At a big picture level, there seem to have been two main areas of focus for taxpayers and the Federal and State Revenue authorities over the last three months:

  • Refunds, refunds, refunds – across GST, Fuel Tax Credits and R&D, there are some exciting opportunities to obtain historical refunds and set up processes to reduce indirect taxes in the future; and
  • Review activity – to balance the refund claim opportunities, and against a declining tax take, the ATO and the State Revenue Offices are increasing audit and compliance activity.

We trust this update is useful – please feel free to contact your usual Grant Thornton advisor or a member of the Indirect Tax team if you have specific queries.

GST and the meaning of supply - Qantas in the High Court

In a highly publicised case, earlier this month the High Court handed down their decision against Qantas who claimed a GST refund on “no-show” passengers. Qantas had earlier successfully argued that it was not liable to pay GST where passengers booked and paid for fares and subsequently failed to take the flight and did not seek a refund. The High Court held that Qantas made a taxable supply for consideration when it entered into the contract with the passengers. As such, GST was payable in the tax period in which the fare was received.

What does this mean?
The conclusion reached would appear to apply to all contracts whether they are completed or not. In other words, a taxable supply may potentially be made when parties enter into a contract and merely create rights and/or enter into an obligation to do something. The ATO is currently reviewing the impact of the decision on a number of public GST rulings – watch this space.

Successful GST refunds - Motor vehicle dealers

The decision in AP Group Limited v Commissioner of Taxation means that certain “incentive” payments (transit/interest protection, target incentives, wholesale target incentives) by car manufacturers to dealers were not subject to GST, and that refunds of GST paid on such arrangements would be available.

The AAT essentially gave instructions to dealers to review their arrangements for potential overpayments of GST.

Changes to the GST refund process

There will be fundamental changes surrounding GST refunds with the release of an Exposure Draft by the Assistant Treasurer in mid-August 2012. The new rules will set out the criteria determining whether taxpayers will or will not be entitled to a refund of overpaid GST.

According to the Exposure Draft, the new rules will apply for tax periods starting on or after 17 August 2012. A new Division is intended to work with the new self-assessment regime for GST, whereby each BAS lodged is deemed to be an assessment. Based on the changes, there may be some difficulty in obtaining historical refunds when the Exposure Draft becomes law.

2013 ATO compliance program for GST

The Commissioner has indicated that the ATO’s annual compliance program for 2012-13 will focus on various GST compliance matters across the micro, small-to-medium and large enterprise sectors.

  • For micro-enterprises, the Commissioner will be focusing on GST refund integrity and GST evasion. Specifically, the ATO will be looking for anomalies, discrepancies, unusual behaviour or changes in patterns and may stop a small percentage of refunds for verification.
  • For small-to medium enterprises, the ATO’s focus will be on GST property transactions. Some of the compliance activities include identifying unreported sales, identifying incorrect application of the margin scheme and identifying misclassification or disposal of real property. The ATO will be undertaking approximately 1,000 audits and reviews and will have a particularly increased focus on developers with a history of non-compliance. The ATO plans to do this by matching the information reported on business activity statements with information from external sources including state and territory property data.
  • For large enterprises, the ATO will be targeting the integrity of business systems for GST to identify errors made. It is expected that 500 reviews and audits will be made with a particular focus on the mining, manufacturing, wholesale trade, financial and insurance services industries. The Commissioner will also be looking into GST and financial supplies. The focus will be on the highest risk transactions and the ATO will be making an estimated 50 reviews and audits across all markets.

GST and property

In the case of ECC Southbank Pty Ltd as trustee for Nest Southbank Unit Trust v Commissioner of Taxation it was held that the taxpayer’s treatment of the supply of shared and studio style apartments was a taxable supply of “commercial residential premises” as opposed to an input taxed supply of residential premises. 

Why would the taxpayer argue for taxable treatment? The taxpayer would then be able to claim GST credits for the costs of construction, operation and maintenance where it would otherwise be denied. Given the decision it is clear that the GST treatment turns on the physical and operational characteristics of each property.

Fuel Tax Credit - Refund opportunity

The large transport company in Australia, Linfox, has been successful in increasing their fuel tax credits (FTCs) recovery by the amount of the road user charge (approximately $0.23/L). Linfox claimed the FTCs on the diesel fuel they use in their refrigerated transport trailers. The Courts found that the fuel in refrigerating the trailers was not used for “travelling on a public road” rather it was used for refrigeration purposes, and as such the FTC should not be reduced.

This decision may impact road transport operators that have purposes for fuel other than “propelling” the vehicle. As such, there is a possibility of a refund for those road transport operators who have reduced their FTCs by the road user charge. We calculate that to be approximately $23,000 for every 100,000L of fuel used, with a four year historical refund window, plus future savings.

Research & Development incentive - A reminder

The R&D Incentive applications for companies with a year ending 30 June 2012 opened in July and the deadline for registration of R&D Activities is 30 April 2013.  Numerous clients have already registered for the new R&D Incentive, successfully transitioning from the R&D Tax Concession to the R&D Incentive.  In addition, several first time claimants are benefiting from the increased benefits of the new incentive such as the refundable tax credit. This essentially “cashes-out” the increased tax benefit as a refunded cash amount.

Guidance from AusIndustry
AusIndustry has issued guidance on eligible R&D as it relates to ICT projects.  The intent of the guidance is to provide an overview and understanding of the key legislative requirements and concepts that AusIndustry need to assess claims, including:

  • a detailed rationale for translating the new R&D definition in a practical business situation 
  • how a company draws upon its prior experience with the R&D Tax Concession 
  • linking R&D activities management with events in a two to three year business cycle 
  • how a company registers activities in an R&D project that include activities that need to be conducted overseas

What are eligible R&D Activities?
In a recent case (RACV), activities were found not to meet the eligibility criteria for R&D concessions on the grounds that the activities did not involve innovation or high levels of technical risk. Although the case applies to the old R&D Tax concession, the case examined what constitutes innovation or high levels of technical risk and some of these concepts are relevant to the new R&D Incentive.

Payroll tax update

Against a background of distressed State balance sheets, we are seeing a significant increase in State Payroll Tax audit and review activity. Such activity is being undertaken at the lowest cost to the State, with potentially the highest return.

It would appear to be common practice for the various Offices of State Revenue (OSR) to send questionnaires to larger employers asking them to undertake their own diagnostic review of their Payroll Tax compliance, and make voluntary disclosure of shortfall amounts or incorrect treatments where appropriate.