Decision impact statement
Reglon Pty Ltd v Commissioner of Taxation
Court Citation(s):
[2011] FCA 805
2011 ATC 20-267
81 ATR 599
(2011) 212 FCR 422
Venue: Federal Court of Australia
Venue Reference No: NSD 4 of 2011
Judge Name: Emmett J
Judgment date: 5 July 2011 (reasons for decision were not published until 19 July 2011)
Appeals on foot: No.
Decision Outcome: Adverse
Impacted Advice
Relevant Rulings/Determinations:
Subject References:
Goods and services tax
Taxable supply
Damages
Compensation
Conversion
Judgment
Précis
Outlines the ATO's response to this case which concerns whether a judgment for damages for conversion of leased equipment was connected with a taxable supply.
Brief summary of facts
Proceedings between Reglon and others
Reglon Pty Ltd (Reglon) entered into an agreement to hire approximately 117,000 items of scaffolding equipment to ACS Hire Pty Ltd (ACS Hire) for ACS Hire's use in the building and construction industry.
Another company connected with ACS Hire, Action Constructions Pty Ltd (Action Constructions), owned other scaffolding, the purchase price of which had been borrowed from Citadel Finance Corporation Pty Ltd (Citadel). Citadel took a fixed and floating charge on the scaffolding purchased by Action Constructions.
ACS Hire allowed the scaffolding it had hired from Reglon to be intermingled with the scaffolding of Action Constructions in such a way that it could not be separately identified or distinguished. Action Construction used Reglon's scaffolding, intermingled with its own scaffolding, in its business of hiring out scaffolding.
Subsequently Citadel appointed a receiver and manager of the assets of Action Construction and later, after the receiver's retirement as such, Citadel, as mortgagee, took possession of the assets of Action Constructions which included the comingled Reglon scaffolding.
Reglon commenced litigation against the receiver and manager, and Citadel in the New South Wales Supreme Court. The judgment was that the defendants were liable to pay damages on conversion of the scaffolding that belonged to the plaintiff.
Proceedings between Reglon and the Commissioner
Subsequent to the proceedings noted above, the Commissioner audited Reglon and concluded that Reglon had made a taxable supply, within the meaning of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999, of the scaffolding to Citadel, which it had not accounted for, leading to an understatement of GST on the relevant Business Activity Statement.
The Commissioner argued that Reglon had made a supply of the goods or title in the goods because:
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- it had instituted the proceedings against Citadel and the receiver;
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- those proceedings were to either obtain the return of the goods or an amount equivalent to what it would have received upon a sale of the goods;
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- the consequence of Reglon initiating and successfully pursuing the proceedings was that title in the scaffolding passed from Reglon to Citadel and, in that sense, Reglon caused a supply of the scaffolding to be made.
Issue decided by the Court
The Court considered (at paragraph 29 of the judgement) that under the law of conversion the correct construction is that 'payment of a judgment in conversion, where the value of the converted goods is given as damages, is taken to be a purchase , not a sale .' Further (at paragraph 32), the Court decided that:
The payment made in satisfaction of that judgment resulted in ownership of the scaffolding vesting in Citadel. That is, the transfer of ownership to Citadel, and the extinguishment of the Taxpayer's ownership by operation of law, occurred without assent and was triggered by the payment of the judgment sum by Citadel. That payment did not depend upon any action of the Taxpayer. I do not consider that, in those circumstances, the Taxpayer may be said to have made a supply .
That is, the Court found that in an action for conversion the transfer of title occurs by operation of law upon the payment of the judgment sum and requires nothing by, in this case, Reglon in the way of making a supply. As there was no supply made by Reglon, there was no taxable supply.
ATO view of Decision
The ATO accepts that an entity does not, merely by bringing a successful action for conversion, make a supply.
Administrative Treatment
None
Implications for ATO precedential documents (Public Rulings & Determinations etc)
None
Implications for Law Administration Practice Statements
None