(1)  ATO withholding of BAS refunds curtailed (for now – again…)
(2)  GST refunds for transitional leases
(3)  Financial assistance payments
(4)  Apportioning partly taxable supplies
(5)  Financial supplies and residential premises amendments introduced
(6)  Other developments

(1)  ATO withholding of BAS refunds curtailed (for now – again…)

Further to the 7 October 2011 edition of The GiST, the Full Federal Court has in a single joint judgement dismissed the Commissioner’s appeal against the decision of the single judge of the Federal Court in the Multiflex case (link).

The Full Court agreed with the earlier decision that under the current legislation the ATO was required to pay a net GST refund amount within such a period as is reasonable in the circumstances, which is the period required to administratively make the refund but not to undertake an investigation which may or may not result in a GST assessment upon the taxpayer.

The Commissioner has sought special leave to further appeal this matter to the High Court and applied for an expedited special leave hearing which is to be held on 9 December 2011. The Commissioner also successfully applied for the mandamus order (for payment of the refunds) to be temporarily stayed.

(2)  GST refunds for transitional leases

A long-standing issue between some taxpayers and the ATO has related to the flood of GST refund claims lodged just prior to the amendments to the Taxation Administration Act 1953 (”TAA”) effective from 1 July 2008 in relation to ‘transitional’ contracts (typically leases) entered into before the GST legislation originally received Royal Assent on 8 July 1999. Two decisions have just been handed down by the Administrative Appeals Tribunal in relation to such issues, and in both cases the taxpayers lost.

The first issue in each case was whether section 13 of the A New Tax System (Goods and Services Tax Transition) Act 1999 (”Transition Act”) applied to make particular post 1 July 2000 supplies under the leases GST-free.

Re MTAA Superannuation (R G Casey Building) Property Pty Ltd and Commissioner of Taxation (link) involved a property lease entered into in 1998. The lease provided for a rent review from 1 March 2001 with the parties to first seek to negotiate any changes and then appoint valuers if necessary, and the parties had agreed to a 10% increase in the rent component on account of GST and a protracted market review resulted in a new GST-inclusive market value rent being backdated to 1 March 2001. Nevertheless the taxpayer lessor in 2008 sought a refund from the ATO for the $7.5 million of GST it collected from the lessee and paid to the ATO in respect of the period from 1 March 2001 to 30 June 2005.

Re National Jet Systems Pty Ltd and Commissioner of Taxation (link) involved a pre Royal Assent aircraft lease pursuant to which the taxpayer provided aircraft and operational and maintenance services. The terms of the lease were amended on a number of instances between its commencement and 30 June 2005. The lease expressly allowed for some of the components of the consideration payable by the lessee airline to be increased if GST was payable but not the actual leasing charge, and from 1 July 2000 to 30 June 2005 these components and the leasing charge were increased to reflect GST, which was then paid over by the taxpayer to the ATO. The taxpayer lessor sought a refund of $40 million of this GST.

In both cases the Tribunal held that the relevant supplies no longer received transitional relief from the imposition of GST by section 13 of the Transition Act as the consideration was no longer identified by the pre Royal Assent agreement. In the MTAA Superannuation case this was due to the market review, as well as by the agreement to increase the rent by 10% for GST. In the National Jet Systems case the pre Royal Assent agreement no longer sufficiently identified the supply or the consideration due to material amendments to the lease including to deal with additional aircraft, although the decision of the parties to increase the leasing charges by 10% for GST which was not specifically required by the lease agreement did not of itself scupper the future operation of the GST-free transitional rules.

The Tribunal also held in each case that, even if section 13 of the Transition Act did apply, while the notices provided to the Commissioner were satisfactory notifications of entitlements to refunds, the Commissioner had correctly exercised the discretion in section 105-65 of Schedule 1 to the TAA to refuse the refunds as they would have resulted in windfall gains either to the taxpayer or the lessee, as neither of the parties were out of pocket on account of any overpaid GST (as the lessee would have claimed input tax credits).

The operation of the transitional rules is obviously very fact-driven. While the taxpayer lost in both cases, the Tribunal appears to have considered that where parties (as many did at the time) took a conservative or practical approach and agreed to gross-up up lease payments for GST which was not specifically required or contemplated by the lease agreement, they may still have technically been GST-free under the transitional rules and so, subject of course to the TAA, potentially ripe for GST refunds.

The focus on prevention of windfall gains in the operation of the 105-65 discretion was justified by the Tribunal on the basis of the often-cited “practical business tax” approach to interpretation or administration of the GST laws, and on community standards and expectations. This final aspect has potential implications for a broad range of GST refund applications.

(3) Financial assistance payments

The ATO issued a draft GST public ruling, GSTR 2011/D4 (link), in relation to the application of GST to financial assistance payments, including payments described as grants, subsidies, sponsorships, financial assistance or support, co-payments, rebates and contributions. This is substantial re-write of the current ruling GSTR 2000/11 on these matters in light of various court decisions.

The draft ruling focuses on in what circumstances the payee makes a supply for which the financial assistance payment is consideration. A few of the interesting changes from the current ruling are discussed below.

The draft ruling analyses payments subject to repayment obligations (eg in the event of the payee failing to do what it agreed to do), and adopts an approach which would appear to result in less payments being subject to GST than was the case in GSTR 2000/11. The draft ruling states that the payment will not be consideration for the supply made by the payee of entering into the obligation to repay, but it is still necessary to determine whether on the facts it is in consideration for the payee entering into an obligation to do something (which it then failed to do). Merely being required to return the funds if the payee does not ultimately do what the payment was intended to support is not sufficient to make the payment subject to GST. An example is given of a tennis club receiving a financial assistance payment from a local council to resurface a tennis court which it was required to refund if it did not undertake the resurfacing, which was not subject to GST as there was no positive obligation on the tennis club to actually do the resurfacing.

The draft ruling also considers a few matters which were not specifically dealt with in GSTR 2000/11, including financial assistance payment arrangements in the form of sponsorships and tripartite arrangements (following the Commissioner’s loss in the Full Federal Court in Commissioner of Taxation v Secretary to the Department of Transport (Vic) (link). This includes arrangements where a party provides a subsidy to a supplier in relation to goods or services provided to a third party.

Appendix 2 to the draft ruling also contains a table summarising the GST treatment of different types of financial assistance payments. Each of these is curiously illustrated. My favourite is the one for a gift, illustrated by a bag of money, but I’m not sure a government agency should be associating itself with those kinds of gifts…

The ruling, when finalised, is proposed to apply both before and after the date of issue subject to transitional arrangements, which provide that an entity can continue to rely on GSTR 2000/11 for payments made prior to 31 December 2012 in respect of an arrangement entered into before the date of issue of the new final ruling, where the rulings conflict.

Both providers and recipients of financial assistance payments should review their GST treatment in light of the draft ruling.

(4) Apportioning partly taxable supplies

The ATO has issued a draft addendum to public ruling GSTR 2001/8 (link) which deals with apportioning the consideration for a supply that includes both taxable and non-taxable parts. The draft addendum is intended to reflect the decision of the Full Federal Court in Commissioner of Taxation v Luxottica (link) and the Administrative Appeals Tribunal in Re Food Supplier and Commissioner of Taxation (link).

In particular the draft addendum discusses the characteristics that differentiate a mixed supply (a supply that contains separately identifiable taxable and non-taxable parts) and a composite supply (a supply that contains a dominant part and includes something integral, ancillary or incidental to that part).

A fundamental point missing from the ATO’s analysis in the original ruling and the addendum however is the proper identification of whether there is fact only one supply or more than one supply actually taking place. The Commissioner’s focus on applying the specific valuation rules for partly taxable supplies in section 9-80 of the A New Tax System (Goods and Services Tax) Act 1999 (“GST Act”) ignores the fact that there may be no need to apportion the consideration for a single supply if there are actually separate supplies being made which have different GST treatments. This single supply versus multiple supplies analysis is the way GST/VAT regimes overseas typically analyse such matters. Section 9-80 may then be of no relevance at all in a particular instance.

The Full Federal Court in the Luxottica case may have commented that a “practical, commonsense approach to characterisation” lead to the conclusion that the spectacles in that case were a single supply of a completed article so that the application of the “impenetrably circular” formula in section 9-80 then fell for determination, but this initial characterisation point is completely overlooked in the ATO’s ruling. There may be a number of different supplies made in any arrangement which, following the recent comments by the Full Federal Court in the Qantas case (refer 6 September 2011 edition of The GiST), may also require an enquiry as to what is the “relevant supply”.

(5) Financial supplies and residential premises amendments introduced

On 23 November 2011 the Tax Laws Amendment (2011 Measures No.9) Bill 2011 (link) was introduced into Parliament including proposed amendments to the financial supplies and residential premises provisions of the GST Act.

These are largely in accordance with the Exposure Draft legislation on these two matters referred to in the 7 October 2011 and 6 September 2011 editions of The GiST respectively.

The financial supply amendments are substantially unchanged from the Exposure Draft, except for a change to the definition of what is a “deposit account” for the purposes of the new restriction to the borrowing provision to exclude debentures, and the insertion of a new section 156-23 to clarify that a supply under a hire purchase agreement is not a periodic or progressive supply.

Apart from some tweaking of the transitional rules, the residential premises amendments in the Bill are substantially the same as the Exposure Draft. While there are no specific legislative changes in the Bill dealing with it, the Explanatory Memorandum (link) also comments on the controversial issue of the GST treatment of the ’wholesale supply’ of the property in a development lease arrangement. It states that the wholesale supply to the developer is a supply of new residential premises with its consideration including the GST-inclusive market value of the work undertaken by the developer on the land prior to its transfer to the developer (ie there is a barter arrangement). This was implicit in the Federal Court’s decision in the Gloxinia case (link), but contrary to the ATO’s position in the now-withdrawn ruling GSTR 2008/2.

(6) Other developments

If you would like further information or assistance with any of the issues highlighted above or any other GST issues, please contact Damian Welshe on 0415 477 099 or at dwelshe@gstconsulting.com.au.

The GiST 25 November 2011 Edition © Damian Welshe & Associates Pty Ltd

The information in this newsletter is general in nature and does not constitute tax advice. It does not take account of your individual circumstances, for which you should seek specific professional advice.