Decision impact statement

AP Group Ltd v Commissioner of Taxation

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Court Citation(s):
[2013] FCAFC 105
2013 ATC 20-417

Venue: Federal Court of Australia
Venue Reference No: NSD 1569 of 2012
Judge Name: Edmonds, Jagot & Bromberg JJ
Judgment date: 18 September 2013
Appeals on foot: No
Decision Outcome: Partly Favourable

Impacted Advice

Relevant Rulings/Determinations:

• GSTR 2006/9: supplies
• GSTR 2001/4: GST consequences of court orders and out-of-court settlements
• GSTR 2001/6: non monetary consideration
• GSTR 2012/2: financial assistance payments
• GSTD 2005/4: are 'wholesale holdback' and 'retail holdback' payments made by a motor vehicle manufacturer or importer of new motor vehicles to a dealer consideration for a supply?

Subject References:
Consideration
Discretion to refund overpaid GST
GST
Motor vehicle incentives
Nexus
Refunds
Supply
Third party adjustments
Third party consideration

Précis

Outlines the ATO's response to this case which concerns the GST treatment of various incentive payments made by motor vehicle manufacturers to a motor vehicle dealer.

Brief summary of facts

The taxpayer is a motor vehicle dealer that acquires motor vehicles from various motor vehicle manufacturers/distributors (manufacturers) through an interposed finance company, under a bailment arrangement. Immediately before the supply of the motor vehicle by the dealer to the customer, the finance company transfers title of the motor vehicle to the dealer, enabling the dealer to sell the motor vehicle to the customer.

The manufacturers made the following incentive payments to the taxpayer:

•

Toyota fleet rebates - paid when floor stock vehicles are sold at a discount price to certain classes of customers

•

Toyota run-out model support payments - paid when certain floor stock vehicles are sold and recorded in the sales system

•

Holden transit/interest protection payments - paid to cover interest fees charged by financiers to the taxpayer while the taxpayer either does not have physical possession of the vehicle or it is not yet ready for sale or display.

•

Ford retail target incentive payments - paid when certain monthly retail sales targets are reached

•

Subaru wholesale target incentive payments - paid when dealer orders a specified number of vehicles from the manufacturer.

Before the Administrative Appeals Tribunal (Tribunal), the Commissioner contended that the payments were consideration for taxable supplies made by the taxpayer to the manufacturers. Alternatively, the Commissioner argued that the fleet rebates, run-out model support and retail target incentive payments were consideration for supplies by the taxpayer to its customers.

On 2 July 2012, the Tribunal (comprising Deputy Presidents Frost and Deutsch) handed down its decision in A.P. Group Limited and Commissioner of Taxation [2012] AATA 409. The Tribunal's conclusions were summarised at [109]:

The taxpayer appealed the Tribunal's decision in relation to the fleet rebates and run-out support payments to the Full Federal Court. The Commissioner cross-appealed in respect of the retail and wholesale target incentive payments. The Commissioner did not appeal the Tribunal's findings in respect of the transit/interest protection payments.

Issues Decided by the Full Federal Court

The issues in dispute were whether the four incentive payments on appeal were consideration for taxable supplies under paragraph 9-5(a) of the A New Tax System (Goods and Services Tax Administration) Act 1999 (GST Act).

The Court unanimously upheld the Tribunal's decision, finding that the Tribunal's 'construction of s 9-5 was orthodox and did not involve error' (at [37]).

Do the payments constitute consideration for supplies made by the dealer to the manufacturer?

The Court concluded that none of the payments constituted consideration for supplies made by the dealer to the manufacturer, as none of the acts done by the taxpayer represented supplies made to the manufacturers.

At [53], Edmonds and Jagot JJ noted that the relationship between the taxpayer and each manufacturer involves 'a whole raft of obligations from one to the other' and contemplates a 'continuing dialogue' between the parties in which 'promises are routinely exchanged'. Their Honours stated that the 'so-called supplies for consideration identified by the Commissioner are nothing more than the encouragement of an overall business relationship between the manufacturer and the dealer to the mutual benefit of both', and that 'to characterise this dialogue as involving supply after supply is unrealistic and impractical'. Their Honours further observed that there was 'no basis to infer that the taxpayer would not behave in the same way for free'.

Do the payments constitute consideration for supplies made by the dealer to the customer?

The Court found that the fleet rebates and run-out model support payments were consideration for supplies made by the dealer to its customers, while the retail and wholesale target incentive payments were not consideration for any supplies made by the dealer.

Supply 'for' consideration

Edmonds and Jagot JJ stated that substituting the definitions of 'supply' and 'consideration' into paragraph 9-5(a) did not result in the omission of the word 'for': '... you make [any form of supply whatsoever] for [any consideration, within the meaning given by sections 9-15 and 9-17 in connection with the supply or acquisition].' ^[1]

Instead, their Honours considered that the word 'for' 'functions in the statutory description to identify the character of the connection which is required' and 'ensures that not every connection between the giving of consideration and the provision satisfy the first condition of making a taxable supply'.^[2]

Consistent with this view, their Honours noted the Tribunal's comments that a 'tenuous' or 'remote' connection between the supply and consideration would be insufficient and stated that the supply must be made for the consideration, even if the consideration was not given by the recipient of the supply.^[3]

Appropriate level of generality or particularity

Edmonds and Jagot JJ noted the difficulties in resolving the competing approaches submitted by the taxpayer and the Commissioner as to the correct level of focus when determining whether a payment is 'for' and 'in connection with' a supply.

Their Honours found that 'selection of the appropriate level of generality or particularity' at which to determine whether the dealer has made a supply for consideration is fact-dependent,^[4] and that all aspects of the arrangements between the dealer, the manufacturer and the customer had to be considered'.^[5]

For the fleet rebates and run-out model support payments, Edmonds and Jagot JJ found that the correct level of focus was the supply of the particular motor vehicle by the dealer which triggers the payment. For the retail and wholesale target incentive payments, it was the overall relationship between the dealer and the manufacturer.

Fleet rebates and run-out support payments

After considering the relevant provisions of each dealership agreement as set out by the Tribunal and the Tribunal's reasoning, Edmonds and Jagot JJ considered that '[t]he appropriate level for the assessment [for the fleet rebate] is the particular supply of the motor vehicle in question by the dealer and the payment which that supply triggers' (emphasis added).^[6]

In coming to this conclusion, their Honours noted that the fleet rebate was only payable by the manufacturer for the supply of a particular (non-fleet) motor vehicle to a particular (fleet) customer, and the fact that the payment was made by the manufacturer rather than the customer did not matter. Their Honours also found that whilst relevant, the customer's lack of knowledge and the internal characterisation of the transaction as a 'rebate' are not determinative.^[7]

Edmonds and Jagot JJ concluded that a fleet rebate was consideration 'for' and 'in connection with' the supply of the motor vehicle to a customer.^[8] Under the same analysis, they held that a run-out model support payments was consideration for the supply of the motor vehicle to the customer. ^[9]

Retail and wholesale target incentives

Edmonds and Jagot JJ found that the retail target incentive payments and the wholesale target incentive payments were not triggered by the supply of a particular motor vehicle, and were instead 'part of wider programs in which dealers would have a strong incentive to participate but which do not depend on the supply of any particular motor vehicle in any particular way'.^[10]

As the payments act to encourage 'conduct relating to the overall management of the business enterprise comprised in the dealership, including sound ordering practices and clearance of old stock to make way for new stock, to the presumed mutual benefit of the dealer and the manufacturer', the 'required level of focus is the overall relationship between the dealer and the manufacturer'.^[11]

In a separate judgment, Bromberg J agreed with Edmonds and Jagot JJ's conclusions, although for different reasons.

ATO view of decision

1. Determining whether there is a supply for consideration

The Commissioner's preliminary views are that the following propositions are relevant in determining whether there is a 'supply for consideration':

a.

All aspects of the arrangements between the parties must be taken into account when determining whether a particular act constitutes a supply for consideration.^[12] This would include a careful consideration of the specific terms and conditions of the arrangements.

b.

The appropriate level of generality or particularity at which to assess whether a particular act constitutes a supply for consideration is factually dependent.^[13] The critical facts include the nature of the supply said to be involved.^[14]

c.

How a party characterises the payment is not determinative of whether there has been a supply for consideration.^[15]

d.

Whether a supply is made for consideration is to be determined from the perspective of the entity said to have made it.^[16]

e.

Conduct that constitutes a supply for consideration may have a range of characteristics, purposes or objectives. The relevant question is not whether the conduct was for consideration but whether the particular supply which arose from the conduct was for consideration.^[17]

2. Determining the GST treatment of motor vehicle incentive payments

The Commissioner's preliminary views on the GST treatment of motor vehicle incentive payments not considered by the Court or Tribunal are outlined below.

Category A: Supplies to manufacturers for consideration

The Commissioner considers that there is a supply by the dealer to the manufacturer for consideration where the dealer does, or agrees to do, something specific for the manufacturer for which there is a payment.

For example, the manufacturer pays the dealer to fit air conditioning units in the manufacturer's motor vehicles. The dealer does something specific (ie fitting services) for the manufacturer, for that payment.

GST consequences

The dealer is liable for GST and the manufacturer is entitled to an input tax credit.

Category B: Third party consideration

The Commissioner considers that there is a supply by the dealer to the customer for which the payment by the manufacturer is 3rd party consideration, where the supply of the particular motor vehicle to the customer gives rise to the obligation for the manufacturer to make the payment to the dealer.^[18]

The appropriate level of analysis is the particular supply of the motor vehicle in question by the dealer and the payment which that supply triggers'.^[19]

GST consequences

In these circumstances the dealer is liable for GST. However, the manufacturer is not entitled to an input tax credit.

For some payments that are made on or after 1 July 2010, the manufacturer may be entitled to a decreasing adjustment under Division 134. In these cases, the dealer does not have a corresponding increasing adjustment in addition to the GST payable on the taxable supply made to the customer.

Category C: No supply for consideration

Where there is no supply for consideration, the dealer is not liable for GST and the manufacturer is not entitled to an input tax credit.

For example a dealer gives one of its employees a reward for achieving outstanding sales in a particular period. The reward is a fringe benefit and fringe benefits tax (FBT) is payable by the dealer. The manufacturer makes a payment to the dealer which merely reimburses the dealer for the FBT payable in relation to the reward. In these circumstances, the dealer does not do anything, or agree to do anything, specific for the manufacturer for that payment. Also, the payment is not connected to the supply of a particular motor vehicle to a customer. Therefore the dealer does not make a supply for consideration.

GST consequences

For some payments that are made on or after 1 July 2010, the dealer may have an increasing adjustment and the manufacturer may have a decreasing adjustment under Division 134.

3. Tripartite arrangements

Edmonds and Jagot JJ express the view that there is 'nothing equivalent' to the circumstances in the Department of Transport case, however there is no analysis of the relevant differences.^[20]

The Commissioner considers that whether a set of actions gives rise to supplies to more than one party is fact and circumstance dependent. The Commissioner notes the subsequent decision of Edmonds J in Professional Admin Service Centres Pty Ltd v Commissioner of Taxation [2013] FCA 1123 provides further analysis of when the one set of actions will give rise to two or more supplies.

Updated 4 April 2014: The Commissioner will maintain his existing views in GSTR 2006/9.^[21]

4. Motor vehicle holdback payments

The Commissioner will maintain his existing view in GSTD 2005/4^[22] that wholesale and retail holdbacks are not consideration for supplies.

5. Other GST Public Rulings

Updated 4 April 2014: The Commissioner does not consider that any significant amendments need to be made to the impacted GST public rulings identified above.

Administrative Treatment

Implications for motor vehicle dealers

1. Payments that are consideration for taxable supplies to customers (3rd party consideration)

GST will continue to be payable on fleet rebates, run-out model support payments and equivalent payments from other manufacturers/distributors, as these form part of the consideration for a taxable supply from the dealer to the customer.

Equivalent payments from other manufacturers/distributors mean payments that have the same characteristics as the Toyota fleet rebates or run-out model support payments that were considered by the Courts.

Other Category B payments

GST is also payable on motor vehicle incentive where the supply of the particular motor vehicle to the customer gives rise to the obligation for the manufacturer to make the payment to the dealer.

Updated 4 April 2014: The Commissioner will be publishing a draft public ruling on the GST treatment of motor vehicle incentive payments on or before 28 May 2014. In the meantime, the preliminary views outlined under 'The ATO View of the Decision' may provide interim guidance.

Consequential implications for luxury car tax (LCT)

The Court's findings that fleet rebates and run-out model support payments are consideration for a supply to the customer also means that these (GST-inclusive) payments need to be added to the consideration provided by the customer for the purchase of the motor vehicle for the purposes of calculating the "price" for LCT purposes.

This means that supplies of motor vehicles that would not have met the LCT threshold under the Commissioner's view before the AP Group decision may now have an LCT liability where the total consideration (including the incentive payment) for the motor vehicle exceeds the LCT threshold ($60,316 for the 2013-14 financial year^[23]).

For motor vehicles that were subject to LCT before the AP Group decision, the LCT liability will increase as a result of the incentive payment being added to the consideration paid by the customer.

Transitional arrangements

The Commissioner understands that there will be some delay in implementing the decision because of the need to modify systems and determine the LCT/GST consequences of the relevant payments. It was expected that by 28 February 2014 taxpayers will be in a position to implement the decision. However, following further representations, the Commissioner recognises that more time is required. Accordingly the Commissioner has revised the implementation date to 1 May 2014. That is, the Commissioner expects taxpayers will be in a position to implement the decision for contracts of sale entered into on or after 1 May 2014.

2. Payments found not to be consideration for any supplies

Dealers operating under a bailment arrangement are not liable for GST in respect of the following payments received from manufacturers/distributors:

•

retail target incentive payments which are not triggered by the supply of an identifiable motor vehicle and are equivalent to the Ford retail target incentive payment

•

wholesale target incentive payments that are equivalent to the Subaru target incentive payment

•

transit allowance or interest protection payments that are equivalent to the Holden transit allowance or interest protection payments.

Other Category C payments

There may be other circumstances not considered by the Courts, not falling within Categories A or B, which do not result in supplies for consideration.

Updated 4 April 2014: The Commissioner will be publishing a draft public ruling on the GST treatment of motor vehicle incentive payments on or before 28 May 2014. In the mean time, the preliminary views outlined under 'The ATO View of the Decision' may provide interim guidance.

3. Entitlement to GST refunds

Dealers may only claim a GST refund in respect of the payments listed under the heading '2. Payments found not to be consideration for any supplies' above, if they are entitled to a refund and the restrictions outlined below do not apply.

Section 105-65^[24] will generally apply to restrict a refund where the GST has been included in the amount of the incentive payment, unless your refund relates to a tax period which started before 1 July 2008. This is because section 105-65 was amended with effect from 1 July 2008 to ensure that the restriction on refunds applies where transactions have been treated as taxable supplies, whether or not the transaction is in fact a supply.

For tax periods which started before 1 July 2008, you are not entitled to the refund unless you have already provided a valid notification of your entitlement to the refund within the relevant time limits prescribed by section 105-55.^[25]

4. How can you claim a refund?

Dealers who have lodged objections

If you have lodged objections to your assessments, you or your representative will be contacted by the ATO to discuss the steps that need to be taken to finalise your objection, including the relevant documents and evidence of payments received from manufacturers for each tax period.

Only the motor vehicle incentive payments considered by the Tribunal and Court, including equivalent payments made by other manufacturers, are within the scope of the objection.

Dealers who have lodged valid entitlement notices but have not objected or have claims that are outside the scope of their objection

If you meet the requirements of the Correcting GST Errors Determination 2013, you can claim a refund you are entitled to in your next business activity statement. For further information on correcting GST errors, refer to the Correcting GST errors guide on www.ato.gov.au .

When you make your claim in a current business activity statement you should send an email to GSTMVPayments@ato.gov.au with the following details:

a.

the tax period in which you are claiming the refund, and

b.

a schedule listing:

i.

the tax periods in which you overpaid the GST

ii.

the amount of overpaid GST for each of those tax periods.

Updated 4 April 2014: If you have any queries about progressing your refund claim you can contact us at GSTMVPayments@ato.gov.au or call 13 28 66 and ask for Wayne Tripp on extension 33842.

5. Records and documents

If you are claiming a refund, you must have the relevant documentation and evidence to support your claims. This includes being able to identify those payments on which GST was overpaid and the tax periods in which the amounts were overpaid.

6. Third party payments - Division 134

Certain motor vehicle incentive payments made on or after 1 July 2010 which are not consideration for a supply may still give rise to increasing adjustments for dealers under Division 134 of the GST Act (third party payment adjustments).

Updated 4 April 2014: The Commissioner will be publishing a draft public ruling on the GST treatment of motor vehicle incentive payments on or before 28 May 2014, including the application of Division 134 to motor vehicle incentive payments.

Implications for motor vehicle manufacturers and distributors

1. Input tax credits

There is no entitlement to input tax credits for payments that are not consideration for any taxable supply or are consideration for a supply to a third party.^[26]

Tax periods before 1 July 2010

For tax periods before 1 July 2010, Federal Chamber of Automotive Industries members are protected by industry letters issued by the ATO, which were public rulings, in respect of input tax credits previously claimed.

Transitional arrangements relating to ongoing treatment of incentive payments

The Commissioner does not intend to take active compliance action in relation to input tax credits that have already been claimed for motor vehicle incentive payments that are now regarded as out-of-scope^[27] or non-creditable in light of this decision.

The Commissioner will continue working with motor vehicle manufacturers and distributors in determining appropriate treatment of incentive payments. This will include consideration of any transitional arrangements, having regard to the implementation of necessary system changes.

2. Third party payments - Division 134

Certain motor vehicle incentive payments made on or after 1 July 2010, which are not consideration for a supply, may give rise to decreasing adjustments for manufacturers and distributors under Division 134 of the GST Act (which is about third party payment adjustments).

Updated 4 April 2014: The Commissioner will be publishing a draft public ruling on the GST treatment of motor vehicle incentive payments on or before 28 May 2014, including the application of Division 134 to motor vehicle incentive payments.

However, the Commissioner's preliminary but considered view is that the manufacturer or distributor will have a Division 134 decreasing adjustment in relation to the types of fleet and run out payments considered by the Court. In these circumstances, the dealer will be liable for GST but not have an increasing adjustment.

In relation to fleet and run out payments that are made to the dealer's customer, the Commissioner's view is that the manufacturer or distributor will also have a Division 134 decreasing adjustment. In these circumstances, a GST registered customer may have a corresponding increasing adjustment.

Incentive payments in other industries

Updated 4 April 2014: The Commissioner notes that bailment arrangements, which involve an interposed entity, may be an important factual distinction. For example, suppliers may pay rebates to customers who reach certain levels of purchases (such as volume rebates). These rebates are typically expressed as a percentage of the purchases made in a particular period. Where there is no interposed entity, a payment of this type is generally regarded by the Commissioner as a reduction in the consideration for the relevant purchases and so is an adjustment event.^[28]

Updated 4 April 2014: Whether other types of incentive payments will be consideration for taxable supplies is dependent on the relevant facts and circumstances. Following the AP Group decision, the Commissioner is not seeking to disturb the GST treatment of incentives payments made in other industries.

For third party payments made on or after 1 July 2010, Division 134 may apply. In these circumstances, an entity (the payer) may have a decreasing adjustment if the payer makes a payment to an entity (the payee) that acquires something the payer had supplied to another entity. An entity receiving a payment (the payee) may have an increasing adjustment.

Further information

Taxpayers who require further advice about GST treatment of incentive payments in other industries should email GSTMVPayments@ato.gov.au .

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

ATO ID 2008/166: GST and motor vehicle industry incentive payments: fleet sales support - margin support - discretionary payments has been withdrawn.

The Commissioner is reviewing GST public rulings which discuss the terms 'supply' and 'supply for consideration' to determine whether any revisions are necessary.

Implications for impacted Law Administration Practice Statements

Nil.

Related Rulings/Determinations:

• GSTR 2006/9: supplies

GSTR 2006/9: supplies

Legislative References:
A New Tax System (Goods and Services Tax) Act 1999
s 9-5
s 9-10
s 9-15
s 195-1 (definition of 'consideration')
Div 134

Taxation Administration Act 1953 (CTH)
s 105-55 of Schedule 1
s 105-65 of Schedule 1

Case References:
A.P. Group Limited and Commissioner of Taxation
[2012] AATA 409
2012 ATC 10-256
83 ATR 493

Commissioner of Taxation v Qantas Airways Limited
[2012] HCA 41
2012 ATC 20-352
(2012) 83 ATR 1

Professional Admin Service Centres Pty Ltd v Commissioner of Taxation
[2013] FCA 1123
2013 ATC 20-424

Secretary to the Department of Transport (Victoria) v Commissioner of Taxation
[2009] FCA 1209
2009 ATC 20-140
(2009) 73 ATR 690