CROWN ESTATES (SALES) PTY LTD & ANOR v FC of T

Members:
BJ McCabe SM

Tribunal:
Administrative Appeals Tribunal, Brisbane

MEDIA NEUTRAL CITATION: [2015] AATA 949

Decision date: 10 December 2015

BJ McCabe (Senior Member)

1. This is a case about agency relationships and the Goods and Services Tax ("GST"). The dispute has arisen in relation to the following periods:

2. Over the periods in dispute, the taxpayer companies conducted a property management business called 'Total Property Management'. I will refer to those entities collectively as 'TPM'. TPM let and managed properties on behalf of property owners. In the course of that work, TPM often engaged with contractors and government entities and arranged for the provision of goods and services on behalf of its owner-clients. The principal issue in this case is whether TPM is entitled to claim input tax credits in respect of those dealings. That turns on whether the taxpayer companies, trading as TPM, made creditable acquisitions in the course of those dealings for the purposes of the A New Tax System (Goods and Services Tax) Act 1999 (Cth) (the GST Act) and made a corresponding taxable supply to the owner-clients. To put it another way: was TPM acting as a principal that acquired goods and services from third parties which it resupplied to its owner-clients, or was it dealing with the contractors et al. as the agent of the owners in each case?

3. There is also an issue over whether administrative penalties have been appropriately assessed. That issue only falls to be determined if the taxpayers are unsuccessful in their primary contention.

4. I am satisfied the taxpayer companies were routinely acting as agents for their owner-clients in the course of the TPM property management business when the taxpayers arranged for the supply of goods and services. The taxpayers were not routinely making creditable acquisitions in the course of those agency relationships and are not entitled to claim input tax credits. It follows the substantive decision must be affirmed. I am also satisfied the decision with respect to penalties ought to be affirmed. I explain my reasons below. Before I do that, I will briefly address a jurisdictional question raised by the taxpayers.

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The jurisdictional issue

5. Mr Rigney, the taxpayers' representative, argued at the commencement of the hearing that the Tribunal was constrained by the grounds of objection that the taxpayers put to the Commissioner. I was referred to provisions of the Taxation Administration Act 1953 (Cth) and the decision in
Re Radge and Commissioner of Taxation (2007) 95 ALD 711. If I understand the argument correctly, Mr Rigney was suggesting the Tribunal should not consider the Commissioner's arguments because to do so would risk deciding the case on a basis that was outside the grounds of objection. I am not sure I understand the argument in this context but suffice to say the arguments before me did not appear to stray beyond the issues and arguments flagged in the notice of objection at exhibit one at pp 172-178. I am satisfied I have the jurisdiction to deal with the arguments and resolve the issues in this case.

The TPM business

6. Mr Peter Watts, a director of the taxpayer companies, said in his statement (exhibit three) that the TPM business was established in 2003. He said the business managed around 1000 residential and commercial properties around Brisbane and southeast Queensland. These proceedings principally concern the arrangements with residential property owners.

7. Mr Watts emphasised there were two aspects to the relationship between TPM and its owner-clients. On the one hand, there was TPM's role in finding and securing tenants and collecting rents that were paid into a trust account; on the other hand, TPM managed "the property and its fittings and grounds, being the management of its physical state of repair and attending to such repair as may be required from time to time": exhibit three at [6]. TPM was appointed to its dual role when a property owner signed a PAMD Form 20a: Appointment of agent - Letting and property management document. The form is published pursuant to the Property Agents and Motor Dealers Act 2009 (Qld) (the PAMD Act), which was the state legislation that governed agents and managers at the relevant time. A copy of one of those documents is reproduced in exhibit one at p 208.

8. In the course of his written and oral evidence, Mr Watts referred to a number of examples where TPM acquired services from contractors or third parties which were used in properties belonging to clients. (An invoice recording one such supply is reproduced in exhibit one at p 206. That invoice relates to gardening services carried out at a property managed by TPM. The invoice is addressed to TPM but it does not expressly confirm TPM acquired the service in its own right or on behalf of anyone else.)

In any event, some of the goods and services were acquired pursuant to the authorisation set out in the Form 20a; in those cases, the cost of the goods or services would be deducted from monies held in trust. But Mr Watts also referred to a number of examples where he says the goods or services were not expressly authorised in the Form 20a. In such a case - in an emergency, for example, or where the owner was not readily contactable, or where there was an informal or oral agreement to act - TPM would arrange for the acquisition of goods or services in its own name. Mr Watts said he was aware of cases where a contractor had tried to recover against TPM when an owner had not come to the party. In such a case, Mr Watts said TPM had no choice but to pay-up and accept the loss. He said the relationship with owners was essentially a precarious one, but it was, in effect, somewhat broader (if more uncertain) than that described in Form 20a.

9. Mr Watts attempted to underline TPM's status by pointing to a decision of the Queensland Civil and Administrative Tribunal (QCAT) in
Crown Estates Pty Ltd v Fitzpatrick [2015] QCAT 37. In that case, TPM and a landlord had been sued by a tenant for personal injuries. Both manager and owner claimed under their insurance policies, and TPM sought to be indemnified by the owner against the cost of the deductible under its policy on the basis it was the owner's agent. QCAT said the claim did not relate to a debt that was within the minor civil dispute jurisdiction. There is nothing in the reasoning that assists the taxpayers.

10. The taxpayers' case comes down to this. TPM's property management activities require the acquisition of goods and services

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- from tradespeople, for example. While those goods and services are acquired for use in properties owned by TPM's clients, TPM says it is not acting on behalf of those owners when it engages the contractors. Rather, it acts as a principal when it engages contractors. TPM then delivers the goods and services to its own clients pursuant to a separate understanding with those clients in which TPM and the client are both principals contracting at arms' length. Mr Watts pointed out he was aware of a number of instances where property owner-clients simply refused to pay for goods or services that were used in their properties, but TPM was still liable to the contractor under the contract. He said that was a product of the fact the owners were strangers to the contracts TPM negotiated with suppliers. Mr Watts said the word "agent" in the PAMD Act and in common discourse did not assist in defining the true nature of the relationship. "Agent" in this context was a term of art rather than a legal characterisation. As principals, the taxpayers say they were entitled to claim input tax credits for GST purposes.

The legislation and the law of agency

11. The GST Act says one is entitled to input tax credits in connection with creditable acquisitions and creditable importations: s 7-1. Section 11-5 says one makes a creditable acquisition if:

12. One cannot receive an input tax credit in respect of a creditable acquisition made by another. I must decide whether TPM acquired anything, and whether there was a supply of such a thing to TPM (as opposed to the property owners whose property was managed by TPM) and that supply was a taxable supply.

13. The GST Act does contain special rules that may apply where supplies or acquisitions are made through an agent. Those rules are set out in Division 153. The division recognises parties may enter into a written arrangement under which intermediaries are treated as suppliers or acquirers. There is no written arrangement in place to that effect in this case. The Commissioner may also make a written determination that the arrangement is to be treated as if the intermediary was the principal, but that has not occurred either. It follows I must decide the outcome of this case without regard to the special rules in Division 153.

14. The High Court discussed agency relationships in
Petersen v Moloney (1951) 84 CLR 91. After acknowledging the word 'agent' was occasionally used in a misleading way in connection with the purchase and sale of property, the Court explained (at 94-95):

…an "agent" is a person who is able, by virtue of authority conferred upon him, to create or affect legal rights and duties as between another person, who is called his principal, and third parties.

15. The important point is that an agent is able to create and affect a legally enforceable relationship between the principal and the third party.[1] See also Alliance Craton Explorer Pty Ltd v Quasar Resources Pty Ltd [2013] FCAFC 29 at [73] per North, Cowdroy, Katzmann JJ. At least where the agent expressly acts on behalf of a named principal, the agent cannot be held liable (either jointly, or in default) to discharge an obligation of the principal precisely because the agent is not a party to the relationship:
Railway Commissioners (NSW) v Orton and Knight (1922) 30 CLR 422 at 426 per Knox CJ, Gavan Duffy and Starke JJ. The agent will also avoid liability where he or she does not disclose the identity of the principal provided it is clear from the terms of the agreement that the agent is acting in that capacity and does not intend to be personally bound. But even where the agent does not disclose the existence of the principal and appears on the face of the relationship to be contracting with the third party in his or her own right, the undisclosed principal will still be liable and may enforce the agreement with the third party: see
Maynegrain Pty Ltd v Compafina Bank [1982] 2 NSWLR 141 at 149-150 per Hope JA. In that event, the (undisclosed) relationship as between principal and agent suggests the acquisition of goods or services from the third party will still amount to a supply of goods or services by the third party to the undisclosed principal, albeit that the

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agent may also be liable to the third party. Importantly, the agent's rights to sue the third party under such an agreement give way to the rights of the principal. If the principal steps in, the agent must stand back - which reflects the underlying commercial reality that the agreement was always intended (at least in the minds of the principal and the agent) to be an agreement between the principal and the third party: see Maynegrain at p 150; see also
IVI Pty Ltd v Baycrown Pty Ltd [2007] 1 Qd R 428 at 443 per Jerrard JA.

16. I should add that the fact an agent may be liable on a contract negotiated with a third party - in the case of an undisclosed principal, for example - does not of itself mean the agent satisfies the criteria in s 11-5 of the GST Act. At most, a finding that the agent was liable to pay for the goods or services would satisfy s 11-5(c). The other criteria must also be satisfied, and one in particular - namely s 11-5(b), which requires that the supply of the thing to you is a taxable supply - is difficult to meet here. I will explain why.

17. Agency relationships typically arise when the principal appoints the agent to act in that capacity. The agent's authority may be express or implied from the agreement between the principal and agent if the agent has actual authority; otherwise the authority might be apparent from the conduct of the principal (so-called 'ostensible' authority): see
Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480 at 502 per Diplock LJ. Agency relationships may also arise by operation of law. The agency of necessity is an example of such a relationship. A person may become an agent and, in an emergency, commit the principal without first obtaining instructions or authority provided (a) it is practically impossible to obtain instructions from the principal in the circumstances, (b) there is an emergency situation which necessitates prompt action, and (c) the action taken is reasonable and in the interests of the principal: see, generally,
China Pacific SA v Food Corp of India (The Winson) [1982] AC 939 at 961 per Lord Diplock. In such a case, the agent is still creating a relationship between the principal and the third party. The agent would only be liable to the third party on the agreement he or she negotiated if it were apparent the parties intended that should occur. (An agent who misrepresents his or her authority may be liable for a breach of the warranty of authority, or for misleading or deceptive conduct - but that is irrelevant for present purposes.)

18. There was a good deal of discussion about the purpose and effect of the Form 20a document that had to be signed by property owners. A copy of one of the standard form agreements (with identifying particulars redacted) is reproduced in exhibit one at pp 9-20. Part 4 of the document is headed "Appointment of Agent" and confirms the agent agrees to perform services for the client including "Letting/leasing of property", "Collection of rent" and "Other property management services" referred to in an addendum. Clause 4.1 provides:

[The] property to be leased & or managed & services to be performed in accordance with the item schedule & terms of appointment forming part of this PAMD 20a form.

19. Clause 6.3 also provided a "maximum value of repairs and maintenance to be paid by the agent without prior approval". In the example given, the owner required that the owner was always to be contacted before approval was given, although Mr Watts explained in his oral evidence that the approval for expenditures that were not pre-authorised would be obtained orally, or by email. In clause E in the addendum there is a checklist of expenditures that could be paid out of the rental monies held in trust. The document also provides for the payment of commission as percentage of the rent collected and a management fee expressed as percentage of the rent together with a small administration fee.

20. The terms of appointment are set out at the end of the document. They speak to the obligations of the agent and the client, and the agent's authority. There is an indemnity clause and a range of other provisions that define aspects of the agent's work and responsibilities.

21. I am satisfied the document describes a relationship between TPM and each of its property-owning clients in which TPM acts as an agent in the classic sense of that term. The essence of agency is there for all to see: TPM is clearly in a position to "create or affect legal

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rights and duties as between another person, who is called [the] principal, and third parties".[2] Petersen v Moloney (1951) 84 CLR 91 at 94–95 per Dixon, Fullagar, Kitto JJ. In his evidence, Mr Watts used language redolent of agency: he spoke of "acting on behalf of" clients. While I accept the Form 20a may not exhaustively define the scope of the relationship in practice - I do not doubt the relationship with each client might have varied depending on the client's preferences and personal circumstances notwithstanding anything said in the PAMD Act and Form 20a - there is no reason to doubt TPM contracted with third parties as agent for the property owners in accordance with its authority, even where that authority had to be specifically sought or confirmed in relation to particular transactions. It follows transactions entered into with third parties on behalf of property-owning clients pursuant to the terms of that agency arrangement were not taxable supplies of things to the agent. They were taxable supplies of things to the principal. The same observation can be made in relation to dealings which occurred pursuant to an agency of necessity. In such a case, the agent merely facilitated an agreement between the third party and the principal with respect to the supply of goods or services to the principal, not TPM. That means the taxpayers are unable to satisfy the criterion in s 11-5(b) of the GST Act. It follows the taxpayers are not entitled to claim input tax credits with respect to those acquisitions because the transactions did not answer the statutory description of a creditable acquisition by the taxpayers.

22. I was provided with limited evidence about the detail of specific transactions with third parties. There are some financial records reproduced in exhibit one at pp 198-205, and a lone invoice at p 206 which is addressed to TPM but refers to the property where the contractor carried out the work. But I was not shown anything in the evidence which suggests the Commissioner's conclusion about the existence of an agency relationship was wrong, and that a different outcome was appropriate. I was certainly not shown invoices or other documents evidencing or describing transactions in a way that suggested the third party and TPM intended that goods or services would be supplied to TPM as principal, rather than to a property-owning client.

23. A few general observations can nonetheless be made given my findings in relation to the existence of an agency agreement. Where invoices provided by third parties named the property-owning client, there can be no doubt there was a supply of the thing to that person, and not TPM. I would add that any contractor dealing with TPM is likely to have assumed TPM was acting on behalf of a property owner when goods or services were supplied to a property even if the principal was not named in the invoice. In such a case, a contractor dealing with a property manager would almost certainly assume the relationship was really between itself and the principal, even if the principal was unnamed. Even in those cases where there was an agency of necessity - because TPM took steps on behalf of an owner who could not be contacted, for example - the substance of the relationship was always between the contractor and the principal. There is no reason to doubt TPM expected to be reimbursed in every case out of the trust monies, or by the property owner. Even in cases where there was an undisclosed principal, so that the agent was also liable on the contract, there is no supply to TPM as principal if it was, in truth, an agency relationship in which TPM negotiated for the supply of goods or services to the property-owning client.

24. I would add that if the taxpayers were liable to pay for goods and services that were found to have been supplied to TPM but which TPM subsequently on-supplied to a property-owning client, any input tax credits that could be claimed by the taxpayers would be offset by the amount of GST they were liable to pay when they were reimbursed by the clients.

25. It follows I would affirm the objection decision with respect to the taxpayers' contentions that they were entitled to claim input tax credits. There is nothing in the material that persuades me the Commissioner's decision was wrong, and that it should be decided differently.

Penalties

26. That leaves only the question of penalties. The Commissioner imposed an administrative penalty in respect of the shortfall amount that arose as a consequence of the false statements made by the taxpayers. The penalty

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was imposed pursuant to s 284-75 in subdivision 284 of Schedule One to the Taxation Administration Act 1953 (Cth). The Commissioner decided the shortfall arose because the taxpayers were reckless with regard to the operation of the taxation laws. That meant a base penalty amount of 50% was appropriate.

27. The taxpayers say the amount of the penalty should be reduced to nil because their case was at least arguable. Mr Rigney, for the taxpayers, suggested that if reasonable people could disagree about the correct position, the reasonableness of the taxpayers' position had to be accepted even if I ultimately rejected the taxpayers' arguments. After the hearing concluded, he referred me to the decision of the Full Federal Court in
Allen (Trustee), in the matter of Allen's Asphalt Staff Superannuation Fund v Commissioner of Taxation [2011] FCAFC 118. But I doubt reasonable people could reach different views of the relationships in this case. The key documents all refer to TPM as an agent; the argument that TPM was not acting as agent was always an unlikely one.

28. I was also told the taxpayers had obtained professional advice which offered some support for their position. Mr Watts referred in particular to a letter from Williams Hall Chadwick, a firm of accountants, in his statement (exhibit three at [27]). A copy of that letter is reproduced in exhibit one at p 59ff. But that letter does not provide much comfort for the taxpayers. Indeed, the author expressly notes the firm's advice on the GST issue was "consistent with the ATO's view". It rather seems to me the taxpayers relied on the advice of Mr Watts himself. Mr Watts is legally qualified. He had firm views on how the relationships in question should be characterised. He was wrong. As an experienced businessman with legal qualifications and access to professional advice, he should not have made the mistakes he made.

29. I am satisfied the taxpayers were reckless with respect to the operation of taxation laws. I am not aware of any basis upon which the penalty might be remitted, either wholly or in part. I therefore affirm the objection decision with respect to penalties.

Conclusion

30. The objection decisions under review must be affirmed.

Footnotes

[1] See also Alliance Craton Explorer Pty Ltd v Quasar Resources Pty Ltd [2013] FCAFC 29 at [73] per North, Cowdroy, Katzmann JJ.
[2] Petersen v Moloney (1951) 84 CLR 91 at 94–95 per Dixon, Fullagar, Kitto JJ.

 

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