Flood of GST disputes

There has been a flurry of recent activity in Australian courts. Several GST cases have been decided indicating that GST is just not as simple as you might expect.

Contract wording

Surprisingly, there are still disputes in respect of the GST wording in a contract, whether the amount was inclusive or exclusive. It highlights the need for contracts to be reviewed for GST and other taxes to ensure that the position is understood, the correct amounts are paid and the parties are legally protected from any additional charges. (Cityrose Trading Pty Ltd v Booth & Anor)

Recently a contract was seen where the amount of GST at stake was $5 million. Surprisingly the contract did not mention GST despite the parties employing large and prestigious advisors. It is prudent for all property contracts and sales of businesses as a going concern to be reviewed for GST, state and direct taxes.

Enterprise

Surprisingly the issue of whether an activity is an enterprise crops up with depressing frequency. Often this concerns activities such as art collections or horse racing/breeding. Recently, however, there have been cases involving other activities that many would see as being an enterprise. For example in Goldberg & Anor and FCT the appellants started a book publishing enterprise and claimed GST credits on their costs. The ATO disallowed these credits as they believed that there was insufficient prospect of a profit and the activities lacked a business like demeanour.

Even where you are clearly an enterprise, the ATO may attack you. In what can only be seen as a revenue raising exercise the ATO attempted to disallow a business’s input tax credits as it claimed the vendor was not an enterprise. The ATO failed in its arguments as the Tribunal found that the activities of the vendors were a property investment enterprise (in addition to their farming enterprise), due to the business-like way the vendors conducted their activities. Hence, the sale was a taxable supply and the purchasers were entitled to claim an input tax credit.

These cases illustrate the hard line taken by the ATO and emphasise the care needed when acquiring assets (ensuring that GST has been correctly charged). Care is also needed - particularly when commencing an enterprise - to establish that an activity is indeed enterprise and therefore entitled to claim credits. Early review is advisable before the ATO launches an enquiry.

No input tax credit allowed

In a similar way to the case described above, the ATO tried to disallow the input tax credit claimed by Hornsby Shire Council where it acquired land by compulsory purchase. The ATO concocted what can only be described as a specious argument in respect of there not being a supply. It is an indication that the ATO seeks to raise revenue in the most unlikely of places. Where there are unusual or one-off activities, care should be taken to ensure that credits can be claimed.

Property dilemmas

As always, there are plenty of GST cases concerning property transactions. In South Steyne Hotel Pty Ltd & Ors v FCT the Federal Court dismissed a taxpayer's appeal concerning the characterisation of 4 categories of supply. The decision also examined the terms "residential premises", "commercial residential premises", "residential accommodation" in a GST context, and looked at whether the supplies were input taxed, GST-free or taxable supplies. Despite the property being described as a hotel it was held that the supplies were not commercial residential, meaning that there was a significant loss of input tax credits.

In Brady King P/L v FC of T (no 2) it was held that margin scheme was not valid and the taxpayer would have to pay a great deal more in GST than they planned. The case illustrates the need to ensure that the complex and changing margin scheme rules are adhered to. The case is also of interest as it decided when a person has an interest in a property and when the margin scheme can be used; this differed from the ATO’s position and does provide some scope to extend the use of the margin scheme.

Conclusion

Whilst GST should be a simple tax, there are many occasions where its complexities can catch a taxpayer out. Complex, unusual or large value transactions should always be reviewed to ensure that the GST to be charged or claimed as a credit is as expected. Failure to do so may mean long and costly disputes with the ATO.

For more information contact:

Krish Patel

Partner - Tax

T  +61 2 8297 2400

E  krish.patel@au.gt.com