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Australia – May 2014 GST Developments.

11 June, 2014

 

Legal News & Analysis – Asia Pacific – Australia – Tax

 

Re Lighthouse Financial Advisers (Townsville) Pty Ltd [2014] AATA 301

 
The Tribunal in Re Lighthouse Financial Advisers (Townsville) Pty Ltd [2014] AATA 391 has affirmed the Commissioner’s finding that a party making a payment for settlement of a legal matter was not entitled to claim input tax credits (ITCs) because it is not a taxable supply.

 
Facts

 
The taxpayer, a financial services company, was established by an individual less than 12 months after the termination of his employment with another financial services company. A term of the individual’s employment contract with the previous employer was that he would not canvass, solicit or compete for the custom of any of the previous employer’s clients for 12 months following the termination of his employment. The previous employer brought proceedings against the individual and the taxpayer company, claiming breach of contract and the tort of procuring or inducing a breach of contract against the taxpayer company.

 
The parties subsequently settled the matter, and it was agreed that a notice of discontinuance would be filed following payment of AUD 200k by the taxpayer and the individual to the previous employer. The taxpayer applied to the Commissioner for a private ruling, seeking confirmation that the payment of AUD 200k as settlement was consideration for a taxable supply whereby the taxpayer company would be entitled to claim ITCs. The Commissioner ruled that the payment was not made for a taxable supply, and a subsequent objection was disallowed.

 
The taxpayer brought proceedings before the Tribunal arguing that the previous employer had made a supply (for which the taxpayer provided AUD 200k as consideration) under section 9-10 of the GST Act by:

 
1. surrendering its contractual right to the fees generated by the 25 clients that had switched their business from the previous employer to the taxpayer during the restraint period (under section 9-10(2)(e)); or
2. releasing the individual from the restraint clause in his employment agreement (section 9-10(2)(g)); or
3. surrendering its right to sue the individual and/or the taxpayer company (under section 9-10(2)(e) or (g)).

 
Held

 
The Tribunal affirmed the Commissioner’s decision to disallow the taxpayer’s objection. The Tribunal rejected the taxpayer’s argument that there was a supply of the surrender of contractual rights to the clients’ fees, as the previous employer did not assert, and indeed did not have, any contractual rights to surrender in respect of those fees.

 
The Tribunal found that the AUD 200k settlement sum was not paid in consideration for the individual’s release from the restraint clause as the previous employer’s statement of claim did not seek to restrain the individual from breaching the restraint clause and the restraint clause was not mentioned in the terms of settlement. The Tribunal also noted that the restraint clause had already expired when the terms of settlement were signed in March 2012.

 
Regarding the argument that there was a supply by the previous employer of a surrender of the right to sue the individual and/or the taxpayer company, the Commissioner accepted that the settlement agreement could be characterised as a “discontinuance supply” within the meaning of GSTR 2001/4 GST Consequences of court orders and out-of-court settlements. The question for the Tribunal was whether this discontinuance supply was made for consideration. The Tribunal was unable to identify a sufficient nexus between the discontinuance supply and the payment. Accordingly, the Tribunal found that the AUD 200k payment was not made in consideration of the surrender of the right to sue.

 

Davsa Forty-Ninth Pty Ltd Acting As Trustee For The Krongold Ford Business Unit Trust v Commissioner of Taxation [2014] AATA 337

 
The Tribunal in Davsa Forty-Ninth Pty Ltd acting as trustee for the Krongold Ford Business Unit Trust v Commissioner of Taxation [2014] AATA 337 has refused most of the taxpayer’s claims for ITCs on vehicles purchased in a one-man car sales business. The Tribunal also affirmed the Commissioner’s decision to impose a penalty of 25% of the shortfall amount for lack of reasonable care.

 
Facts

 
The taxpayer purchased 16 vehicles between 2004 and 2008 for a total purchase value of AUD 926,436. The vehicles were purchased as part of the taxpayer’s one-man business of selling motor vehicles. The vehicles were stored at the taxpayer’s private premises, and at least five of them were used privately by the taxpayer and his wife. During the relevant period one of the 16 vehicles was sold by the taxpayer; to his daughter, at a loss. The taxpayer claimed ITCs on all 16 of the vehicles.

 
The Commissioner disputed the taxpayer’s ITC claims, contending that the taxpayer did not carry on an enterprise within the meaning of the GST Act. Alternatively, the Commissioner argued that the taxpayer was not entitled to the ITCs because he did not hold valid tax invoices, did not pay consideration during the relevant period, and the acquisitions were of a private and domestic nature.

 
The taxpayer appealed to the Tribunal and challenged the imposition of a 25% penalty.

 
Held

 
The Tribunal affirmed the Commissioner’s decision to reject the taxpayer’s ITC claims in respect of all but one of the 16 vehicles.

 
Although the Tribunal considered that the taxpayer’s activities did bear sufficient indicia of a business to be regarded as carrying on an enterprise or carrying out steps in commencement of an enterprise, the Tribunal accepted the Commissioner’s other arguments. In respect of the 5 vehicles used privately by the taxpayer and his wife, the Tribunal noted that ITCs can be claimed on assets that have been used privately to the extent of appropriate apportionment. In this case, the taxpayer’s evidence did not disclose an appropriate basis of apportionment. Accordingly, the ITCs claimed in respect of those vehicles were denied.

 
The Tribunal did not allow ITCs in respect of other vehicles because the taxpayer’s evidence did not disclose valid tax invoices either at all or at the requisite time for the ITCs claimed.

 
In respect of two of the vehicles, the Tribunal found that the taxpayer did not pay all of the consideration for the vehicles that corresponded with the ITC claimed.

 
Four vehicles in respect of which ITCs were claimed were found to have been purchased second-hand from people not registered for GST (and as such the purchases of those vehicles were not a taxable supply), or were found not to have been involved in a taxable on-supply during the relevant period.

 
On the question of penalty, the Tribunal accepted that the taxpayer’s consultation of a tax agent constituted an attempt to take reasonable care to comply with the law. However, the evidence did not disclose what steps the taxpayer’s tax agent took and therefore the taxpayer did not discharge his onus of showing that both he and his tax agent took reasonable care. Accordingly, the Commissioner’s decision to impose a penalty of 25% on the shortfall amount was upheld.

 

Yates v Commissioner of Taxation [2014] AATA 279

 
The Tribunal in Yates v Commissioner of Taxation [2014] AATA 279 has affirmed the Commissioner’s decision to deny the taxpayer’s claims for certain ITCs on the ground that there was a total lack of evidence to support them. The Tribunal also affirmed the Commissioner’s decision to impose a 50% penalty on the shortfall amount for recklessness.

 
Facts

 
The taxpayer lodged business activity statements for the tax periods between 31 January 2008 and 30 September 2011 (inclusive) claiming a broad array of ITCs.

 
The Commissioner denied the taxpayer’s claims to certain ITCs on the basis that the taxpayer had not provided tax invoices or other sufficient evidence. The disallowed ITCs related to items that had been charged to certain credit cards, items that had been assigned the description “Mine Automation Development” by the taxpayer, and other disallowed items.

 
Before the hearing the taxpayer provided further information in relation to some of the items claimed, and the Commissioner conceded those items.

 
The taxpayer also challenged the Commissioner’s decision to impose a penalty on 50% of the shortfall.

 
Held

 
The Tribunal affirmed the Commissioner’s decision to deny the items remaining in dispute. The Tribunal concluded that it was impossible for the Commissioner to allow the payments because of the lack of evidence provided by the taxpayer. The Tribunal observed that “the absence of tax invoices is one thing but a total lack of any evidence of what the specific amounts refer to is another”.

 
The taxpayer argued that providing evidence to the Tribunal in support of the ITC claims would place him in breach of certain defence-related legislation because of the nature of the work involved. The Tribunal rejected this argument, noting that the taxpayer had made no attempt to explain exactly how providing the requested information to the Commissioner would offend section 14A of the Defence Trade Control Act 2012 (Cth).

 
The Tribunal found that the taxpayer had wholly failed to satisfy the burden of proof to show that the Commissioner’s assessment was excessive.

 
On the question of penalties, the Tribunal agreed with the Commissioner that the taxpayer’s conduct constituted recklessness warranting the imposition of a 50% penalty. The taxpayer’s recklessness was to be found in his deliberate action of claiming the various items as ITCs in circumstances where he was unable to substantiate those amounts.

 
ATO ID 2014/19 GST And The Supply Of Newly Constructed Residential Premises Under An Arrangement Entered Into Prior To 27 January 2011

 
The ATO released ATO ID 2014/19 GST Consequences And The Supply Of Newly Constructed Residential Premises Under An Arrangement Entered Into Prior To 27 January 2011, which provides that newly constructed residential units developed and built by an entity under an arrangement entered into with a government body, that the entity was commercial committed to as at 27 January 2011, cease to be new residential premises upon the granting of new individual strata lot leases over each individual unit for the purposes of section 40-75(1)(a) of the GST Act.

 
This is because the granting of a new individual strata lot lease for each residential unit gives rise to a supply of residential premises, and section 40-75(2B) of the GST Act does not disregard this supply for the purposes of applying section 40-74(1)(a) because the transitional exception at Item 12 of Schedule4 to the Tax Laws Amendment (2011 Measures No 9) Act 2012 applies.

 
This interpretive decision replaces ATO ID 2013/57 GST and the supply of residential premises by way of assignment of a long-term strata lot lease.

 
A New Tax System (Goods and Services Tax) Waiver of Tax Invoice Requirement (Motor Vehicle Incentive Payment Made to Motor Vehicle Dealer) Legislative Instrument 2014

 
The A New Tax System (Goods and Services Tax) Waiver of Tax Invoice Requirements (Motor Vehicle Incentive Payment Made to Motor Vehicle Dealer) Legislative Instrument 2014 (Instrument) was registered. The Instrument waives the requirement for a recipient making a creditable acquisition to hold a tax invoice for an ITC to be attributable to a tax period, where:

 

  • the recipient makes a creditable acquisition of a motor vehicle from a motor vehicle dealer (the supplier); and 
  • the supplier receives or is entitled to receive a motor vehicle incentive payment for the supply of the motor vehicle to the recipient in addition to the consideration it receives from the recipient; and 
  • the recipient holds a document that meets the requirements prescribed in the Instrument.

 
The Instrument is taken to have commenced on 1 May 2014 and applies to tax periods for which the GST return is required to be given to the Commissioner on or after 1 May 2014.

 
The Instrument responds to the practical implications of the Full Federal Court’s decision in AP Group v FCT [2013] FCAFC 105 where the documents provided by motor vehicle dealers do not satisfy all of the requirements of a tax invoice under section 29-70(1) of the GST Act.

 
ATO Decision Impact Statement Swanbat Pty Ltd v Commissioner of Taxation [2013] AATA 891

 
The ATO has released a Decision Impact Statement on the Tribunal’s decision in Swanbat Pty Ltd v Commissioner of Taxation [2013] AATA 891.

 

The Commissioner accepts that in cases where he mistakenly refunds an amount to a taxpayer outside of the 4 year period specified in section 105-55 of the GST Act, he should seek to recover the incorrectly paid refund as an administrative overpayment under section 8AAZN of the Taxation Administration Act 1953 (Cth).

 
It is also accepted that in the particular circumstances where a refund is incorrectly paid outside the 4 year period in section 105-55 of the GST Act, it is not appropriate for the Commissioner to seek to recover the incorrectly paid refund by making an assessment of the taxpayer’s net amount that includes GST on sales that are not taxable and/or that excludes ITC entitlements for acquisitions or importations that are creditable.

 

Tax Laws Amendment (2014 Measures No 1) Act 2014 (Cth)

 
The Tax Laws Amendment (2014 Measures No 1) Bill 2014 completed its passage through Parliament without amendment and has received royal assent. 

 
The Act amends the GST Act and the Taxation Administration Act 1953 (Cth) to ensure that overpaid GST is refundable only in certain circumstances (new Division 142). The amendments will allow taxpayers to determine their entitlement to a refund of excess GST rather than having to rely on the Commissioner exercising a discretion to refund an overpaid amount.

 
The Public Servant v Commissioner of Taxation [2014] AATA 247

 
The Tribunal has upheld a private ruling in The Public Servant v Commissioner of Taxation [2014] AATA 247. The case dealt with whether a AUD 15k settlement payment to a former public servant was an employment termination payment under section 82-130(1) of the Income Tax Assessment Act 1997 (Cth) and not a tax free capital payment for personal injury.

 
The Tribunal considered its role in reviewing objection decisions in relation to private rulings turned on the scheme on which the ruling was founded and reviewing the facts as found by the Commissioner upon issuing the ruling. Accordingly, the Tribunal’s review turned on the specified scheme identified, just as the ruling did.

 
The Tribunal found that neither the Commissioner nor the Tribunal could redefine the scheme after the private ruling had been issued. Therefore, the Tribunal had no choice but to uphold the Commissioner’s objection decision.

 
The Tribunal commented that in certain circumstances, where there is an objection against a private ruling, then the right of objection against the assessment is limited to a right to object on grounds that neither were, nor could have been, grounds for the taxation objection against the ruling. This meant that the public servant could not object to any assessment in relation to the AUD 15k payment, and then challenge any objection decision.

 
From 1 July 2010, the general rulings system is adopted for GST and allows a taxpayer to object to a GST private ruling. This is therefore an important decision to bear in mind in deciding whether to object to a private ruling or to the relevant assessment.

 

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For further information, please contact:

 

Geoffrey Mann, Partner, Ashurst 
[email protected]


Jadie Teoh, Ashurst
[email protected]


Kristina Popova, Ashurst
[email protected]

 

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