Decision impact statement
Naidoo v Commissioner of Taxation
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 AATA 443
2013 ATC 10-323
(2013) 93 ATR 437
Venue: Administrative Appeals Tribunal
Venue Reference No: 2012/0101, 0111
Judge Name: SM Lazanas
Judgment date: 28 June 2013
Appeals on foot: No
Decision Outcome: Partly Favourable
Impacted AdviceRelevant Rulings/Determinations:
Input tax credits
|The ATO has reviewed the impact of this decision including precedential documents and Law Administration Practice Statements|
Outlines the ATO's response to this case which concerns whether the taxpayer was carrying on an enterprise and entitled to input tax credits, and makes comments about the Commissioner's approach in raising assessments.
Brief summary of facts
The taxpayer registered for GST as a partnership on 1 November 2000. Its partners were Mr R Naidoo and Mrs E Naidoo. The partnership owned and operated hotels and motels, including the Alpha Hotel in Alpha, Queensland until selling those assets in early 2006.
On 31 January 2006, Kesons Pty Ltd ("Kesons") purchased an interest in the Alpha Hotel. Mr and Mrs Naidoo were appointed directors of Kesons on 1 June 2007 and 29 June 2009 respectively. In 2007 Mr and Mrs Naidoo acquired 100% of the shares in Kesons.
The taxpayer asserted that after the Naidoo Partnership sold the hotels in January 2006, it provided management and support services for the hospitality industry and occasionally pest control services. The key client of the Naidoo Partnership during the relevant period was Kesons.
In evidence before the Tribunal, Mr Naidoo explained that he worked as an employee of Kesons managing the hotel, and in this capacity he worked in the mornings from 7 am to 11 am and again in the evenings from 5 pm to about 10 or 11 pm. In the hours between about 11 am and 5 pm, he worked as a partner in the Naidoo Partnership providing the contracted services (including electrical, plumbing, carpentry, maintenance and pest control) to Kesons.
The Commissioner found that the partnership was not carrying on an enterprise and cancelled its GST registration. In making assessments for each quarterly tax period beginning 1 April 2007 and ending 31 March 2011, the Commissioner disallowed the input tax credits claimed by the taxpayer in each tax period, but required the taxpayer to pay amounts on account of GST that the taxpayer had collected. This resulted in assessments of positive net amounts despite the taxpayer not being entitled to be registered for GST.
The Commissioner also determined that the behaviour of the partnership involved recklessness and imposed penalties of 50% of the shortfall amounts.
Issues decided by the court
Was the Naidoo partnership carrying on an enterprise?
The Tribunal found that the Naidoo Partnership was not carrying on an enterprise for the purposes of the GST Act in the relevant period as the activities engaged in by Mr Naidoo were not done by him in his capacity as a partner of the Naidoo Partnership or otherwise on behalf of the Partnership. The Tribunal found that Mr Naidoo provided these services in his capacity as a director and employee of Kesons. The Tribunal also found that the Naidoo Partnership did not undertake an activity or series of activities in the form of a business, in the relevant period.
Was the Commissioner correct in cancelling the GST registration of the Naidoo partnership?
The Tribunal found that, as the Naidoo Partnership was not carrying on an enterprise in the relevant period, the Commissioner was correct in cancelling its GST registration
Was the Naidoo partnership entitled to claim input tax credits?
The Tribunal determined that, as the Naidoo Partnership was not carrying on an enterprise at any stage during the relevant period, it did not have a creditable purpose in making the acquisitions and, therefore, did not make creditable acquisitions in the relevant period. Accordingly, the Tribunal held that the Naidoo Partnership was not entitled to claim input tax credits.
Was the Commissioner correct in assessing the net amount for each relevant tax period by reference to section 105-65?
The Commissioner argued that section 105-65 of Schedule 1 to the TAA is a necessary step in finally determining a taxpayer's liability in respect of GST and that it is, therefore, properly to be taken into account in an assessment of the taxpayer's net amount for each of the relevant tax periods. It is on that basis that the Commissioner assessed the Naidoo Partnership to positive net amounts for each of the relevant tax periods.
The Tribunal found that the GST Act expressly provides for the working out of the net amount, a defined term, in a precise manner using clear and unambiguous language in subsection 17-5(1) of the GST Act. There are adjustments and special rules which affect the net amount, including those set out in subsection 17-5(2) and those listed in section 17-99, as well as in other Acts, such as the A New Tax System (Wine Equalisation Tax) Act 1999, but their implications for the calculation of the net amount are expressly indicated.
The Tribunal further found (at paragraph 92) that "The net amount in subsection 17-5(1) is worked out using the formula "GST - input tax credits" where, relevantly, GST is in turn defined as "the sum of all of the GST for which you are liable on the *taxable supplies that are attributable to the tax period". It does not factor into the net amount calculation, amounts of overpaid GST (that is, GST not on taxable supplies)".
The Tribunal concluded that, contrary to the Commissioner's approach, section 105-65 of Schedule 1 to the TAA is not a provision which allows the Commissioner to alter the net amount calculated under subsection 17-5(1) of the GST Act. The Tribunal found that section 105-65 cannot be taken into account in the determination of the net amount for a tax period, preferring the view that section 105-65 operates after the net amount for a tax period is calculated under the GST Act.
The Tribunal further noted that, if an entity does not carry on an enterprise, then it cannot make "taxable supplies" nor "creditable acquisitions" even though it may still be registered for GST and have tax periods applying to it. Its GST liability must be zero and its ITC entitlement must also be zero. Accordingly, the Tribunal concluded that the net amount of the Naidoo Partnership for each of the tax periods from 1 April 2007 to 31 March 2011 was zero.
Having concluded that section 105-65 does not alter the determination of a taxpayer's net amount under the GST Act, and noting that section 105-65 does not contain any express provision allowing a taxpayer to object, the Tribunal found that it does not have jurisdiction to review the Commissioner's decision under section 105-65.
The Tribunal noted that the taxpayer's review rights are limited to judicial review in proceedings brought in the Federal Court under section 39B of the Judiciary Act 1903 or the Administrative Decisions (Judicial Review) Act 1977.
Overpaid GST - are the conditions set out in subsection 105-65(1) satisfied?
The Tribunal did not accept the Commissioner's argument that the Naidoo Partnership "overpaid" GST in all of the relevant tax periods. The Tribunal took the view that the Naidoo Partnership could not have overpaid GST in circumstances where the GST liability was entirely offset by a claim for input tax credits that was also incorrectly reported. In those periods, where the GST liability was entirely offset and the partnership reported a negative net amount, the taxpayer did not receive a lesser amount of input tax credits than it would otherwise have been entitled to (as it was not entitled to any input tax credits), nor did it overpay GST in respect of any supply.
The Tribunal decided that the partnership only overpaid GST in three tax periods in which it reported positive net amounts, and then only to the extent that it actually paid more GST than it was liable to pay or received a lesser amount of input tax credits than it was otherwise entitled to receive. As the partnership was not entitled to any input tax credits and only paid $7, $407 and $100 in GST in June 2009, September 2010 and March 2011 respectively, these were the only amounts 'overpaid' for the purposes of section 105-65. The Tribunal noted that, if it had jurisdiction, it would have decided to refuse to refund only those positive net amounts, totalling $514.
The Tribunal however did note that its findings in this regard were not based on a conclusion that section 105-65 applies only to positive net amounts. The Tribunal accepted the Commissioner's view that section 105-65 can apply to overpaid GST on individual supplies and, therefore, can apply in circumstances where a taxpayer reports a negative net amount for a tax period.
However, the Tribunal found that an amount of GST must have been "overpaid" in order for section 105-65 to apply. In that respect, the present case was to be distinguished from a case where a taxpayer has a negative net amount that involved the correct reporting of input tax credits but incorrect GST liability. In that case, the taxpayer would have overpaid GST because the refunds it received based on the correct input tax credits would have been less than the taxpayer would have otherwise been entitled to receive. However, a reduction in the input tax credits to which a taxpayer was never entitled (such as in the present case because it was not carrying on an enterprise in the relevant period) is not sufficient to constitute an overpayment.
The Tribunal noted that the Commissioner formed the view that the Naidoo Partnership was liable to pay penalties at the rate of 50% on the basis that there had been recklessness as to the operation of the tax laws. Having regard to the facts of the case, the Tribunal was not satisfied that the taxpayer had discharged the onus of showing that the penalties imposed at that rate were excessive. Further, the Tribunal was not satisfied that the penalties imposed should be remitted to any extent.
However, the Tribunal ruled that the provisions of the TAA require the 50% penalties to be calculated in respect of the shortfall amount and, in this case, the shortfall is comprised of the amounts that were overpaid by the Commissioner to the Naidoo Partnership as GST refunds for the relevant tax periods. It followed that the total penalties were $8,438 (50% of $16,876) not $17,686.50 (50% of $35,373), as the Commissioner assessed.
ATO view of Decision
Other than in respect of the s 105-65 issue, the decision was consistent with the Commissioner's submissions.
The Commissioner has not appealed the Tribunal's decision that it does not have jurisdiction in respect of s 105-65. The Commissioner will adopt the Tribunal's view on this issue.
The effect of the decision is that section 105-65 does not alter the determination of a taxpayer's net amount under the GST Act, and the Tribunal does not have jurisdiction to review the Commissioner's decision under section 105-65. Where the taxpayer seeks a refund of overpaid GST but the Commissioner refuses to exercise his discretion under section 105-65 to pay a refund, taxpayers will not be able to seek review of this decision before the Tribunal. The taxpayer's review rights are limited to judicial review.
The Commissioner also accepts that section 105-65 does not apply to the extent that an additional amount of GST is included in the net amount reported by a taxpayer, but the net amount itself is not overpaid. For example, where the additional GST is offset in the net amount calculation by overclaimed input tax credits or other errors. In cases where a taxpayer is found not to have been carrying on an enterprise (so that its correct net amount for a tax period is zero), section 105-65 may apply to restrict a refund of any overpaid amount of GST, but only to the extent that the taxpayer has actually overpaid a positive net amount in a tax period.
Proposed legislative amendments
On 26 June 2013, a Bill was introduced into the House of Representatives, which if enacted would have repealed section 105-65 and replaced it with a new Division in the GST Act dealing with refunds of overpaid amounts of GST.
However, the Bill has now lapsed.
Section 105-65 decisions and review rights
Where a taxpayer is found to have overpaid GST in circumstances where section 105-65 applies, the taxpayer's assessment of net amount for the relevant tax period will be amended to reflect the correct net amount for the tax period. However, unless the Commissioner exercises his discretion to pay a refund under section 105-65, an adjustment will be made to the taxpayer's account to reflect the amount that is not being refunded because of the operation of section 105-65.
Where the Commissioner makes a decision refusing to exercise his discretion under section 105-65 to pay a refund, he will advise taxpayers of the decision and that they have a right to seek judicial review.
Taxpayers that have overpaid GST in circumstances where section 105-65 applies cannot self-assess the exercise of the discretion and would need to make a request, in writing, to the Commissioner seeking the exercise of that discretion. The request can be lodged via the GSTmail@ato.gov.au mailbox. If you have an Indirect Tax Client Relationship Manager, you may wish to let them know that you have lodged that request.
Where taxpayers self assess on a presumption that the Commissioner will exercise the discretion in their favour and the ATO processes the refund without regard to section 105-65, the Commissioner may recover the refund as an "administrative overpayment" pursuant to section 8AAZN of the TAA.
Notwithstanding that a decision by the Commissioner to exercise or refuse to exercise the discretion under section 105-65 cannot be reviewed in Part IVC proceedings concerning an assessment, the Commissioner will on request conduct an informal review of decisions involving the exercise of the Commissioner's discretion under section 105-65. However, taxpayers should be mindful of any time limits for commencing judicial review proceedings in respect of the Commissioner's original decision.
Application of section 105-65 to "no enterprise" cases
For those cases where a taxpayer is found to have not been carrying on an enterprise, the Commissioner will (subject to time limits) amend the assessment of their net amount for each tax period to zero. He will recover any refund of a negative net amount and, where appropriate, impose a shortfall penalty based on the amount of the refund. For those tax periods where the taxpayer returned a positive net amount, section 105-65 may apply to restrict a refund to the extent that the taxpayer has actually overpaid a positive net amount for a tax period.
Amounts erroneously claimed by the Commissioner in reliance of s 105-65
The Commissioner's previous view about the application of section 105-65 may have resulted in the Commissioner having recovered an excess amount in certain cases where he determined that the taxpayer was not carrying on an enterprise. There are cases where the taxpayer incorrectly returned GST as payable and incorrectly claimed input tax credits:
- In cases where the taxpayer reported a negative net amount, the Commissioner may have subsequently assessed the taxpayer for a positive net amount on the basis that the input tax credits should be disallowed but the GST should not be refunded because of section 105-65. However, on the basis of the decision in this case, the Commissioner would only be entitled to recover the overpaid refund, as the taxpayer's net amount for the tax period should be zero.
- In cases where the taxpayer reported a positive net amount, the Commissioner may have assessed the taxpayer to a greater positive net amount, by denying input tax credits claimed, but not offsetting these credits by GST overpaid. However, on the basis of the decision in this case, the Commissioner should not have used section 105-65 to recover an additional amount. Rather, section 105-65 should only have restricted any refund to which the taxpayer may otherwise have been entitled.
Taxpayers who think that they overpaid amounts to the Commissioner because of these sorts of circumstances may seek a refund of amounts incorrectly recovered by the Commissioner. The request for a refund can be lodged via the GSTmail@ato.gov.au mailbox.
Implications for ATO precedential documents (Public Rulings & Determinations etc)
Following the decision of the Administrative Appeals Tribunal, the Commissioner has revised the views expressed in MT 2010/1 to reflect the Tribunal's conclusion that section 105-65 is not taken into account in determining a taxpayer's net amount and the circumstances where section 105-65 may apply to restrict a refund of an overpaid amount of GST.
Revised MT 2010/1 was published on 26 February 2014.
Implications on Law Administration Practice Statements
|Date of amendment||Part||Comment|
|5 September 2014||Administrative treatment||Updated to advise of a revision to MT 2010/1.|
A New Tax System (Goods and Services Tax) Act 1999
Taxation Administration Act 1953
s 105-5 of Schedule 1
s 105-40 of Schedule 1
s 105-65 of Schedule 1
Administrative Appeals Tribunal Act 1975
Judiciary Act 1903
Administrative Decisions (Judicial Review) Act 1977
BRK (Bris) Pty Ltd v Commissioner of Taxation
 FCA 164
2001 ATC 4111
(2001) 46 ATR 347
Commissioner of Taxation v Administrative Appeals Tribunal
(2011) 191 FCR 400
 FCAFC 37
2011 ATC 20-248
(2011) 82 ATR 663
Commissioner of Taxation v Multiflex Pty Ltd
(2011) 197 FCR 580
 FCAFC 142
2011 ATC 20-292
(2011) 82 ATR 153
Deputy Commissioner of Taxation v PM Developments Pty Ltd
(2008) 173 FCR 247
 FCA 1886
(2008) 70 ATR 741
2008 ATC 20-078
Hart v Federal Commissioner of Taxation
(2003) 131 FCR 203
 FCAFC 105
2003 ATC 4665
(2003) 53 ATR 371
International All Sports Ltd & Anor v Commissioner of Taxation
 FCA 824
(2011) 81 ATR 607
2011 ATC 20-268
McAndrew v Federal Commissioner of Taxation
 HCA 62
(1956) 98 CLR 263
Re Australian Leisure Marine Pty Ltd and Commissioner of Taxation
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(2010) 76 ATR 390
2010 ATC 10-148
Re Cyonara Snowfox Pty Ltd and Commissioner of Taxation
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2011 ATC 10-177
(2011) 80 ATR 225
Re Luxottica Retail Australia Pty Ltd and Commissioner of Taxation
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(2010) 75 ATR 169
2010 ATC 10-119
Re MTAA Superannuation Fund (R G Casey Building) Property Pty Ltd and Commissioner of Taxation
 AATA 769
2011 ATC 10-213
(2011) 84 ATR 334
Re National Jet Systems Pty Ltd and Commissioner of Taxation
 AATA 766
(2011) 82 ATR 740
2011 ATC 10-212
Re The Private Tutor and Commissioner of Taxation
 AATA 136
2013 ATC 1-052
Re Wynnum Holdings No 1 Pty Ltd and Commissioner of Taxation
 AATA 296
2011 ATC 10-180
(2011) 83 ATR 444
In circumstances that would otherwise fall within the ambit of section 105-65(1)(a) and section 105-65(1)(b)
Or the net amount that the Commissioner is required to refund to the taxpayer is not reduced