Decision impact statement

KAP Motors Pty Ltd v Commissioner of Taxation

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Court citation:
[2008] FCA 159
2008 ATC 20-007
68 ATR 927
(2008) 246 ALR 395
(2008) 168 FCR 319

Venue: Federal Court of Australia
Venue Reference No: NSD 2070 of 2006
Judge Name: Emmett J
Judgment date: 28 February 2008
Appeals on foot:
None.

Impacted Advice

Relevant Rulings/Determinations:

• GSTD 2005/4

Impacted Practice Statements:

• PSLA 2002/12

Subject References:
GST
restriction on refunds
section 105-65 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953)
application of the section to transactions where the consideration received is not for or in respect of a supply you made.
Restitution
whether a common law action for money had and received can be defended on the basis that the claimant may be a constructive trustee of the funds for a third party
whether constructive trust relevant to the enforcement of common law action.

Précis

Outlines the Tax Office's response to this case which concerned the entitlement to a refund for GST that was overpaid because of a mistaken belief concerning the GST treatment of holdback payments that motor vehicle dealers receive from distributors.

Decision Outcome

Adverse.

Brief summary of facts

The taxpayers carried on the business of retail dealers in new motor vehicles. They entered into dealership agreements with various motor vehicle manufacturers/distributors and also entered into agreements with finance companies, commonly referred to as 'floor plan arrangements' to finance the acquisition of new motor vehicles from those motor vehicle distributors.

Under the floor plan arrangements, the taxpayers acquired possession of, and subsequently title to, motor vehicles for sale to retail customers in the following way:

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They would order a motor vehicle from a motor vehicle distributor on behalf of a finance company.

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The motor vehicle distributor would sell the motor vehicle to the finance company and would issue an invoice in relation to the sale of the motor vehicle to the finance company.

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The finance company would bail the motor vehicle to the taxpayers and the motor vehicle distributor would deliver the motor vehicle to the taxpayers for display and sale.

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They would negotiate the sale of the motor vehicle to the ultimate retail customer. Immediately prior to sale to the customer, the taxpayers would purchase the motor vehicle from the finance company. Until that time, the motor vehicle would remain the property of the finance company.

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The finance company would issue an invoice in relation to the sale of the motor vehicle to the taxpayers.

The taxpayers also had an arrangement with each motor vehicle distributor pursuant to which the distributor would, upon the sale of each new motor vehicle, pay a rebate to the taxpayers, commonly known in the industry as a holdback payment. The arrangement in relation to the payment of holdback payments did not form part of the dealership agreements between motor vehicle distributors and the taxpayers.

The holdback payment was paid directly to the taxpayers by the motor vehicle distributor and did not form part of the consideration paid by the taxpayers to the finance company. The payment was generally not referred to in the invoice issued by the distributor to the finance company, nor did it change the consideration paid by the finance company to the distributor. Finally the holdback payment did not alter the consideration paid by the taxpayers to the finance company, in respect of the purchase of the motor vehicle under the separate floor plan arrangement.

During the relevant tax periods from 1 July 2000 the taxpayers received the holdback payments from the motor vehicle distributors. From 1 July 2000 until February 2004 and April 2005 they remitted to the Commissioner GST referable to those holdback payments.

The Commissioner issued Goods and Service Tax Determination GSTD 2005/4 which stated that such holdback payments were not made for or in respect of any supply.

Subsequently, the taxpayers made a request to amend their BAS to receive a refund or credit in respect of the overpaid GST relating to those holdback payments and when the Commissioner refused to pay the refund the taxpayer made an application to the Federal Court under s 39B of the Judiciary Act 1903 seeking a writ of mandamus against the Commissioner to make the refund.

The proceeding then came before the Court by parties having agreed to proceed on a set of agreed facts with the court being asked to answer two questions, which then basically became the two issues before the court.

Issues decided by the court

1. Does s105-65 of Schedule 1 to the TAA 1953, on its proper constructions, operate to preclude the entitlement of the taxpayers to a refund of GST paid by them after 1 July 2000 to the Commissioner in respect of holdback payments received by them?

His Honour held that in its terms s105-65 is limited to circumstances where there is a supply that is not a taxable supply. It does not in its terms extend to some transaction that does not involve a supply within the meaning of the GST Act. His Honour observed that there may be circumstances in which a taxpayer who obtains a refund from the Commissioner will derive a windfall gain, if the provision is construed literally. However, that is not a reason for construing the words of the provision as meaning something that they do not say because the explanatory memorandum says that the purpose of the provision is to preclude a windfall in connection with a supply.

Justice Emmett refused to give the section an expansive construction on the basis that there is no justification present in the case for the court to depart from the defined meaning given to a term, which in this case is the word 'supply' in s105-65.

2. Is the entitlement of the taxpayers to a refund of GST paid by them after 1 July 2000 in respect of holdback payments precluded by the general law in the absence of their refunding or undertaking to the Court to refund a corresponding amount to the persons from whom they received the holdback payments (including the GST component) in respect of which GST was paid?

His Honour took the view that the existence of a constructive trust could not be raised by the Commissioner as a defence to a common law action for money had and received. His Honour said that such an action is not defeated simply because the claimant has recouped the outgoings from others and that it was difficult to understand why, as between the taxpayers on the one hand and the Commissioner on the other hand, the failure to pass on refunded GST to the relevant distributors should constitute conduct that would disentitle the taxpayers from recovering from the Commissioner moneys that should never have been paid to the Commissioner. In that regard, his Honour observed that the concept of impoverishment as a co-relative of enrichment is foreign to Australian law. Even if there was any equity in favour of the distributors attaching to the fruits of any judgment that the taxpayers might recover against the Commissioner, that circumstance was irrelevant to this proceeding.

Tax Office view of Decision

The Commissioner contended that given the history of similar provisions in the previous sales tax regime and in the context in which the section appears in the Act, s105-65(1) of Schedule 1 to the TAA should be given a purposive construction such that the word 'supply' included a purported supply or a putative supply and that it referred non-technically to any transaction ("something which is not a supply") that was incorrectly treated as a taxable supply. Such an interpretation, it was argued, would give effect to Parliament's intention to ensure that business taxpayer's who incorrectly charged GST to their customers did not receive a windfall gain.

The Commissioner accepts his Honour's construction that section 105-65 of Schedule 1 to the TAA does not apply where it is ultimately found that there is no supply at all. The interpretation is open on the plain literal meaning of the words.

The Commissioner further contended that the claim by the taxpayers for a refund of overpaid GST could be resisted because any such refund would be impressed with a constructive trust in favour of the distributors who had made the holdback payments to which the refund related.

While his Honour agreed that the taxpayers may have become a constructive trustee of the amount received from the distributors, his Honour took the view that the existence of a constructive trust could not be raised by the Commissioner as a defence to a common law action for money had and received.

The Commissioner accepts his Honour's view on this issue.

The Commissioner is not appealing the Court's decision

Administrative Treatment

If you believe you have overpaid GST in relation to a Holdback payment that falls within GSTD 2005/4 you may seek to claim a refund of that overpaid GST. (see 'How to claim a refund,'). GSTD 2005/4 refers only to retail and wholesale holdback payments and does not include other incentive payments that may be made by the manufacturers/distributors to dealers.

For example: payments such as dealer development reserve and floor plan allowance are not, based on the Commissioners current understanding of those payments, considered to be part of the holdback payments contemplated by GSTD 2005/4 and therefore should not be included in your claim for refunds. If you are unsure whether a particular payment that you have received falls within the ruling then you should seek clarification from the ATO by requesting a private ruling, in the manner outlined in the 'other claims' section below.

In principle however, the decision in KAP Motors is not restricted to Holdback payments. If you believe you have overpaid GST in relation to a transaction where it is ultimately found that there was no supply at all, then you may seek to claim a refund for that overpayment by following the steps in the 'other claims' section below. (see 'How to claim a refund,')

Notifying the Commissioner of your entitlement and the four year rule

Section 105-55 of Schedule 1 to the TAA provides that you are not entitled to a refund or credit unless you notify the Commissioner that you are entitled to the refund or credit within four years after the end of the tax period.

To be eligible to claim a refund you must notify the Commissioner in an activity statement or in some other written form. (also see "how to claim a refund').

The four year period ends four years after the end of the tax period for which a refund is payable or to which a credit is attributable. For example if you provide a valid notification to the Commissioner on 5 June 2008 then tax periods ending 30 June 2004 and later are within the four years and tax periods ending 31 May 2004 and earlier are outside the four years.

Where the net amount for a tax period is positive (i.e. the GST payable exceeds the input tax credits) you may be able to claim refunds of overpaid GST up to this net amount for tax periods outside the relevant four year period. However you cannot claim refunds for periods outside the relevant four year time period where you have a negative net amount (i.e. your input tax credits exceed your GST payable) and you were entitled to a refund from the Commissioner in that particular tax period or the claim will cause your net amount for that tax period to become negative unless you have previously notified the Commissioner of your entitlement to that refund within the relevant four year period.

Example 1 ;

For the tax period ending 31 July 2000 (ie outside the relevant four year period)

GST	100,000
less ITC	50,000
Net amount	50,000 (you paid to the Commissioner)

You may make a claim for a refund of overpaid GST that arises because there was no supply at all however only to the extent of an amount equal to what you paid to the Commissioner for this tax period.

Example 2

For the tax period ending 31 July 2000 (ie outside the relevant four year period)

GST	100,000
less ITC	150,000
Net amount	(50,000) (the Commissioner paid a refund to you)

In this case you may not make a claim for a refund of overpaid GST that arises because there was no supply at all unless you have notified the Commissioner of your claim no later than 31July 2004.

Example 3

For the tax period ending 31 July 2000 (ie outside the relevant four year period)

GST	100,000
less ITC	50,000
Net amount	50,000 (you paid to the Commissioner)

After working out the holdback payments received for the tax period ending 31 July 2000 the amount of overpaid GST is $70,000. In this case for this tax period you are only entitled to a refund of $50,000 unless you have notified the Commissioner of your entitlement to the $70,000 claim by no later than 31 July 2004.

For the purposes of working out your net amount you must add any Luxury Car Tax and Wine Equalisation Tax debits or credits to your GST net amount (GST paid less ITC's), but you should exclude amounts relating to Fringe Benefits Tax or Pay As You Go that may also be reported on the same statements.

Further, in working out whether your input tax credits exceed your GST any wholesale sales tax credits permitted during the transition period at the commencement of the GST under section 16 of the A New Tax System (Goods and Services Tax Transition) Act 1999 are to treated as if they were an input tax credit.

Valid notifications

For a notification to be valid it must meet certain minimum requirements and cannot be a broad ambit claim. The Commissioner has issued a fact sheet entitled 'Time limits on GST refunds' indicating how taxpayer's may notify the Commissioner of their entitlement to a refund (refer to link below)

http://atogovau/print.asp?doc=/content/47026.htm

Income Tax

In purported reliance upon section 17-5 of the Income Tax Assessment Act 1997, a taxpayer may have incorrectly excluded from their assessable income a part of a holdback receipt in the mistaken belief that it related to GST payable on a taxable supply. However, any such part of a holdback receipt is assessable income of the recipient in the income year in which the holdback receipt was derived. Therefore, subject to the relevant time limits imposed by section 170 of the Income Tax Assessment Act 1936, a taxpayer should amend their relevant prior year income tax returns to include the entirety of their holdback receipts as assessable income in each income year in which the receipts were originally derived. There are no additional income tax consequences arising from the refund by the Commissioner to the taxpayer of GST incorrectly paid in relation to a holdback receipt.

Administrative Penalties and Interest Charges - Income Tax

In respect of amendments made to your income tax returns arising from the refund of overpaid GST associated with a holdback receipt:

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you will not be liable to an administrative penalty under Division 284 of Schedule 1 of the Taxation Administration Act 1953 and

•

on the basis that you request an amendment to your relevant income tax returns by the 13/02/2009 any interest charges related to the shortfall will be fully remitted in line with the Commissioner's guidelines contained in paragraphs 113 to 115 of PS LA 2006/8.

If you have any questions in respect the income tax amendment process or penalties you may contact:

Taxpayers who have any concerns about being able to meet any tax bill arising from the amendments can call 13 11 42 to discuss the possibility of entering into a payment arrangement.

Effect on Business Customer's input tax credits

It should be noted that once you have claimed your refund of overpaid GST your business customers are no longer entitled, unless they hold a public or private ruling which protects their entitlement, to any input tax credit they may have claimed as a result of the payment they made to you.

The Commissioner may take the appropriate action to identify and notify customers that are no longer entitled to input tax credits as a result of the refund of overpaid GST made to their supplier. As such, customer's who do not have the protection of a public or private ruling may consider making a voluntary disclosure reducing their input tax credit claim in relation to these types of transactions.

Proposed Legislative amendments

On 6 May 2008 the Treasurer issued a press release announcing that the Government proposed to introduce amendments to overcome anomalies that were highlighted by the decision that relate to the scope of the restrictions on refunds and the four-year time limit on the payment and refund of indirect taxes. Refer to the Treasurer's Press Release No.30 entitled "Indirect Tax: Refunds and Amendment time limits'

The press release states

The amendments are to restrict refunds on overpayments of GST for tax periods starting on or after 1 July 2008 and address the anomaly for the four-year time limits for GST, wine equalisation tax, luxury car tax and fuel tax credits notified on or after 1 July 2008.

The amendments were introduced into Parliament on 29 May 2008.

Assuming that the amendments are passed into law, valid notifications for a refund received on or after 1 July 2008 will have the proposed new four year rule applied to the refund sought.

If the amendments are passed into law, you will not be able to claim any refund of overpaid GST caused by the fact that there was no supply at all for periods outside the relevant four year period unless you have provided a valid notice notifying the Commissioner of your entitlement by no later than 30 June 2008. Notifying your entitlement in your 30 June 2008 activity statement due to be lodged on 21 July or 28 July 2008 will not qualify as a notification of your entitlement prior to 1 July 2008.

In other words, to have the law as in force prior to 1 July 2008 apply to your circumstances a separate notification of your entitlement will be required by no later than 30 June 2008 .

If notification of your entitlement to a refund is received on or after 1 July 2008 and the amendments pass into law then the new law restricting your claims to four years from the end of the tax period which the notification is received will apply to your circumstances.

Notification may be made in your May Activity Statement, due for lodgement on 21 June 2008, provided it is lodged no later 30 June 2008 or by lodging a separate notification by that date which complies with the fact sheet 'Time limits on refunds' which should be mailed to:

Australian Taxation Office

GPO Box 9935

In Your Capital City

If your valid notification is received before 30 June 2008 then the law as currently enacted will apply to you and you may still claim refunds for periods outside the four year in accordance with the various rules and limitations outlined above. The actual claims for the overpaid refunds in relation to holdback payments received by motor vehicle dealers only, may still be claimed in the May or June activity statement in accordance with the instructions outlined below.

How to claim a refund

GSTD 2005/4 Holdback Payments

The Commissioner has exercised his power of general administration to allow motor vehicle dealers, (this includes motor cycle dealers), to claim their refund of overpaid GST in respect of holdback payments in the current activity statements for the tax periods up to and including 30 June 2008. The discretion does not allow for partial claims in one activity statement and a further claim in another activity statement. Taxpayers must include their entire refund of overpaid GST in respect to their holdback claim in the one activity statement in a tax period up to and including 30 June 2008.

Taxpayers who do not comply with this requirement will be required to lodge revised activity statements for each particular tax period(s)

This option is only available to motor vehicle dealers; however motor vehicle dealers can otherwise choose to claim their refunds by revising the particular activity statement(s) to which the holdback payments relate.

For motor vehicle dealers who lodge electronically, they should amend and submit the relevant activity statements electronically.

For motor vehicle dealers who lodge via paper, they should mail their amended activity statements to:

Australian Taxation Office

Locked Bag 1936

ALBURY NSW 1936

Other Claims

The exercise of the Commissioner's discretion to allow refunds being claimed in the current BAS up to and including 30 June 2008 is limited solely to motor vehicle dealers that have paid GST on motor vehicle holdback amounts. If other entities believe they can apply the KAP Motors decision to their circumstances they should first seek advice from the ATO by requesting a private ruling. Requests should be mailed to .

Australian Taxation Office

GPO Box 9935

In Your Capital City

Further any procedural questions on how to make a claim in the BAS or in relation to motor vehicle holdback notifications should also be addressed to Michael Chamberlin.

Attention Michael Chamberlin

Australian Taxation Office

GPO Box 9990

Melbourne VIC 3000

Or email michael.chamberlin@ato.gov.au;

Or phone 03 9275 4016

Review of refund claims

We have set up a team to review motor vehicle holdback GST refund claims. The claims may be subject to an audit or inquiry. It is highly recommended that prior to lodging a claim that you ensure you can substantiate your claim by providing the following documentation if requested:

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confirmation that the claim relates to holdbacks;

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copies of recipient created tax invoices;

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copies or extracts from general ledger accounts;

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copies of relevant agreements;

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schedule of each month's claims;

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other source documentation as required.

Implications on current Public Rulings & Determinations

The Tax Office has not currently identified any implications for current public rulings or determinations.

Implications on Law Administration Practice Statements

Law Administration Practice Statement PSLA 2002/12 is under review. The Tax Office has not currently identified any implications for other current practice statements.

Legislative References:
Taxation Administration Act 1953 (Cth)
Schedule 1, 105-65
Schedule 1, Division 284

A New Tax System (Goods and Services Tax) Act 1999 (Cth)
9-5
9-10
11-5

Income Tax Assessment Act 1997
17-5

Income Tax Assessment Act 1936
170

Case References:
CIC Insurance Ltd v Bankstown Football Club Ltd
[1997] HCA 2
(1997) 187 CLR 384
(1997) 141 ALR 618

Commissioner of State Revenue (Vic) v Royal Insurance Australia Ltd
[1994] HCA 61
(1994) 182 CLR 51
(1994) 94 ATC 4960
29 ATR 173

Cooper Brookes (Wollongong) Pty Ltd v Federal Commissioner of Taxation
[1981] HCA 26
(1981) 147 CLR 297
(1981) 81 ATC 4292
11 ATR 949

Hospital Products Ltd v United States Surgical Corporation
[1984] HCA 64
(1984) 156 CLR 41
(1984) 55 ALR 417

Roxborough v Rothmans of Pall Mall Australia Ltd
[2001] HCA 68
(2001) 208 CLR 516
(2001) 48 ATR 442

R v PLV
[2001] NSWCCA 282
(2001) 51 NSWLR 736