GST Developments Peter Adams

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1 GST Developments Peter Adams Session 5 GST Refunds Legislative Change Businesses would be denied under the proposed Div 36 a refund of excess GST recorded in the BAS and paid, except in two specific cases: 1. where GST has not been passed on to another entity - where supplier bears economic cost of GST, rather than transfer it to customer as increased prices; 2. Where excess GST has been passed on by supplier to another entity, but that entity has received a reimbursement of GST and is not registered for GST. Outside of those two exceptions, the Commissioner has no clear basis for refunding the excess GST. This is in stark contrast to the current law which gives the Commissioner a discretion to pay refunds of excess GST to suppliers. GSTR 2014/D4 issued by ATO as guidance. 1

2 ATO ID - GST refund and reimbursement by a journal entry Over paid GST can no longer be refunded unless taxpayer provides evidence that they bear the GST cost or that they have reimbursed GST cost to customer In ID 2013/56 Commissioner of Taxation considers that ATO will not be satisfied that an amount of overpaid GST has been reimbursed to a recipient when a supplier merely makes a journal entry in its accounts. If journal entry is effectively an offset against an owed amount, then may be acceptable as evidence of reimbursement of GST GST Financial Supply Regulations Treatment of all components of a hire purchase transaction as taxable supplies Currently, supply of credit under a hire purchase agreement is regarded as an input taxed financial supply if made for a separate charge disclosed to the recipient. If charge is not separately identified and disclosed, supplier does not make a financial supply and GST is payable The amendments ensure that all supplies made under hire purchase agreement on or after 1 July 2012 are not financial supplies thus making them fully taxable (and creditable) 2

3 GST on no-shows QANTAS v FCT In June 2008, QANTAS taxpayer lodged a GST refund notification with the Commissioner for GST that it said was incorrectly paid by it in respect of pre-paid fares for unused travel The Commissioner subsequently issued the taxpayer with notices of assessment which included GST paid by the taxpayer in respect of the disputed pre-paid fares. The Commissioner also disallowed the taxpayer s objections to the assessments Full Federal Court held that GST was not payable by an airline where a passenger books and pays for airline travel, but subsequently cancels the booking or does not turn up for the flight and does not receive a refund. Court said that what each customer paid for was carriage by air ( essence and sole purpose of the transaction ) - the actual travel was the relevant supply, and if it did not occur there was no taxable supply. However, High Court has now held that GST was payable based on supply being contractual promise to transport or convey which remained intact. What about forfeited security deposits GST treatment now? Commissioner cannot delay GST refunds - Multiflex v FCT Taxpayer carried on a business which involved purchasing mobile phones from suppliers in Australia and exporting them to overseas customers. On the basis of GST returns lodged, the taxpayer was entitled to GST refunds Commissioner, however, had suspicions that the documentary evidence for the taxpayer s claims for input tax credits was fraudulent and delayed payment of the refunds pending completion of an investigation. Taxpayer commenced legal proceedings claiming that it was entitled to immediate payment of the refunds The Full Federal Court has now also affirmed that the Commissioner was not entitled to delay paying GST refunds due to a taxpayer while he completed an investigation into the accuracy of the taxpayer s GST returns. NOTE recent law change - Commissioner can refuse release of refunds with effect from 1/11/2011 3

4 Supply by Mortgagee in Possession AKN Consultants Pty Ltd (as trustee for Naidu Family Trust) v FC of T Facts The taxpayer, AKN Consultants Pty Ltd (AKN), was the trustee for a family trust which loaned money to an investment company (J&H) secured by a second mortgage over a property owned by J&H. J&H subsequently failed to repay the loan on the due date J&H as vendor entered into a contract of sale for the property Supreme Court of Victoria ordered that AKN (in liquidation) enter into possession of the property and that AKN liquidator be appointed as agent for the mortgagee in possession, ie AKN. Court also ordered that J&H be wound up for insolvency. Transfer of land was subsequently executed by liquidator, as agent for the mortgagee in possession. Taxable supply occurred upon executing transfer AKN Consultants Pty Ltd (as trustee for Naidu Family Trust) v FC of T Facts Commissioner advised taxpayer that it was liable for GST payable on the sale of the property Commissioner claimed that property was sold at the time transfer was completed on or about 12 January 2009 and that the taxpayer was liable for the payment of GST as the mortgagee in possession at the time. Commissioner contended that s 105-5(1)(a) of GST Act were satisfied because taxpayer supplied the property of J&H to third party, towards satisfaction of a debt owed by J&H to taxpayer under the relevant loan contract Commissioner further contended that the requirements of s 105-5(1)(b) were satisfied because it would have been a taxable supply had J&H made the supply, being the sale of new residential property. 4

5 Taxable supply occurred upon executing transfer AKN Consultants Pty Ltd (as trustee for Naidu Family Trust) v FC of T Decision AAT held that a taxable supply for GST purposes occurred at settlement, consequent to agent of mortgagee in possession executing the transfer. The supply did not occur when the vendor of the property executed the contract of sale - supply did not occur until sale was completed. AAT found that the fact that AKN supplied a property owned by a debtor to a third party in satisfaction of a debt owed by the vendor to AKN fell squarely within s of the GST Act. AAT has held that taxable supply by taxpayer as mortgagee in possession occurred when sale was completed (when agent of mortgagee in possession executed transfer), not when vendor executed contract of sale Note legislative change from 1 July 2013 to excuse lender from GST liability on supply to recover debt GST on vehicle incentive payments - AP Group Ltd v FCT The taxpayer was engaged in motor vehicle dealerships throughout Australia. Taxpayer received incentive payments from motor vehicle manufacturers or distributors from which it sourced the vehicles that it sold. Payments included fleet rebates, run-out model support payments, transit/interest protection payments, retail target incentive payments, and wholesale target incentive payments. Commissioner contended that incentive payments were consideration for supplies and subject to GST The AAT has held that incentive payments were not subject to GST as it could not be said to be consideration for supplies made by the dealer to the manufacturer. GSTR 2014/1 Issued as guidance by ATO 5

6 Yacoub & Anor v FCT- Partners not JV participants and liable for unpaid GST Husband and wife carried on a contract building business. Husband registered Myej Lydbrook P/L for GST which he described as limited partnership used in joint construction projects After Commissioner issued GST assessment to Myej Lydbrook, the taxpayers (husband and wife) paid 50% this GST liability. Company did not pay the other 50% and Commissioner brought proceedings against taxpayers for recovery of unpaid GST Taxpayers contended that Myej Lydbrook was not a partnership but joint venture Court held it was partnership as contractual arrangement between taxpayers and company was for sharing of joint or collective profits rather than a share of the output of the arrangement. ECC Southbank P/L (Trustee for Nest Southbank Unit Trust) v FCT Student accommodation was commercial residential premises The Federal Court has ruled that certain supplies of student residential accommodation were supplies of commercial residential premises and therefore taxable supplies. The Federal Court held that the test to be applied for the purpose of determining whether the premises was commercial residential premises involved asking whether the premises was a hotel, motel, inn, hostel or boarding house or whether it was similar to in the sense that it had a likeness or resemblance to any of those types of establishment 6

7 Sale of commercial property as going concern was GST-free -SDI Group P/L v FCT Taxpayer leased a property which it later sold subject to the lease. Sale contract did not make specific written reference to sale of the property being the supply of a going concern, but Parties settled the transaction as a supply of a going concern. Commissioner argued that it was not supply of a GST-free going concern as parties had not agreed the same in writing However, the taxpayer pointed to evidence in the form of various documents, which it submitted collectively constituted an agreement in writing. AAT agreed that it was the mutual intention of the parties that it was the supply of a going concern and there was sufficient written evidence of that. Requirement for agreement to be in writing was satisfied by a combination of the contract of sale, the tax invoice and a goods statutory declaration exchanged at settlement indicating that it was sale of a going concern. GST: timing of election for margin scheme; supply of going concern - Cyonara Snowfox Pty Ltd v FCT Taxpayer carried on a business of land development and sold several properties. For three of these supplies the taxpayer sought to apply the margin scheme. A further supply was treated as GST-free going concern as it was allegedly subject to a live lease. Taxpayer claimed it could make a choice to apply the margin scheme in July 2007 (when it objected to the Commissioner's assessment), notwithstanding that at settlement in 2004, it received GST of 10% of total supply price. Taxpayer contended the margin scheme, allowed a taxpayer to elect to use the margin scheme after the date of the relevant supply Court held that election to apply the margin scheme could not be made after the date of the relevant supply. The Tribunal also affirmed that the taxpayer was not entitled to the GST-free going concern concession - no executed copy of a lease document 7

8 No GST refunds for net negative amounts for car dealership Re Dandenong Motors Unit Trust and FCT Taxpayer conducted a car dealership and as part of its business, it received hold-back payments made by parties (manufacturers or importers of motor vehicles) Taxpayer included hold-back payments in its GST net amount in its BASs. In KAP Motors V FCT, Federal Court held that taxpayers who remitted GST on hold-back payments were entitled to refunds as no supply had been made Hold-back payments in BASs varied so that for some months there was a: positive GST net amount reported exceeding GST referrable to hold-back payments - without the hold-back payments, there would have been lower positive GST net amount; positive GST net amount reported less than GST referrable to hold-back payments without hold-back payments, there would have been negative GST net amount; and negative GST net amount reported after inclusion of GST referrable to hold-back payments - without the hold-back payments, there would have been a larger negative GST net amount Following KAP Motors decision, and more than 4 years after period to which the claims relate, the taxpayer sought GST refunds on the hold-back payments No GST refunds for net negative amounts for car dealership Re Dandenong Motors Unit Trust and FCT Commissioner allowed refunds for tax periods where there was a positive GST net amount, but not for periods where there was a negative GST net amount (citing the operation of s of Sch 1 to the Taxation Administration Act) Court held that, at all times, s limited the right to refunds of negative net amounts - these amounts could only be paid if the Commissioner was notified of the entitlement within 4 years of the period to which the entitlement related 8

9 No written agreement, so not a GST-free supply of a going concern Re Brookdale Investments Pty Ltd and FCT The AAT has affirmed the Commissioner's decision that a sale of various properties ("the land") by a taxpayer was a not a GST-free supply of a going concern but rather, was a "taxable supply" for GST purposes. AAT did not accept that statutory declarations made by the taxpayer and the purchaser, almost 5 years after the supply was made, constituted an agreement in writing that the supply was of a going concern "at or before the time that the supply [was] made The agreement that supply was of a going concern must be made on a timely basis and, more particularly, at or before the time supply was made. Decreasing adjustment denied: not registered for GST Re GOL-HUT Pty Ltd as trustee for Helensvale Unit Trust and FCT AAT affirmed that a taxpayer was not entitled to a decreasing GST adjustment because it was no longer being registered, or required to be registered, for GST Taxpayer acquired land and developed a retirement village in 2000 and although registered for GST, did not claim input tax credits on any purchases during the construction of the village as all of its supplies were input taxed. Taxpayer deregistered for GST purposes and the development was sold as new residential premises Taxpayer subsequently claimed an entitlement to a decreasing adjustment Taxpayer argued that it was entitled to a GST refund (decreasing adjustment) as a consequence of the change in purpose of the acquisition of goods and services. Commissioner stated taxpayer was not entitled to make a decreasing adjustment as it did not have a "tax period as a result of not being registered. 9

10 Supplies to non-resident travel agents not GST-free- ATS Pacific P/L v FCT The Federal Court has held that supplies provided by a taxpayer, an Australian travel agent, to non-resident travel agents was subject to GST as it did not fall within the scope of GST-free exports. The supplies were ultimately provided to non-resident tourists who travelled to Australia. However, the Court held that a margin fee charged by the taxpayer was GST-free. GST margin scheme case Commissioner wins Div 165 issue in High Court - FCT v Unit Trend Services Pty Ltd The taxpayer in the case is the representative member of a GST group of companies involved in the development of residential building unit projects. The process involved initial construction by one member of GST group and subsequent sale to another GST group member as going concerns which completed the projects and sold completed units under margin scheme Commissioner challenged scheme under the anti-avoidance provisions in Div 165 of the GST Act negating a total GST benefit in excess of $21m. Taxpayer argued that Div 165 does not apply because GST benefit was attributable to the making of a choice, election, application or agreement expressly provided for by the GST Act. High Court now held in favour of Commissioner that a choice, election engineered by entering into a scheme does not negate application of Div

11 Clayton v Commissioner of Taxation Taxpayers (husband and wife) acquired a rural property Taxpayers intended to establish eco-tourism business with accommodation for visitors as primary source of their income Taxpayers registered business name and registered for GST Business plan but development application delays forced revised business plan and commencement of operations No income derived from paying customers GST registration and GST ITC entitlement require enterprise AAT considered that taxpayers not carrying on enterprise as relevant activities were largely preparatory and exploratory Therefore taxpayers not entitled to claim input tax credits on a number of purchases following acquisition of the rural property Appeal dismissed - claimed ITCs re property development Bayconnection Property Developments P/L v FCT Taxpayers were owned by same family who had been involved in property development and construction activities Each taxpayer was registered for GST purposes and lodged BASs claiming ITCs for acquisitions which were mostly from related parties. Taxpayers contended that acquisitions were related to development of a training and education centre for the relevant periods. Commissioner contended that taxpayers were not entitled to ITCs for the relevant periods as they were not carrying on an enterprise. AAT held taxpayers were not carrying on enterprise and were therefore not entitled to ITC claims and affirmed penalty imposed Federal Court dismissed taxpayer's appeal and confirmed AAT decision that it was not carrying on enterprise and not entitled to ITCs 11

12 GST: partnership not carrying on enterprise - not entitled ITCs Re Naidoo and FCT GST registered partnership (husband & wife) provided certain services (maintenance and handyman work) to another entity which owned and operated a hotel. Mr Naidoo claimed he worked in the morning and evenings for K Co in his capacity as director/employee and that during the middle of the day, he worked as a partner of the partnership providing contracted services to K Co. K Co was previously owned by Mr naidoo s children but subsequently taken over by Mr and Mrs Naidoo. AAT held that Partnership did not constitute an enterprise and Commissioner was entitled to cancel GST registration and deny claim for ITCs. GST: consideration re property sale received at settlement Re Rod Mathiesen Truck Hire P/L as trustee for Mathiesen Family Trust The AAT has held that, for the purposes of the GST Act, all of the consideration in relation to the sale of a property was received by the taxpayer at the time of settlement, despite not all the consideration being received at that time Following execution of the sale contract, purchaser indicated difficulty in paying full sale price on settlement Parties entered into vendor finance arrangement allowing for later payment of balance outstanding Vendor finance agreement held to be separate from sale agreement, there timing of supply under sale contract is time of settlement even if full price not received by that time 12

13 Confidential v FCT - Entitlement to GST input credits This decision considers claiming of ITCs for the acquisition of intellectual property and debtors from related parties Related parties agreed for transfer of intellectual property on completion as purchase price was payable on completion Purchase price included cash and assumption of liabilities AAT held that no supply was made because based on the evidence, the property did not pass between the parties AAT pointed to a lack of consideration being made between the related parties in the form of actual payments of cash or proper assumption of relevant liabilities Accordingly no ITCs were available AAT made decision notwithstanding that relevant written agreements governing the transactions were in place AAT also held no market value substitution for consideration applied Rod Mathiesen Truck Hire P/L v FCT Decision Impact Statement This decision concerned liability to pay GST on sale of vacant land where vendor finance formed part of consideration for the supply on settlement of the property Taxable supply consideration not reduced by vendor finance subsequently put in place following financial difficulties for purchaser Vendor finance is separate transaction, so full sale price for land subject to GST The value of promise to pay also constitutes consideration for GST purposes 13

14 Cityrose Trading Pty Ltd v Booth & Anor - GST inclusive purchase price Price of real property sale transaction was at issue General proposition is that price is inclusive of GST unless specifically specified as GST exclusive GST clause in sale contract refer to value and consideration in same context and uses terms interchangeably - for GST purposes terms have different meanings Supreme Court considered GST clause in contract void for uncertainty and ordered it to be struck out Accordingly the Court held that the price in the contract would be held to be GSTinclusive Confidential v FCT - No entitlement to ITC s as no enterprise carried on Taxpayer purportedly started consultancy business venture shortly before being incarcerated to serve term of imprisonment Taxpayer obtained GST registration Taxpayer incurred expenditure relevant to this venture and claimed GST costs as GST input tax credits Onus on Taxpayer to show creditable acquisitions No evidence that enterprise actually established and carried on No evidence of GST costs incurred (tax invoices, etc) Accordingly Court held that there was no entitlement to ITCs 14

15 VGGL v FCT GST - Whether taxpayer entitled to ITCs on legal fees Taxpayer was property developer and was registered for GST Taxpayer was also previously owner of shares in a company with a water filtration business Taxpayer had sold shares in company to third party, but incurred legal costs when third party initiated legal proceeding against taxpayer Taxpayer claimed ITCs relevant to legal fees incurred Taxpayer also claimed ITCs relevant to property development projects Court held ITCs for legal fees not claimable as no creditable purpose GST costs not relating to property development enterprise Court also held no ITCs available for property development projects as no tax invoice and substantiating documentation Penalties applied against taxpayer Recklessness in making false and misleading statement notwithstanding engagement of tax agent Swanbat P/L v FCT GST-free refund for GST supplies to foreign resident Supplies to foreign resident treated in original BAS as taxable supplies more than four years before taxpayer sought refund as supplies should have been GST-free Commissioner acknowledged and paid refund entitlement but issued assessment as more than four years after original BAS Commissioner issued assessment including amount in net GST payable amount for relevant BAS period Court agreed more than four year means GST refund entitlement is out of scope but Commissioner cannot include amount as part of GST net amount as supplies are genuinely GST-free 15

16 GST: Meaning of "residential premises - GST Ruling Residential premises used predominantly for residential accommodation Ruling states that the test of "residential premises to be used predominantly for residential accommodation (regardless of the term of occupation)" is to be interpreted as a single test that looks to physical characteristics of the property to determine premises' suitability and capability for residential accommodation. ATO view - test does not require an examination of subjective intention of, or use by, any particular person Premises that display physical characteristics evidencing suitability and capability to provide residential accommodation are residential premises even if used for other purpose, e.g. where premises are used as a business office. Conversely, premises that do not display suitability of being occupied for residential accommodation are not residential premises to be used predominantly for residential accommodation, even if actually occupied for residential accommodation. GST: Meaning of "residential premises - GST Ruling GSTR Shelter and basic living facilities ATO does not consider "residential premises" to be restricted to extended or permanent occupation it can incorporate lodging, sleeping or overnight accommodation. Premises must provide shelter and basic living facilities to satisfy the definition. Supply of a residential apartment in a building may include a garage, car parking space, or storage area located within the building complex. ATO considers that garage, car parking space, or storage area is "ancillary or incidental to the dominant component of the supply", being the residential apartment - to be used for the better enjoyment of the residential apartment ATO view is supply is a composite supply of residential premises to be used predominantly for residential accommodation. However, if supplied separately from supply of a residential unit is not a supply of residential premises to be used predominantly for residential accommodation 16

17 GST: Meaning of "residential premises - GST Ruling Fit for human habitation Ruling makes assertion that premises must be fit for human habitation in order to be suitable for, and capable of, being occupied for residential accommodation. Partially built building is not residential premises until it becomes fit for human habitation. Contractual or legal prohibitions against residential occupation do not prevent premises from being suitable and capable for providing residential accommodation. In addition, ATO considers following still suitable and capable of being occupied for residential accommodation: in a minor state of disrepair; or subject to a temporary legal prohibition for occupation pending minor repairs Vacant land is not residential premises GST: Meaning of "residential premises - GST Ruling Display homes: a house that is residential premises to be used predominantly for residential accommodation may be supplied by way of lease as a display home. Ruling states that, regardless of whether the lease contains a prohibition on the house being used as a residence or for residential accommodation, the supply is an input taxed supply under s Transportable buildings: a transportable building such as a demountable dwelling or moveable home that is designed as a residence, or to provide residential accommodation, is residential premises when placed on land and installed ready for occupation. Road use vehicles: road vehicles, including motor homes, caravans and campervans, are not residential premises as they are not land or a building. 17

18 GST: Meaning of "commercial residential premises GST Ruling Ruling lists factors relevant to characterising premises as commercial residential premises: Commercial intention: the premises are operated on a commercial basis or in a business like manner even if they are operated by a non-profit body. Multiple occupancy: the premises have the capacity to provide accommodation to multiple, unrelated guests or residents at once in separate rooms, or in a dormitory. Holding out to the public: the premises offer accommodation to the public Accommodation is the main purpose: providing accommodation is the main purpose of the premises Central management: the premises have central management to accept reservations, allocate rooms, receive payments and perform or arrange services. Management offers accommodation in its own right: the entity operating premises supplies accommodation in its own right rather than as an agent. Provision of, or arrangement for, services: management provides guests and residents with some services and facilities, or arranges for third parties to provide them. Occupants have status as guests: predominantly, the occupants are travellers who have their principal place of residence elsewhere - not tenants. GST: Meaning of "commercial residential premises GST Ruling Factors to indicate premises not hotel, motel, guest house, boarding house, etc: operator and occupant agree for accommodation to be supplied for periodic term, such as in a residential lease; operator and occupant document condition of premises under written contract before accommodation is initially supplied and when occupant ceases to occupy premises; operator has right to impose cleaning fee on occupant when occupant ceases to occupy premises; occupant is permitted, subject to the terms of the lease, to alter part of premises, such as by attaching hanging devices on a wall; occupant is permitted, subject to the terms of the lease, to keep pets in premises; occupant must separately arrange and pay for connection of utilities; occupant is responsible for cleaning and minor maintenance of premises; premises are unfurnished the right to occupy the residential premises is supplied to occupant in exchange for occupant loaning an amount to operator together with other fees. 18

19 GST: Meaning of "commercial residential premises - GST Ruling Ruling states that separately titled rooms, apartments, or adjacent cottages or villas located on adjoining or abutting land can be combined with "sufficient commercial infrastructure" so that, as a whole, it can be operated similarly to a hotel, motel, inn, or hostel Supplies of accommodation in premises operated in this way are supplies of accommodation in commercial residential premises. ATO accepts that a single supply by sale or lease of premises consisting of rooms, apartments, cottages or villas as well as commercial infrastructure, regardless of whether they are separately titled, is a supply of commercial residential premises Long-term accommodation - commercial residential premises- GST Ruling Division 87 contains concessionary treatment for commercial accommodation that is provided as long-term accommodation by either: modifying the value of the taxable supply, thereby reducing GST payable; or Allowing taxpayer to choose not to apply Div 87 in which case supply is an input taxed Where Div 87 applies, the value of the taxable supply of long-term accommodation is modified as follows: the value of the supply is 50% of what would be the price of the supply if Div 87 did not apply; where the accommodation is provided in commercial residential premises that are not predominantly for long-term accommodation, the value of the supply is calculated as the sum of: (i) the unmodified value of the part of the supply that relates to first 27 days; and (ii) 50% of what would be the price of that part of the supply after the first 27 days. 19

20 Long-term accommodation - commercial residential premises- GST Ruling "Predominantly for long-term accommodation" Commercial residential premises are predominantly for long-term accommodation where at least 70% of supplies of accommodation in the commercial residential premises is for a continuous period of 28 days or more Commissioner accepts that one of the following methods or a combination of both can be used to determine 70% threshold: the actual occupancy of the premises for the 12 months preceding the month for which the booking is made; or the projected occupancy for the 12 months following the month in which the booking is made. If it is inappropriate to use either of these methods, a "reasonable alternative may be adopted. GST Ruling: Supplies made by an operator of a moveable home estate Commissioner considers in the draft Ruling that a moveable home estate is not commercial residential premises as it is not covered by, nor is sufficiently similar to, any other type of premises referred to in the definition of commercial residential premises Supply of a moveable home estate is not a taxable supply as it is not a supply commercial residential premises 20

21 GSTD 2014/2: GST treatment of options costs in margin scheme transaction Real property acquisition often facilitated through obtaining call option in the first instance ATO view is that cost for option to acquire and sell real property under margin scheme not included as consideration in calculating the margin The supply of the call option and the supply of the real property are two separate supplies. GST CofT v MBI Properties GST-free supply and Div 135 adjustment Div 135 provides that recipient of a supply of a going concern has an increasing adjustment to take into account proportion of supplies made in running the concern that is not taxable supplies or GST-free supplies. Taxpayer purchased going concern in the form of three apartments which were subject to leases to Mirvac Management Pty Ltd (Mirvac) and used as part of a serviced apartment business Commissioner determined that, under Div 135 taxpayer had an increasing adjustment in the amount of $215,000 (representing 10% of the total purchase price for the three apartments). 21

22 GST CofT v MBI Properties GST-free supply and Div 135 adjustment Taxpayer argued that supplies to which s135-5(1) refers are supplies by it, not supplies by the Vendor from whom they purchased the apartments and only referable to supplies made after taxpayer s acquisition and not before At first instance, Federal Court held that that there was nothing in the legislation that required intention must relate to its own activities or that it must intend to make input taxed supplies itself in order for an increasing adjustment to arise under section Federal Court accepted Commissioner s argument that Div 135 increasing adjustment applies as taxpayer intended that leases originally granted by Vendor to Mirvac would continue to be made through the enterprise which taxpayer acquired from Vendor as a GST-free going concern. GST CofT v MBI Properties GST-free supply and Div 135 adjustment High Court has now also held that the conditions for operation of s135-5 of the GST Act were met, and Commissioner was correct to assess taxpayer to an increasing adjustment High Court held that by assuming lessor s rights and obligations under the leases, taxpayer made input taxed supplies of residential premises by way of lease to Mirvac through the enterprise it acquired from the Vendor. The High Court also held that the supplies Taxpayer made were for a price - being rent to be paid by Mirvac to Taxpayer under each apartment lease. 22

23 GST Decision Impact Statement - MBI Properties Pty Ltd v CofT Commissioner considers High Court s decision gives rise to following GST outcomes: a purchaser of leased residential premises as GST-free going concern, with intention of continuing to observe and act in accordance with covenants of the existing lease, is liable for an increasing adjustment under s135-5; a purchaser of leased residential premises makes an input taxed supply by way of lease, and s11-15(2)(a) operates so that there is no entitlement to an input tax credit for anything acquired that relates to making that supply GST Decision Impact Statement - MBI Properties Pty Ltd v CofT Commissioner also considers that: where leased premises acquired by a purchaser are not residential premises, the purchaser makes a supply of the premises to the tenant and that supply will be a taxable supply when the requirements of s9-5 are met. Therefore, after the sale: purchaser is required to pay GST on rent paid by the tenant; where the other requirements of section 11-5 are met, the tenant is entitled to input tax credits with respect to rent paid to the purchaser after the sale; vendor is not liable for GST on rent paid to the purchaser after the sale; and where purchaser or tenant account for GST on a basis other than cash, their respective supply or acquisition of the premises by way of lease will be treated as being made on a progressive or periodic basis for the purposes of Div 156 of the GST Act. 23

24 GST Decision Impact Statement - MBI Properties Pty Ltd v CofT Observing covenants to provide quiet enjoyment under a lease amounts to engaging in an activity done on a regular or continuous basis, in the form of a lease confirms that an entity granting a lease or acquiring a reversion makes a supply of the use and occupation of the leased premises in the course of carrying an enterprise It remains a question of fact and degree whether the entity may also be engaged in some other or broader enterprise. GST RV Investments (Aust) Pty Ltd as Trustee of the RV Unit Trust v CofT AAT had previously ruled some transactions were not creditable acquisitions because no goods or services were actually acquired or because acquisitions were non-deductible expenses. A number of those transactions, totalling $92,245, were only evidenced by petty cash invoices lacking key details. Taxpayer claimed Commissioner s failure to cross-examine sole witness about the invoices before the AAT represented a concession by the Commissioner Federal Court rejected claim, stating that what the taxpayer suggests about what the Commissioner conceded by choosing to not cross-examine the witness about the specific invoices was without foundation. Taxpayer s witness could not identify what list of invoices represented, and therefore, taxpayer could not rely on the principle of res ipsa locquitur ( the thing speaks for itself ) in relation to the invoices. 24

25 GSTR ATM fees, credit and debit card surcharges ATM services fees A supply by an entity for a fee of not more than $1,000 is a financial supply if it is a supply of a withdrawal from an account, a deposit into an account, an electronic transfer from an account, or advice of the balance of an account. The term ATM services in subregulation (4A) of the GST Regulations restricts the listed services to those performed through the use of an automatic teller machine (ATM). A fee imposed for an ATM service listed under subregulation (4A) of the GST Regulations is consideration for an input taxed supply. STR ATM fees, credit and debit card surcharges Credit card surcharge A credit card surcharge imposed by a merchant on a customer for a credit card transaction forms part of the consideration for the supply of the goods or services made by the merchant. There is a sufficient nexus between the surcharge and the supply of the goods or services for the surcharge to be paid for the supply. The credit card surcharge forms part of the consideration for a taxable, input taxed or GST-free supply depending on the GST treatment of the supply of the goods or services in question. The ruling provides a number of examples of the treatment of different credit card surcharges. 25

26 GSTR ATM fees, credit and debit card surcharges Debit card surcharge A debit card surcharge imposed by the merchant on a customer for a debit card transaction forms part of the consideration for the supply of goods or services made by the merchant. There is a sufficient nexus between the surcharge paid by the customer and the supply of goods or services made by the merchant for the surcharge to be regarded as being paid for the supply in question. The debit card surcharge forms part of the consideration for a taxable, input taxed or GST-free supply depending on the GST treatment of the supply of the goods or services in question. The ruling provides a number of examples of the treatment of different debit card surcharges. GSTR Developments leases with GOVT agencies The Draft Ruling discusses the GST treatment of particular transactions arising when development lease arrangements are entered into by government agencies and private developers. The Draft states that these development lease arrangements typically have the following features: the developer undertakes the development on land owned by the government agency in accordance with a written agreement; and the government agency supplies the land by freehold or long-term lease subject to the developer undertaking the development in accordance with the terms of the written agreement. The developer only becomes entitled to transfer of the freehold or grant of the long-term lease when the development is completed. 26

27 GSTR Developments leases with GOVT agencies Example (GSTR 2014/D5) A government agency enters into a development lease arrangement with a development company for the development of land owned by the agency. Under the development lease, the agency is required to transfer the freehold title to the land to the development company once it has completed the development in accordance with the terms of the arrangement. Supply of the land by way of the freehold is consideration for the supply of development services provided. The supply of the development services is in turn consideration for the agency s supply of the land. The development company therefore makes a taxable supply of development services to the agency, and the agency makes a taxable supply of land to the development company ATO ID - GST - changes in net amount where entity notified Commissioner of entitlement to refund Facts The entity is registered for GST. It lodges and pays net amount shown on its BAS for relevant tax period. Within 4 years after end of tax period, entity realised that it did not claim ITC Before the end of that four-year period, entity gives Commissioner notice under s of Sch 1 of TAA. At the time of preparing its revised BAS entity also realised that it failed to report GST payable on a taxable supply that is attributable to same tax period. The amount of unpaid GST payable is less than amount of unclaimed ITC that it now wants to claim in same tax period, resulting in an overall decrease to net amount. Entity lodges revised BAS for relevant tax period, (showing overall decrease in net amount) after 4 years from date upon which that net amount became payable. Commissioner did not give entity a notice under s of Schedule 1 of TAA requiring payment of an unpaid net amount for that tax period. 27

28 ATO ID 2014/36 - GST - changes in net amount where entity notified Commissioner of entitlement to refund Issue In working out an entity's entitlement to a refund under s of Schedule 1 of TAA 1953 does the 4-year time limit in s of Schedule 1 of TAA apply to prevent an amount of unpaid GST payable on a taxable supply being taken into account, where, in the same tax period: the entity has an input tax credit entitlement not previously attributed to any tax period; the amount of that entitlement is greater than the increase in GST payable on the taxable supply, and the entity has, for that tax period, given the Commissioner a valid notice under section of Schedule 1 to the TAA? ATO ID - GST - changes in net amount where entity notified Commissioner of entitlement to refund Decision No. The 4-year time limit in s of Sch 1 of TAA does not apply to prevent unpaid GST payable being taken into account in determining the entity's entitlement to a refund under s of Sch 1 of TAA in these circumstances. 28

29 GSTD - do payments made by vendor to purchaser of real property when rent received falls below rental yield guaranteed by vendor give rise to an adjustment event under Div 19 of GST Act YES Payments made to purchaser by a vendor when rent received falls below rental yield guaranteed give rise to adjustment event when: Payments are made by vendor, pursuant to agreement between vendor and purchaser; Guaranteed rental yield is a bona fide and reasonable representation of rental return; The agreement between vendor and purchaser is integral to contractual arrangement for sale of property and setting sale price of property; Vendor and purchaser agree that vendor is responsible for securing a tenant, and vendor may act as purchaser's letting agent or may appoint external letting agent; The real property is leased to tenant pursuant to a lease between purchaser and tenant The vendor is required to make payment to purchaser based on difference between actual rent received and amount of return that property is expected to achieve in market place The vendor guarantee rental amount or rental yield for a set period of time, and The consideration provided by purchaser is limited to agreed sale price and purchaser does not provide any separate or additional consideration for the rental guarantee. GSTD - do payments made by vendor to purchaser of real property when rent received falls below rental yield guaranteed by vendor give rise to an adjustment event under Div 19 of GST Act Example 1 - Guaranteed rental yield - residential premises Apartment Builders, a property developer, is selling individual apartments in a newly constructed residential apartment complex. Lillian, a property investor, purchases an apartment from Apartment Builders for $750,000. The $750,000 sale price is struck and agreed to by the parties on the basis that, as part of the terms of the sale, Apartment Builders agrees to guarantee a rental yield of 5% per annum for 24 months (amounting to a total guaranteed rental of $75,000 for the 24 month period). The 5% rental yield guaranteed by Apartment Builders is reflective of the rental yield that has been achieved by comparable apartments in the same suburban area. 29

30 GSTD - do payments made by vendor to purchaser of real property when rent received falls below rental yield guaranteed by vendor give rise to an adjustment event under Div 19 of GST Act Example 1 - Guaranteed rental yield - residential premises (continued) Immediately following the sale of the apartment to Lillian, Apartment Builders arranges for the apartment to be leased to an arm's length third party tenant, Vincent. Under lease between Lillian and Vincent, rental is $3,000 per month for 12 months. At end of the 12 month lease term, Vincent agrees to rent apartment for another 12 months. Under renewed lease, rental is increased to $3,100 per month - total rent received by Lillian for the 24 month 'rental guarantee' period is $73,200. Because total rent received by Lillian over 24 month 'rental guarantee' period is less than guaranteed amount of $75,000 (i.e. $3,125 x 24 months), pursuant to agreement between Apartment Builders and Lillian, Apartment Builders makes a payment of $1,800 to Lillian. The $1,800 payment made by Apartment Builders has the effect of reducing the consideration for the supply of the apartment by Apartment Builders to Lillian. The $1,800 payment is an adjustment event under paragraph 19-10(1)(b) of the GST Act. GSTD - do payments made by vendor to purchaser of real property when rent received falls below rental yield guaranteed by vendor give rise to an adjustment event under Div 19 of GST Act Example 2 - Guaranteed rental yield - commercial premises Legis Properties (Legis) sold Wonder Mart shopping centre to Lature Developments (Lature). At the time of the sale of the shopping centre to Lature, it was 75% leased to retail and commercial businesses under terms covering at least the next two years. The remaining 25% of the shopping, comprising 5 individual shops, was untenanted. The price for Legis' sale of the shopping centre to Lature was struck and agreed to by the parties on the basis that Legis agreed to guarantee the rental yield of 5 untenanted shops for a period of two years. Consistent with the amount of rent being paid by the tenants of other similar shops in the shopping centre, under the agreement between Legis and Lature, the guaranteed rental yield of the five untenanted shops totalled $30,000 per month. If any month during the two year period that Legis has guaranteed the rental yield for the five shops, the total monthly rental received by Lature for those five shops falls below $30,000, Legis is required to pay the amount of shortfall to Lature. 30

31 GSTD - do payments made by vendor to purchaser of real property when rent received falls below rental yield guaranteed by vendor give rise to an adjustment event under Div 19 of GST Act Example 2 - Guaranteed rental yield - commercial premises (continued) Immediately following the sale, Legis arranged for the vacant area to be leased by Lature to a third party. Three of the five vacant shops were leased after the sale and the total monthly rent received by Lature for those three shops was $18,000. After 12 months, the remaining 2 untenanted shops were leased and the total monthly rent for the five shops was $29,000. Pursuant to the terms of the agreement between Legis and Lature and the rental yield guaranteed by Legis for the five shops, Legis paid Lature $12,000 per month in the following month for the first 12 months of the two year guarantee period and $1,000 per month for the remaining 12 months of the two year guarantee period. The above mentioned monthly payments made by Legis during the two year rental guarantee period in accordance with the terms of the agreement between Legis and Lature had the effect of reducing the consideration for the sale of the Wonder Mart shopping centre and is an adjustment event under paragraph 19-10(1)(b) of the GST Act GSTD - is supply of brokerage services for sale or purchase of financial products on overseas exchanges a GST-free supply YES. Supply of brokerage services that facilitates sale or purchase of financial products on overseas securities or futures exchanges is a GST-free supply where: 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. 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 - not products involving supplies of goods or real property. 31

32 New Developments Criterion Prestige v FCT Issue whether the taxpayer was carrying on an enterprise for the purposes of registration for GST Motor dealer company run by a medical practitioner Company established to trade in luxury motor vehicles Registered for GST, luxury car tax, motor dealer Acquired luxury car for $335,500 incl. GST and claimed input tax credit No luxury car tax paid as taxpayer claimed acquisition was trading stock Chattel mortgage clause Goods will not form part of the Borrower s inventory Commissioner audited taxpayer and held it was not carrying on enterprise and amended BAS and luxury car tax accounting and cancelled GST registration. Taxpayer also charged 50% administrative penalty for recklessness Taxpayer appealed on basis that insurance on vehicle that covered test drives (but condition that the individual be the only driver) and listing on carsales.com Records of test drives was limited AAT held that no creditable acquisition arose - Taxpayer had failed to call evidence from test drivers and timing of test drives after notice of audit New Developments Rio Tinto Services Limited v Commissioner of Taxation [2015] The Full Court of the Federal Court of Australia (the Full Court) has concluded that acquisitions relating to the lease of residential premises were not creditable acquisitions. In this decision, the employer (the taxpayer) supplied residential premises by way of lease to its workers. The taxpayer made acquisitions relating to the residential premises and attempted to claim input tax credits in respect of those acquisitions. The Full Court held that the taxpayer was not entitled to the input tax credits. The acquisitions wholly related to the making of an input taxed supply, being the lease of the residential premises, notwithstanding that the taxpayer had supplied the residential premises for a broader purpose of carrying on its enterprise. 32

33 Tax Update 2016 Supply of hotel accommodation through an agent is a taxable supply Paul J Castan & Son Pty Ltd ATF Castan Investments U/T v FCT [2016] AATA 298 The taxpayer, a hotel owner, entered into a management agreement with another entity for the other entity to be the operator of the hotel. The entity acted solely as the agent of the taxpayer. Section 40-35(1)(a) relevantly provides: (1) A supply of premises that is by way of lease, hire or license (including a renewal or extension of a lease, hire or licence) is input taxed if: (a) the supply is of residential premises (other than a supply of commercial residential premises or a supply of accommodation in commercial residential premises provided to an individual by the entity that owns or controls the commercial residential premises); or [emphasis added] AAT concluded that while operator (agent) provided the supply accommodation in the commercial residential premises to the guests, it was the taxpayer which owned the hotel that made the supply of accommodation to the guests. Therefore, under s40-35, the supply of the accommodation is a taxable supply and subject to GST. Tax Update Court Judgements Taxpayers not entitled to ITC)s because acting as agents Crown Estates (Sales) Pty Ltd v FCT [2015] AATA 949 Taxpayer companies conducted a property management business. Taxpayers made acquisitions of goods and services for and on behalf of their clients. Taxpayers claimed ITCs relevant to acquisitions made for and on behalf of their clients ATO denied ITCs as taxpayers acted merely as agent not as principal under any of the relevant transactions ATO position premised on GST Ruling GSTR 2000/37 33

34 Tax Update Court Judgements Taxpayers not entitled to ITCs because acting as agents Crown Estates (Sales) Pty Ltd v FCT [2015] AATA 949 AAT concluded that standard agency relationship existed between taxpayers and clients premised on formally documented arrangement between taxpayers and clients Consequently, taxpayers were not entitled to claim input tax credits on the acquisitions as they operated under a standard agency arrangement Division 153 of GST Act contains special rules that may apply where supplies or acquisitions are made through an agent. Under Division 153 parties may enter into a written arrangement under which intermediaries are treated as suppliers or acquirers Commissioner may also make a written determination that the arrangement is to be treated as if the intermediary was the principal. AAT considered that neither of these exceptions applied in this case. Tax Update Notes Barter transactions and cash basis: GST attributable to tax period in which barter credits are received Taxology Pty Ltd v FCT [2016] AATA 565 The corporate taxpayer carries on an enterprise of providing professional services to the general public and accounts for GST on a cash basis. It joined a trading program (barter scheme) operated by Bartercard Exchange Ltd (Bartercard). Under the scheme, trades are conducted on a 100% barter basis unless consent is obtained to trade in cash. For each member, Bartercard establishes a trade account for recording trades entered into by them. 34

35 Tax Update Notes Barter transactions and cash basis: GST attributable to tax period in which barter credits are received Taxology Pty Ltd v FCT [2016] AATA 565 A trade is recorded by: crediting the trade account of the selling member with the trade dollar amount of the transaction; and debiting the trade account of the buying member with the trade dollar amount of the transaction. Trade dollar is an accounting unit used to record the value of goods and services traded. One trade dollar is equivalent to one Australian dollar. Bartercard does not have any obligation to any member to redeem or convert trade dollars to cash. Tax Update Notes Barter transactions and cash basis: GST attributable to tax period in which barter credits are received Taxology Pty Ltd v FCT [2016] AATA 565 The taxpayer applied for a private ruling, asking whether it could attribute the GST payable on its taxable supplies made under the barter scheme at the time it redeems its barter trade credits for goods and services. The Commissioner issued a private ruling stating that it could not so attribute the GST payable on its taxable supplies. The taxpayer s objection was disallowed and it sought review by the AAT. The AAT held that the taxpayer must attribute GST payable on its taxable supplies to the tax period in which its trade account is credited. 35

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