Decision impact statement

National Jet Systems Pty Ltd and Commissioner of Taxation

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Court citation:
[2011] AATA 766
2011 ATC 10-212
82 ATR 740

Venue: Administrative Appeals Tribunal
Venue Reference No: 2010/3764-3765, 1994
Judge Name: Downes J, O'Loughlin, SM
Judgment date: 31 October 2011
Appeals on foot: No.
Decision Outcome: Favourable

Impacted Advice

Relevant Rulings/Determinations:

• GSTR 2000/16
• MT 2009/1
• MT 2010/1

Subject References:
Goods and Services Tax
Refund claim
Lease
Refunds
Exercise of discretion

Précis

Outlines the ATO response to this case regarding entitlement to a refund of GST paid pursuant to a 'wet lease' of certain aircraft. The GST had been passed on by the taxpayer to the recipient of the supply.

Brief summary of facts

National Jet Systems Pty Ltd ("National Jet") provided aircraft together with operational and maintenance services by way of lease (known as a 'wet lease') to Airlink Pty Ltd, a wholly owned subsidiary of Qantas Airways Limited.. The lease was restated on 24 June 1999 and its terms amended on a number of occasions between then and 30 June 2005.

The lease expressly allowed some, but not all, of the components of the consideration payable by Airlink to be increased if GST was payable on those components. From 1 July 2000 to 30 June 2005 National Jet increased these components to reflect GST and paid the resulting GST of $48,314,320.35 to the Commissioner.

National Jet subsequently claimed that section 13 of the GST Transition Act 1999 applied so that GST was not payable at all and sought a refund of $40,284,647. The Commissioner refused to pay the refund and National Jet lodged an application for review with the Administrative Appeals Tribunal.

Issues decided by the tribunal

The issues in dispute were:

•

whether the supplies were GST-free under section 13 of the GST Transition Act;

•

whether a notification of entitlement to a refund form lodged by National Jet was valid for the purposes of s 105-55 of Schedule 1 to the TAA;

•

whether, if there was an entitlement to a refund, the Commissioner had a discretion not to allow the refund and if so whether that discretion should be exercised; and

•

whether, in respect of some of the tax periods, an extension of time to object should be allowed.

The Tribunal handed down a decision favourable to the Commissioner (other than on the section 105-55 notification issue) and held that the supplies were not GST-free under section 13 of the GST Transition Act.

The Tribunal held that the necessary enquiry is whether the consideration paid after 1 July 2000 was for supplies made after that time that were specifically identified for a consideration that can be identified in the terms of a written agreement where those terms were operative before the Royal Assent date. It is those supplies that are the subject of the relief conferred by section 13. The section does not apply to situations where a pre-Royal Assent date agreement does not identify post-Royal Assent date supplies and consideration, whatever be the explanation of the lack of connection between agreement and supply.

In this case, after the Royal Assent date the suite of goods and related services, viewed as a single supply, specifically identified in the lease, was materially different to the supply identified before the Royal Assent date, as was the consideration for it. In these circumstances, supplies made pursuant to the lease were not subject to section 13 of the GST Transition Act and were subject to GST.

The Tribunal found that there was no review opportunity within the meaning of subsection 13(5)(a), and that the requirement for a paragraph 13(5)(b) or (c) "general review, renegotiation or alteration" to be of all or nearly all of the consideration, was also applicable to a review opportunity under paragraph 13(5)(a).

The Tribunal also observed that, in the present circumstances, there would be a windfall gain if a refund were to be made. Accordingly, if there was an amount refundable without considering the discretion under section 105-65 of Schedule 1 to the Taxation Administration Act 1953 ("TAA"), the discretion ought to be exercised and no refund made. The intention of the legislation was to prevent windfall gains. The Tribunal added that a practical business approach to administration of the GST laws is not consistent with allowing windfall gains. And, to the extent that community standards and expectations have a role to play, those standards and expectations would require denial of windfall gains where the real cost of the overpaid GST has been born by the wider community.

The Tribunal agreed with the Commissioner that no extension of time should be granted to the taxpayer to object to the assessments for the periods from February 2001 to September 2004.

The Tribunal also held that National Jet had given the Commissioner a valid notice for the purposes of s105-55 of Schedule 1 to the TAA and item 16(2) of Schedule 2 of the Tax Laws Amendment (2008 Measures No 3) Act 2008 (Cth).

ATO view of Decision

Transitional Contracts

The approach of the Tribunal to the application of section 13, where there is a change in consideration not provided for by the agreement, is similar to the approach taken by the Tribunal in MTAA Superannuation Fund (R G Casey Building) Property Pty Ltd v Commissioner of Taxation [2011] AATA 769 ('MTAA'). The Full Federal Court subsequently upheld that decision [2012] FCAFC 89.

In respect of paragraph 13(5)(a), the question of whether there is a review opportunity when some but not all components of the consideration can be grossed-up for GST is not without difficulty. The Commissioner had argued that the use of the word 'general' in paragraphs 13(5)(b) and (c) was the foundation for the requirement^[1] that the review be of all or nearly all of the consideration. The word 'general' is not an express qualification to the change in consideration contemplated in paragraph 13(5)(a). We also note the subsequent decision of the Full Federal Court in MTAA, where the court placed some emphasis on the word 'general' in construing what constitutes a review opportunity under paragraph 13(5)(b).

Since the Tribunal found for the Commissioner based on the arguments concerning s 13(1), and the matter did not ultimately go on appeal to the Federal Court, there was no ability in this case to further clarify the application of paragraph 13(5)(a). Given that section 13 has now ceased to operate for some 7 years, there may not be a further occasion to consider the operation of paragraph 13(5)(a) where substantial components of the consideration can be grossed up for GST.

Rather than update GSTR 2000/16 to take account of the Tribunal's reasons for decision in this case, and the decision of the Tribunal and subsequent Full Federal Court decision in MTAA, the Commissioner proposes to withdraw the ruling.

Refund restriction provision

The Tribunal's decision supports the Commissioner's views set out in MT 2010/1 that the prevention of windfall gains is the principal criterion to be taken into account in the exercise of the discretion under section 105-65 of Schedule 1 to the TAA.

It is also noted that the Tribunal approached section 105-65 on the basis that it gives the Commissioner a discretion to decline to pay a refund.

In MT 2010/1, the Commissioner takes the view that the operation of section 105-65 to deny the requirement to pay refunds that would otherwise be payable is not discretionary and that, where the conditions in section 105-65 apply, the Commissioner has no obligation to pay a refund that would otherwise be payable under section 8AAZLF of the TAA. However, the words 'need not' indicate the Commissioner has a residual discretion to pay a refund in appropriate circumstances,

The Commissioner's approach in MT 2010/1 is consistent with the decision of the Tribunal in Luxottica Retail Australia Pty Ltd v FC of T [2010] AATA 22^[2].

As neither Tribunal decision provides any substantive analysis or reasons for preferring one approach to the other, the Commissioner does not propose to change the view set out in MT 2010/1.

Extension of time to object

In respect of the Tribunal's decision on the extension of time issue and its observation about section 105-65 of Schedule 1 to the TAA curing the prejudice in relation to credit recovery, the Commissioner accepts that this is appropriate. However, in some cases the taxpayer contends that section 105-65 does not apply, or that it would be appropriate nevertheless to refund. In such cases, the Commissioner would consider that it would be appropriate to regard any prejudice to the Commissioner in relation to input tax credits being out of time to recover as a factor weighing against the extension of time to object. The Tribunal's observations about a refund being contrary to community expectations (albeit in the context of section 105-65) might also weigh against a request.

The Commissioner notes that the time limit for objections is independent of the time limit for refunds and credits under section 105-55 of Schedule 1 to the TAA. This means that

•

where a taxpayer has lodged a notification for the purposes of section 105-55; and

•

is later assessed and lodges an objection after the period provided by section 14ZW has expired

the Commissioner must consider whether to grant a request to consider the objection out of time.

In such a case, the earlier lodgment of a section 105-55 notification before expiry of the time limit for objection would be one of the circumstances that the Commissioner would take into account in considering the request to consider the objection. See the discussion about the circumstances of the delay in paragraph 14 of PS LA 2003/7.

Tribunal's decision regarding notification of entitlement

The Commissioner accepts the conclusion of the Tribunal on this issue.

There may be some cases where a notification for the purposes of section 105-55 of Schedule 1 to the TAA provides some information about a claimed refund, but is framed in a general way. This may mean there is some doubt as to whether there is a particular refund entitlement that is being identified, or whether the notice is merely seeking to reserve the taxpayer's rights in the event it later identifies refund opportunities. Where a notification is general in nature, if and when a subsequent claim for a refund is made, the Commissioner will consider the circumstances surrounding the notification. The Commissioner will need to determine if the notification in fact sought to cover the later claimed refund, or whether instead the notification was merely speculative in terms of seeking to reserve rights in case a claim can be identified.

The Commissioner considers that, if at the time the notification is made there is no refund entitlement that has been identified, the notification cannot be valid.

This is consistent with the approach in MT 2009/1 at paragraph 14 and paragraphs 48 to 49. The Commissioner will issue an addendum to MT 2009/1 refining the explanation of the requirements of a notification in light of this decision and other recent cases.

Administrative Treatment

Implications for ATO precedential documents ( Public Rulings & Determinations etc )

The decision had minor impacts on GSTR 2000/16. As section 13 of the GST Transition Act only operates to make supplies GST-free where the supply is made before 1 July 2005, rather than updating the ruling, the Commissioner has withdrawn the ruling with effect from 15 May 2013.

An addendum to MT 2009/1 was published on 27 March 2013 to reflect the Tribunal decision in this case and other recent cases^[3].

The Commissioner does not propose to make any changes to MT 2010/1 in relation to the question of how the discretion under section 105-65 operates. It is also felt that the Tribunal's observations concerning windfall gains in any event reflect the Commissioner's approach to the operation of section 105-65.

Implications for Law Administration Practice Statements

The Tribunal decision in relation to whether the taxpayer should be allowed an extension of time to object is based on principles set out in Brown v Commissioner of Taxation [1999] FCA 563, 42 ATR 118, as applied to the facts of this case. PS LA 2003/7 sets out the Commissioner's administrative policy for dealing with extension of time requests. No change to PS LA 2003/7 is considered to be necessary as a result of this decision.

We invite you to advise us if you feel this decision has consequences we have not identified, or if a precedential decision such as a Public Ruling or an ATO ID requires reconsideration or amendment. Please forward your comments to the contact officer by the due date.

Legislative References:
A New Tax System (Goods and Services Tax Transition) Act 1999
13


A New Tax System (Goods and Services Tax ) Act 1999

Tax Laws Amendment (2008 Measures No 3) Act 2008 (Cth)
Sch 2, item 16(2)

Taxation Administration Act 1953
8AAZLF
14ZU(c)
14ZW(2)
Sch 1 ss105-5
105-10
105-55
105-65

Case References:
Brown v Commissioner of Taxation
[1999] FCA 563
42 ATR 118
99 ATC 4516

Central Equity Ltd v Commissioner of Taxation
[2011] FCA 908
2011 ATC 20-274
82 ATR 550

Commissioner of Taxation v DB Rreef Funds Management Ltd
[2006] FCAFC 89
(2006) 152 FCR 437
2006 ATC 4282
62 ATR 699

DB Rreef Funds Management Limited v Commissioner of Taxation
[2005] FCA 509
(2005) 218 ALR 144
2005 ATC 4302
59 ATR 388

Drake v Minister for Immigration and Ethnic Affairs
(1979) 2 ALD 60

Luxottica Retail Australia Pty Ltd v FC of T
[2010] AATA 22
2010 ATC 10-119
75 ATR 169

MTAA Superannuation Fund (R G Casey Building) Property Pty Ltd v Commissioner of Taxation
[2011] AATA 769
2011 ATC 10-213

MTAA Superannuation Fund (R G Casey Building) Property Pty Ltd v Commissioner of Taxation
[2012] FCAFC 89
2012 ATC 20-323

Westley Nominees Pty Ltd v Coles Supermarkets Australia Pty Ltd
[2006] FCAFC 115
(2006) 152 FCR 461