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:

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

Exclamation The ATO is reviewing the impact of this decision including precedential documents and Law Administration Practice Statements. This Interim Decision Impact Statement will be followed by a Final Decision Impact Statement.

Précis

Outlines the ATO's interim 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 v Commissioner of Taxation [2012] AATA 409. The Tribunal's conclusions were summarised at [109]:

Commissioner's first argument -Consideration for a supply to the manufacturer? Commissioner's second argument - Consideration for a supply to the customer?
Fleet rebates No Yes
Run-out model support payments No Yes
Transit/interest protection payments No Argument not relied on
Retail target incentive payments No No
Wholesale target incentive payments No Argument not relied on

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 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

The Commissioner is giving further consideration to what impact the decision has on his existing public views on 'supply' and 'consideration'. The Commissioner's preliminary views are that:

The Commissioner's existing views on nexus to the effect that there must be a 'sufficient' connection are not inconsistent with the Court's observations on the term 'for' in the phrase 'supply for consideration'.
Caution is required when determining whether the one set of actions gives rise to more than one supply, but that does not necessarily require a significant change to GSTR 2006/9.

Other motor vehicle incentive payments

AP Group was only about certain types of motor vehicle incentive payments. The Commissioner is giving further consideration to how the decision applies to other motor vehicle incentive payments.

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.[12]

The Commissioner considers that whether a set of actions gives rise to supplies to more than one party is fact and circumstance dependant. 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.

Motor vehicle holdback payments

Wholesale holdback payments

The Commissioner considers that the AP Group decision supports the view in GSTD 2005/4 that wholesale motor vehicle holdback payments are not consideration for supplies.

Retail holdback payments

Following the AP Group decision, there may be doubt as to whether retail holdback payments should continue to be treated as 'out of scope', which is the view in GSTD 2005/4, or whether they are sufficiently 'for' the supply of a vehicle by a dealer to its customer.

On balance, the Commissioner considers that while the supply of the vehicle is the 'trigger' for payment of retail holdbacks, they are not as extrinsically related to the supply of vehicles as the fleet rebate and run-out support payments considered by the Full Federal Court. Even though triggered by supply of the vehicle, the Commissioner considers that such payments are essentially about maintaining the dealer's profit margins. Accordingly, the Commissioner will maintain his existing view.

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.

Payments similar to fleet rebate and run-out model support

The same treatment will also apply to other payments not considered by the Court which are sufficiently similar to fleet rebates and run-out model support payments.

Each payment is subject to the specific terms and conditions of the relevant dealership agreements and other documentation which may impact on the GST treatment. The Commissioner will provide further guidance on these payments as soon as possible.

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" of the supply made by dealers to their customers.

As a result, the LCT liability for a motor vehicle that is above the LCT threshold will increase as the price on which the LCT is calculated is increased by the amount of the incentive payments (as further consideration for the supply of the motor vehicle).

Other supplies of motor vehicles that would not have met the LCT threshold under the Commissioner's view before AP Group decision, may now give rise to a 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[13]).

What you need to do

Dealers are expected to start calculating and remitting LCT on the basis that the 'price' includes the fleet rebates and run-out model support incentive payments.

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:

retail target incentive payments which are not triggered by the supply of an identifiable motor vehicle
wholesale target incentive payments
transit allowance or interest protection payments

Payments similar to transit allowances and target incentives

The same treatment will also apply to other payments not considered by the Court which are sufficiently similar to the payments listed above.

Each payment is subject to the specific terms and conditions of the relevant dealership agreements and other documentation which may impact on the GST treatment. The Commissioner will provide further guidance on these payments as soon as possible.

GST refunds

Section 105-65[14] 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.

Where section 105-65 does not apply to restrict a refund, you will not be 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.[15]

How can you claim a refund?

Dealers who have lodged objections

If you have lodged objections to 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 evidence of payment received from manufacturers.

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

Dealers who have not objected but have lodged valid entitlement notices

Send your contact details and details of your claim to GSTMVPayments@ato.gov.au, so that we can contact you to discuss any refund you may be entitled to and how it can be progressed.

Records and documents

If you are seeking a refund, you must have the relevant documentation and evidence to support your claims.

Third party payments - Division 134

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

The Commissioner is currently developing more detailed views about Division 134 adjustments.

Implications for motor vehicle manufacturers and distributors

Input tax credits

Under Division 11 of the GST Act, 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.

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.

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[16] or non-creditable in light of this decision.

The Commissioner will continue working with the 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.

Third party payments - Division 134

Certain motor vehicle incentive payments made on or after 1 July 2010 may give rise to decreasing adjustments for manufacturers and distributors under Division 134 of the GST Act (third party payment adjustments).

The Commissioner is currently developing more detailed views about Division 134 adjustments.

Incentive payments in other industries

Whether other types of incentive payments will be consideration for a taxable supply by the payee to the payer is fact and circumstance dependant.

The Commissioner notes that the 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.[17]

Whether other types of incentive payments are consideration for a supply by the payee to a third party will depend on the specific facts and circumstances.

Further information

Taxpayers who require further advice regarding the application of the decision to incentive payments in other industries, including the relevant GST treatment, possible refunds and their obligations in relation to accounting for GST or claiming input tax credits should email GSTMVPayments@ato.gov.au in the first instance.

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 will review existing precedential documents and determine if any changes are required.

Implications for impacted Law Administration Practice Statements

Nil.

Comments

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.

Related Rulings/Determinations: GSTR 2006/9

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

At [32]

At [33]

At [35]

At [43]

At [42]

At [43]

At [44]

At [35] and [44]

At [46]

At [48]

At [48]

At [52]

Luxury Car Tax Determination LCTD 2013/1: Luxury car tax: what is the luxury car tax threshold and the fuel-efficient car limit for the 2013-14 financial year?

Schedule 1 to the Taxation Administration Act 1953

Schedule 1 to the Taxation Administration Act 1953

Also refer to PSLA (GA) 2013/3 Treatment of input tax credits claimed by a recipient of a non taxable supply where the Commissioner has the discretion to give a refund of the overpaid GST to the supplier due to the operation of section 105-65 of Schedule 1 to the Taxation Administration Act 1953.

Paragraph 24 of GSTR 2000/19 Goods and services tax: making adjustments under Division 19 for adjustment events.

AP Group Ltd v Commissioner of Taxation history
  Date: Version:
You are here 15 November 2013 Identified
  13 December 2013 Identified
  4 April 2014 Identified
  28 October 2014 Resolved