Download Property Council of Australia

Christine Barron
General Manager
Indirect Tax Division
The Treasury
Langton Crescent
Parkes ACT 2600
26 October 2009
E-Mail:[email protected]
[email protected]
Dear Christine
Treasury Review of GST Administration Exposure Draft 2009 GST
Administration Measures Bill (“Exposure Bill”)
Thank you for the opportunity to comment on the Treasury Exposure Bill.
The Property Council is the peak body representing the interests of owners and
investors in Australia’s $400bn property investment sector. The Property
Council serves the interests of companies across all four quadrants of property
investment debt, equity, public and private.
Our members welcome and continue to support the Government’s commitment
to streamlining the operation of the GST, reducing compliance costs, and
removing inconsistencies.
In relation to the GST Consultation Paper, Property Council members support
streamlining the operation of the GST and improving the effectiveness of the
provisions and make the following comments:
1)
we support the 4 yr time limit provisions providing:
a. Treasury consider replacing the concept of “immediate consequence”
with a more appropriate concept, such as "relates directly";
b. if the concept of “immediate consequence” is to be retained, it should
be clarified with wording and examples in the EM and legislation to
avoid confusion and disputes;
c. the exception in proposed section 93-5(2)(a) to the four year rule for
input tax credit claims should arise regardless of whether the four
year period has already expired, so long as the immediate
consequence test (or alternative test) is satisfied (this is to avoid
windfall revenue that punishes taxpayers);
d. a supplier is entitled to a decreasing adjustment in certain
circumstances outlined in the submission to ensure suppliers are not
The
Voice
of
Leadership
e. burdened with tax in a revenue neutral transaction; and
f.
2)
the provisions clarify that a taxpayer can attribute input tax credits in
later periods.
we support the agency provisions providing:
a. they will apply in the context of “billing and paying agents” as
intended under the EM to ensure there is no confusion and dispute;
b. they are extended to apply to subdivision 153-A circumstances to
alleviate compliance issues involving property managers, billing
agents or paying agents.
The Property Council also note that it is supportive of the current interaction of
associate provisions, however, given the timeframe for consultation, there has
not been adequate time to fully assess these provisions in detail.
The attached submission outlines our precise recommendations regarding the
reform issues we have raised.
We note that this is one of several ongoing consultations regarding the
streamlining of GST provisions and we look forward to working closely with you
to resolve the issues.
We would appreciate the opportunity to discuss this submission with you further
at your convenience.
In the meantime, please do not hesitate to contact me directly on 0406 45 45
49.
Yours sincerely
Andrew Mihno
Deputy Executive Director International & Capital Markets
Property Council of Australia
0406 45 45 49
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Submission:
Treasury Review of
GST Administration Pt
III
Property Council of Australia
October, 2009
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Table of Contents
Section 1 – 4 Year Time Limit on Entitlements to Input
tax Credits and Fuel Tax Credits
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Section 2 – Agency
11
Section 3 – Interaction of Associate Provisions
14
page 4
Schedule 1
Schedule 1—Time limit on
entitlements to input tax credits and
fuel tax credits
1
The concept of ‘immediate consequences’ in proposed
Division 93
1.1
(a)
Issue
Proposed section 93-5 contains a new four year time limit on claiming input tax
credits. The exceptions to the four year rule in section 93-5(2) use the concept
of 'immediate consequence'. This concept is new to the GST law (and new to
Federal tax laws as far as the Property Council is aware).
The Property Council is concerned that the meaning of this phrase is uncertain
and believes that another concept might better reflect the spirit and intention of
the legislation. Alternatively, if the concept is retained, the Property Council
believes that the brief explanation of the concept and the two simple examples
contained in the draft Explanatory Memorandum are not sufficient and that more
detail needs to be included in the Explanatory Memorandum to clarify the
meaning of the phrase.
(i)
Alternative concept to immediate consequence
While the Property Council has not had sufficient time to develop firm views on
alternative concepts, some preliminary comments are set out below.
The Property Council considers that a phrase that is already familiar within the
GST law is preferable to a new concept that is of uncertain application.
The scenarios used in the draft Explanatory Memorandum to illustrate the
concept of immediate consequence are as follows:
•
An input tax credit for an acquisition related to a taxable supply that was
wrongly treated by a taxpayer as an input taxed supply.
•
Input tax credits arising from the failure to lodge a BAS.
•
Input tax credits related to fraudulent or evasive behaviour.
•
Input tax credits where a taxpayer notifies the Commissioner of the credit
entitlement before the four year period expires (such as where a taxpayer
did not possess a tax invoice for the credit).
Without expressing a concluded view on the issue, the Property Council
considers that the phrase "the input tax credit arises as an immediate
consequence of circumstances that relate directly to" in proposed section 93-5
leads to the same outcomes as the phrase "the input tax credit relates directly
to" in the above examples.
The "relates directly to" test is one that is very familiar to judges, taxpayers and
the Commissioner in both a GST context and tax laws more generally.
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Further, in at least some circumstances, it is clear that the phrase "the input tax
credit arises as an immediate consequence of circumstances that relate directly
to" is intended to cover the same ground as the in relation to test. For example,
the draft Explanatory Memorandum states that the current wording "would
include an input tax credit for an acquisition related to a taxable supply that was
wrongly treated as a financial supply for which the Commissioner has provided
notice requiring payment" (paragraph 1.22).
This view is also supported by the fact that the draft Explanatory Memorandum
often uses the concept of directly relates to or arising from certain
circumstances to explain the immediate consequence concept.
Finally, many of the examples and situations set out in the draft Explanatory
Memorandum refer to input tax credits (i.e. acquisitions) that relate to a
subsequent supply. The Property Council notes that it is an unnatural use of
language to the use the term consequences to refer to the acquisitions that
occur before the supply takes place in these examples and situations. The
"relates directly to" test more naturally fits with these examples and situations.
(ii)
Explanation of the concept of immediate consequence
If the concept is of immediate consequence is retained in the final legislation,
the Property Council believes the brief explanation of the concept and two
simple examples in the draft Explanatory Memorandum do not provide sufficient
clarity around the concept. Further detail needs to be included in the
Explanatory Memorandum to clarify the meaning of the phrase. The Property
considers the following example of the concept of immediate consequence in a
property context should be included in the draft Explanatory Memorandum:
•
(b)
A taxpayer purchases a property under the margin scheme. It does not
claim an input tax credit (as per section 75-20 of the GST Act). The
taxpayer develops the property and then sells it, again under the margin
scheme. The Tax Office subsequently audits the taxpayer, determines that
the first sale was not eligible for the margin scheme and hence assesses
the taxpayer for GST of 1/11th of the sale price of the second sale of the
property. In these circumstances, the taxpayer could have ordinarily
claimed an input tax credit on its purchase of the property (assuming the
claim is within the four year time limit). The purchase of the property
arises as an immediate consequence of the circumstances that relate
directly to the subsequent sale of the property (the Tax Office has issued a
notice of assessment in relation to the latter, which constitutes a notice
under section 105-50(3)(a) of Schedule 1 to the TAA).
Commercial impact of proposal
The current brief explanation of the concept of immediate consequence is likely
to lead to uncertainty for taxpayers and litigation regarding the concept. The
use of another concept (such as "relates directly to") or, alternatively, further
clarification of the concept will increase the likelihood that judges, taxpayers and
the Tax Office understand the intention of the provision.
(c)
Recommendation
The Property Council would be pleased to workshop with Treasury an alternative
concept to immediate consequences. Our preliminary view is that the phrase
"the input tax credit arises as an immediate consequence of circumstances that
relate directly to" in proposed section 93-5 should be replaced with the phrase
"the input tax credit relates directly to".
Alternatively, if the concept of immediate consequence is to be retained, the
Property Council recommends that further detail is included in the Explanatory
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Memorandum to clarify the meaning of the phrase, such as the margin scheme
example set out above.
Exceptions to the four year time limit in proposed Division
93
1.2
(a)
Issue
The exceptions to the four year time limit on claiming input tax credits in
proposed section 93-5(2) allow input tax credits to be claimed where they
satisfy the immediate consequence test (discussed above). However, in relation
to proposed section 93-5(2)(a), the exception will not arise where the four year
period has already expired for the input tax credit. The draft Explanatory
Memorandum confirms this outcome (paragraph 1.23).
The Property Council considers that this outcome is inappropriate in the context
of a transaction tax, such as the GST. In the GST law, there is a fundamental
connection between a taxpayer's acquisitions and its supplies through the input
tax credit mechanism in section 11-5 of the GST Act (see also, for example, the
comments of the court in HP Mercantile Pty Limited v FC of T [2005] FCAFC 126,
in particular at paragraph 13ff).
The limitation in proposed section 93-5(2)(a) that input tax credits will not be
available where the four year period has already expired is unfair and will
particularly penalise taxpayers in the property industry. This is because
property developers incur the majority of their costs before (often significantly
before) the supply is made. The Property Council's concerns can be seen from
an extrapolation of example 1.2 in paragraph 1.23 of the draft Explanatory
Memorandum.
In the example, LLE P/L (a property investment company) sells a motel complex
in January 2006, treating the sale as an input taxed supply of residential
premises. In September 2009, LLE P/L is audited by the ATO. The auditors
identify that the motel complex was a taxable supply of commercial residential
premises. Where LLE P/L acquired the motel as a taxable supply or constructed
the motel, it would have paid significant GST amounts in relation to these costs
that it could not claim back as input tax credits (we assume LLE P/L treated the
lease of the motel as an input taxed supply of residential rent).
LLE P/L will have a material GST liability assessed by the Tax Office (including
potential penalties and interest) and may well not be entitled to recover the
additional GST amount from the purchaser. In these circumstances, LLE P/L has
borne the GST assessed on the sale plus the GST it was not able to claim on the
purchase / construction of the motel. It has borne substantially more GST on
the sale of the motel than is appropriate (in a practical sense, the effective GST
rate on the sale of the motel is significantly higher than 10%). Further, LLE P/L
is likely to be at a significant financial disadvantage compared to a taxpayer that
treated the supply of the motel as taxable, since such a taxpayer not only would
have claimed a full input tax credit on the purchase / construction of the motel,
but would also have ensured that its sale contract with the purchaser allowed
recovery of its GST liability.
We also note the Tax Office effectively receives a windfall in revenue in these
circumstances to the detriment of the taxpayer.
Accordingly, the Property Council believes the exception to the four year rule for
input tax credit claims should arise regardless of whether the four year period
has already expired, so long as the immediate consequence (or the alternative
"relates directly to") test is satisfied.
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The Property Council believes that such an approach is philosophically consistent
with the proposed Division 133 adjustment. The Division ensures that a
recipient of a supply is not financially disadvantaged where it is obligated to pay
an additional amount on account of GST to a supplier in circumstances where
the time to claim the corresponding input tax credit has expired. The Property
Council believes that a property developer should similarly not be financially
disadvantaged where it is obligated to pay a GST liability to the Tax Office on a
supply in circumstances where the time to claim the corresponding input tax
credit in relation to that supply has expired.
Such an approach is also consistent with the proposal to allow the Commissioner
to amend a taxpayer's GST liability outside the four year review period for
where there has been an amendment in relation to a particular (refer paragraph
2.2.30 of Second consultation paper issued by Treasury concerning the
Implementation of the recommendations of the Board of Taxation’s review of
the legal framework for the administration of the GST).
Finally, it seems odd that a taxpayer engaged in fraud or evasion is in a better
position in respect of its entitlement to claim input tax credits (refer paragraph
1.28 of the draft Explanatory Memorandum) compared to a taxpayer that makes
an inadvertent mistake (which is not entitled to input tax credits where the four
year period has already expired).
The draft Explanatory Memorandum indicates that the exceptions to the four
year rule in proposed section 93-5(2) and proposed Division 133 are intended to
overcome inequities to taxpayers otherwise arising from the operation of the
four year time limit. The Property Council believes that limiting input tax credit
claims in proposed section 93-5(2)(a) where the four year period has already
expired is similarly inequitable to taxpayers.
(b)
Commercial impact of proposal
As indicated above, limiting input tax credits in the manner suggested where the
four year period has already expired is likely to lead to a windfall for the
revenue to the detriment of the taxpayer. Such taxpayers are also likely to be
inequitably punished compared to taxpayers that correctly accounted for GST.
(c)
Recommendation
The Property Council recommends the exception to the four year rule for input
tax credit claims should arise regardless of whether the four year period has
already expired, so long as the immediate consequence test is satisfied.
Proposed section 93-5(2)(a) should be replaced with the following paragraphs
(we have also included our suggested amendments as a result of issue 1.1
above):
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"(a)
the input tax credit relates directly to an amount, or an amount of
an excess, in relation to which paragraph 105-50(3)(a) in Schedule
1 to the Taxation Administration Act 1953 applies; or
(aa)
both of the following apply:
(i)
the input tax credit relates directly to a refund, other
payment or credit in relation to which paragraph 10555(1)(b) in Schedule 1 to that Act applies;
(ii)
the Commissioner gave to you the notice referred to in that
paragraph not later than 4 years after the end of the tax
period to which the credit would be attributable under
subsection 29-10(1) or (2) of this Act; or"
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Proposed Division 133 decreasing adjustment for suppliers
1.3
(a)
Issue
Proposed section 133-5 allows a taxpayer to claim a decreasing adjustment
where the taxpayer is contractually obliged to provide an additional payment
because their supplier is liable for GST and the four-year period for the taxpayer
to claim the corresponding input tax credit has expired. The adjustment will
reduce the taxpayer’s liability by the amount of the input tax credit to which
they would otherwise have been entitled.
The Property Council believes that a similar provision allowing a supplier a
decreasing adjustment should be available in the following circumstances:
•
The supplier and recipient treated a transaction as taxable. The supplier
remitted the GST and recipient claimed an input tax credit.
•
The transaction was later found to be GST-free or input taxed. The Tax
Office assessed the recipient for the overclaimed input tax credit.
•
The recipient is contractually entitled to claim a refund from the supplier
on account of the GST it previously paid to the supplier.
•
The four year period for the supplier to recover the GST overpaid to the
Tax Office under section 105-55 of Schedule 1 to the TAA has expired.
Such a situation is analogous to the proposed section 133-5.
(b)
Commercial impact of proposal
Such a proposal ensures that suppliers are not left bearing the burden of tax (in
what should effectively be a revenue neutral transaction for the government).
(c)
Recommendation
The Property Council recommends that a supplier should be entitled to a
decreasing adjustment in the circumstances outlined above. The Property
Council would be pleased to provide suggested drafting for such a provision.
Proposed amendments to sections 29-10(3) & (4) of the
GST Act
1.4
(a)
Issue and commercial impact of proposal
The government has accepted the Board of Taxation's recommendation to
amend the GST law to remove any doubt about the ability of a taxpayer to
attribute input tax credits in later tax periods (refer paragraph 2.2.13 of the first
consultation paper issued by Treasury concerning the Implementation of the
recommendations of the Board of Taxation’s review of the legal framework for
the administration of the GST).
The Property Council believes this requires a relatively minor amendment to
sections 29-10(3) and 29-10(4) of the GST Act. In these circumstances, the
Property Council believes this amendment should form part of the current Bill,
since it has particular relevance to the issues dealt with in Schedule 1 of this Bill
than to the proposed amendments allowing taxpayers to disregard minor errors
in tax invoices and enabling taxpayers to treat other documents as a tax invoice
in certain situations.
(b)
Recommendation
The Property Council recommends that the proposed amendments to sections
29-10(3) and 29-10(4) of the GST Act should appear in the current Bill. The
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Property Council would be pleased to provide suggested drafting for such a
provision.
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Schedule 2
2. Agency
Subject to the comments set out further below, the Property Council supports
the proposed amendments to the agency provisions in Subdivision 153-B of the
GST Act (as set out in Schedule 3 of the Exposure Draft). However, it
submitted that the amendments should also be extended to cover the agency
provisions in Subdivision 153-A.
2.1
Clarification regarding “Billing and paying agents”.
(a)
Issue
The amendments in the Exposure Draft extend the existing agency provisions in
Subdivision 153-B so that the provisions may also apply where a supply or
acquisition is “… made through the intermediary or facilitated by the
intermediary”.
In our view, this language does not make it clear that Subdivision 153-B may
apply in the context of “billing agents” or “paying agents”. However, this would
appear to be the intention behind the amendments (refer paragraph 3.11 of the
Exposure Draft EM).
(b)
Commercial impact of proposal
If it is not made clear in the GST Act that Subdivision 153-B may apply in
context of billing or paying agents there is a risk that taxpayers may become
embroiled in costly disputes with the ATO concerning the operation of the new
provisions. This is notwithstanding the reference to “billing agents and paying
agents” in the Exposure Draft EM.
For example, there could be disputes over the question as to whether a “paying
agent” who has merely paid for an acquisition on behalf of another entity
(principal) has in fact “facilitated” the principal’s acquisition.
(c)
Recommendation
We recommend that the proposed amendments be revised to make it clear
beyond doubt that the new provisions will apply in the context of “billing and
paying agents”. This could be achieved by either:
(i)
including specific references to “paying agents” (in the provisions relating
to acquisitions) and “billing agents” (in the provisions relating to supplies);
or
(ii)
including a definition of the term “faciliate” in the Dictionary in section
195-1 of the GST Act. The definition should make it clear that a billing or
paying agent can facilitate a supply or acquisition.
We note that if the expression “facilitate” is defined, consideration would need
to be given to the impact that this may have on the use of the word
“facilitating” in the definition of “financial supply facilitator” in Reg 40-5.07 in
the GST Regulations.
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2.2
The amendments should be extended to apply to
Subdivision 153-A
(a)
Issue
The amendments set out in the Exposure Draft are limited to Subdivision 153-B
of the GST Act. However, for the reasons set out below, it is submitted that the
amendments should also be extended to cover the provisions in Subdivision
153-A.
(b)
Commercial impact of proposal
If the amendments are extended to the provisions in Subdivision 153-A, this
would assist in alleviating compliance issues where principals utilise property
managers, billing agents or paying agents, but have not entered into 153-B
Agreements. We have set out below examples of instances in which billing and
paying agents may be used (in circumstances where there is no 153-B
Agreement).
(i)
Property Management Services
Property managers are typically responsible for issuing tax invoices on behalf of
the property owner(s) to tenants for the rent payable under commercial leases.
The property manager may not be a common law agent for this purpose
because the manager was not necessarily authorised to make the supply of the
premises to the tenant on behalf of the owner(s) (when the lease was originally
granted), despite being responsible for the day-to-day management of the
leased premises. It is usually preferable, particularly in cases where a property
is owned by multiple co-owners, for the property manager to issue the tax
invoices for the rent in its own name rather than in the name of the owner(s)
that actually make the supplies.
Similarly, the property manager may also be responsible for paying for certain
expenses on behalf of the property owner(s) (for example, cleaning costs).
However, the property manager may not have made the acquisition as a
common law agent (for example, where the property owner(s) directly entered
into a contract with the third party supplier for the relevant goods / services).
Again, it would generally be preferable in these circumstances if the supplier
could simply issue a tax invoice to the property manager, in the name of the
property manager, without having to enquire whether the property manager is
a party to a Subdivision 153-B Agreement.
(ii)
Billing and payment arrangements within corporate / stapled
groups
It will often be the case that one entity within a corporate or stapled group will
pay for things that have been supplied to multiple entities within the group.
For example, an insurer may provide general insurance to numerous entities
within a group to cover, say, property damage. Each entity may be separately
liable to pay its own premiums. However, rather than invoicing each insured
entity separately, it is simpler for the insurer to invoice a single entity (paying
agent) within the group (without having to enquire as to whether the paying
agent has entered into a Subdivision 153-B agreement with all of the other
entities in the group). The paying agent would then pay the insurer and
subsequently be reimbursed by the relevant insured entities. The paying entity
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may not strictly be a common law agent of the insured entities in respect of the
dealings with the insurer.
A similar example involves a law firm providing services for multiple legal
clients within the same corporate or stapled group. There may be
arrangements where suppliers are requested to summarise and simplify the
invoicing process by way of a single invoice addressed to a single entity, such
as a group service company, for payment. For the client, this would streamline
both the invoicing process and workflow (1 invoice) and payment process (1
payment), while providing more useful information. For the supplier, this would
reduce the number of missed, outstanding or timing differences otherwise
associated with sending and following up multiple invoices and receiving
multiple payments.
Such an arrangement would not of itself be possible under the current rules as
a service company would not necessarily be a common law agent for the
purposes of Subdivision 153-A. That is, multiple tax invoices would be
required. A proposal to extend to Subdivision 153-A the proposed changes to
Subdivision 153-B would provide potential practical and administrative benefits,
without detracting from the integrity of the overall GST regime, existence of
audit trail or underlying GST revenue base.
(c)
Recommendation
Similar amendments to those which will be made to the provisions in
Subdivision 153-B should also be made to the provisions in Subdivision 153-A.
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Schedule 3
Interaction of the Associate
Provisions
The Property Council supports the proposed amendments to the Interaction of
Associate Provisions section in the Consultation Paper.
We do not have any further comments at this time however, we note that there
is not enough time within the consultation to fully analyse these provisions. We
will advise you in due course if any issues arise from the Consultation Paper.
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