365

The Tribunal in Advent 7 Pty Ltd v Commissioner of Taxation [2014] AATA 365 has rejected the taxpayer’s input tax credit claims because the taxpayer was unable to substantiate them. The Tribunal also affirmed the Commissioner’s decision to impose a 50% penalty on the shortfall amount for recklessness.


During the relevant tax periods from 1 April 2008 to 30 June 2011, the taxpayer’s main business activities involved computer system design and the marketing of licensed computer software. A director of the taxpayer (who was the only witness in the proceedings before the Tribunal) was also director of a number of other related entities. During the relevant tax periods, the taxpayer claimed a total of AUD 404,491 of input tax credits, mostly attributable to the acquisition of services said to be rendered by entities related to the taxpayer and described in the tax invoices as “monthly business consulting and management” or “marketing consulting services”.

After conducting an audit of the taxpayer, the Commissioner issued two Notices of Assessment: one reducing the taxpayer’s input tax credit entitlements to nil, the other imposing a 50% penalty on the shortfall totalling AUD 202,245.50. The taxpayer’s objections to the Notices of Assessment were disallowed by the Commissioner, prompting the appeal by the taxpayer to the Tribunal.

The primary issue before the Tribunal was whether there was sufficient evidence to show that any of the services claimed to have been acquired by the taxpayer gave rise to an input tax credit claim. The Tribunal also considered whether the 50% penalty was appropriate.


The Tribunal wholly rejected the taxpayer’s input tax credit claims.

The Tribunal found that the taxpayer’s evidence fell well short of establishing that there were acquisitions which were made for creditable purposes because the materials provided did not reveal the specific nature of the services said to have been provided to the taxpayer by the relevant entities.

The Tribunal said that it was virtually impossible to determine what the phrases used to describe the services on the tax invoices actually meant. The Tribunal observed that the lack of specificity and contemporaneous evidence identifying specific services would be odd in any case no matter the quantum of the input tax credit claim, but was of real concern where the claim was in excess of AUD 400k. The Tribunal also noted that where there are strong connections between the relevant entities and their officers, it is even more important for the precise services (if any) provided by the related entities to be clearly articulated. In the result, the Tribunal was not satisfied that the serviceswere provided to the taxpayer such as to enable the taxpayer to claim the input tax credits in respect of the relevant period.

On the issue of penalty, the 50% penalty for recklessness was affirmed because the Tribunal found that the taxpayer was grossly indifferent to, and had failed to take reasonable care to comply with, the applicable taxation laws. In considering what risks the reasonable person “in the position of the statement-maker” would appreciate, the Tribunal took into account the background and expertise of the director of the taxpayer. The Tribunal found that the taxpayer had not advanced any persuasive grounds for remitting any part of the penalty.

ATO ID 2014/21 (GST And Contoured Pillows)

The ATO has issued ATO ID 2014/21 (GST and contoured pillows) which explains that the supply of a contoured pillow designed for people with head and/or neck injuries is GST-free under section 38-45(1) of the GST Act.

ATO ID 2014/21 expressly notes that pillows not specifically designed for people with an illness or disability (such as pillows that are designed merely to promote healthy posture) do not satisfy section 38-45(1) because they are not designed specifically for people with an illness or disability and they are used widely by people who do not have an illness or disability.

The new ATO ID 2014/21 replaces ATO ID 2002/525 (GST and contoured pillows).

North Sydney Developments Pty Ltd v Commissioner of Taxation [2014] AATA 363

The Tribunal in North Sydney Developments Pty Ltd v Commissioner of Taxation [2014] AATA 363 has set aside the Commissioner’s private ruling, which stated that the taxpayer’s four-year time limit in which to claim input tax credits had expired, on the ground that a letter from the taxpayer to the Commissioner was an effective notification under the TAA within that time limit.


The taxpayer company did not lodge business activity statements in December 2005 and January 2006. The Commissioner issued “lodgement and payment” notices for those two months on 16 February 2006 and 24 March 2006, respectively. The taxpayer went into receivership in June 2006.

By letter dated 3 September 2006 the taxpayer advised the Commissioner that it was unable to comply with the Commissioner’s “lodgement and payment” notices because the receiver had taken possession of all of the taxpayer’s books and records and was refusing access to them. The taxpayer’s letter further provided the Commissioner with notice that substantial GST refunds would be due to the taxpayer for these months.

By private ruling dated 6 June 2013, the Commissioner ruled that although the taxpayer was entitled to input tax credits for the months of December 2005 and January 2006, the four-year time limit imposed by section 105-55 of Schedule 1 of the TAA had expired.

The taxpayer’s objection to the private ruling was disallowed, prompting the appeal to the Tribunal. Resisting the appeal, the Commissioner argued before the Tribunal that in order to abrogate the four-year time limit under section 105-55(1)(a) of Schedule 1 of the TAA a notification to the Commissioner of an entitlement to a refund, other payment or credit must tell the Commissioner what the refund is. The Commissioner contended that the taxpayer’s letter of 3 September 2006 did not answer this requirement, and as such the four-year time limit had expired.


The Tribunal set aside the Commissioner’s private ruling on the ground that the taxpayer’s letter of 3 September 2006 was a sufficient notification for the purposes of section 105-55(1)(a).

The Tribunal concluded that the letter of 3 September 2006 did have the effect of notifying the Commissioner of the refund, other payment, or credit to which section 105-55(1) applied. The Tribunal drew this conclusion for two reasons. Firstly, section 105-55(1)(a) required no greater specification than the tax period involved, and the nature of the refund or input tax credit claimed; the taxpayer’s letter of 3 September 2006 satisfied these requirements. Secondly, even if section 105-55(1)(a) required some greater degree of specificity, the 3 September 2006 letter would still be satisfactory because it indicated that the reason for the notification was the lack of access to the books and records in the receiver’s possession.

Van Gestel v Commissioner Of Taxation [2014] AATA 396

The Tribunal in Van Gestel v Commissioner of Taxation [2014] AATA 396 has affirmed that it has jurisdiction to hear a taxpayer’s application for a review of the Commissioner’s GST assessments in circumstances where the taxpayer claims to have been the victim of an identity fraud. The Tribunal concluded that the taxpayer’s claims rendered him relevantly “dissatisfied” within the meaning of section 14ZZ(1)(a)(i) of the TAA to give rise to the Tribunal’s jurisdiction to entertain the application.


Business Activity Statements (BASs) were lodged electronically for the months of July and August 2010 in the taxpayer’s business’ name, resulting in refunds of AUD 9,695 and AUD 8,791 being paid by the Commissioner into third party accounts that were said to be nominated by the taxpayer in telephone conversations with the ATO.

The Commissioner subsequently audited the taxpayer’s business and discovered that it did not exist. The Commissioner issued assessments claiming back the refunded amounts from the taxpayer. The taxpayer denied ever lodging BASs in July or August 2010, and claimed to have never received the refunded amounts. The taxpayer unsuccessfully objected to the assessments and applied to the Tribunal seeking to be relieved of the obligation to repay the refunded amounts.

The Commissioner challenged the Tribunal’s jurisdiction to hear the taxpayer’s application, arguing that the taxpayer was not dissatisfied within the meaning of section 14ZZ(1)(a)(i) of the TAA.


The Tribunal concluded that it does have jurisdiction to hear the application because of its finding that the taxpayer was relevantly dissatisfied.

The Tribunal’s finding of dissatisfaction was made on the ground that a review of the Commissioner’s objection decision necessarily extends to its factual basis. The Tribunal found that this factual basis may also include the taxpayer’s contention that he never claimed the input tax credits giving rise to the refunded amounts in the first place. Accordingly, the Tribunal found that where there is a dispute as to the factual basis of the decision which might affect the outcome, and the outcome has an important consequence for the taxpayer, the taxpayer who wishes to proceed with a review of that decision can be said to be dissatisfied.


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