Decision impact statement

KAP Motors Pty Ltd v Commissioner of Taxation

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Court Citation(s):
[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 that his Honour's construction of section 105-65 of Schedule 1 to the TAA 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,')

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. (see 'How to claim a refund,')

You cannot claim refunds for periods outside the relevant four year time period where you have a negative net amount or the claim will cause your net amount to become negative unless you have previously notified the Commissioner of your entitlement to that refund within the relevant four year period.

Generally a refund of overpaid GST you receive should be returned as assessable income.

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.

How to claim a refund

GSTD 2005/4 Holdback Payments

The Commissioner has exercised his power of general administration to allow motor vehicle 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.

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:

Other Claims

The exercise of the Commissioner's discretion to allow refunds being claimed in the current BAS 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.

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 implication 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

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

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