Legal Briefing No. 70

Number 70

31 March 2004

Gordon Brysland

Canberra
Gordon Brysland Senior General Counsel
T 02 6253 7286 F 02 6253 7304
gordon.brysland@ags.gov.au

GST – still on your corporate radar?

Around the millennium, Australian Government departments
and agencies were gearing-up for the new GST law coming
into force. Contracts were reviewed for transitional purposes,
clauses drafted for standard agreements, training courses
made available, new financial systems implemented, and
a range of advisers engaged. The ATO indicated it would
be sympathetic to a degree on compliance generally, given
the novelty and complexity of the new regime. There remained
a perception, however, that GST would have little practical
impact on governments and their activities.

Things have
changed. The government sector generally has been identified
as one where a potentially low level of
GST compliance may persist.

Already there are now at
least 30 decided cases dealing with GST issues. The law,
its interpretation and public
rulings have all moved on significantly since year
2000. There is a strategic need, therefore, for departments
and agencies to re-focus on their GST management. GST
needs
to be on your corporate radar, both when you contract
with third parties and when you self-assess for BAS
purposes.
The reasons for this are discussed below, illustrated
where
possible by recent Australian cases.

The GST landscape

GST is a tax on domestic consumption.
It is imposed on 'taxable
supplies' – that is, supplies for consideration
made by an entity conducting an enterprise which is registered
or required to be. Registered entities claim input tax
credits on holding tax invoices for taxable supplies to
them according to the extent the supply is used for a creditable
purpose. Exemptions from GST are divided into two main
categories. Entities making GST-free supplies (food, health,
education, exports etc.) pay no GST, but retain full input
tax credit access. Entities making input taxed supplies
(residential premises, financial supplies etc.) also pay
no GST, but are denied input tax credits on supplies to
them – cf. Marana Holdings Pty Ltd v FCT [2004] FCA
233. These entities are subject to what is called input
taxation. A range of government taxes, fees and charges
are put beyond the scope of GST.

At one time, there were
doubts about the validity of any law imposing GST – for
example, Dabner (1992) 1 Taxation in Australia (Red
Edition) 70 (at 76). These revolved around
an inability on the part of the Commonwealth to tax State
property, and the fact that laws imposing taxation must 'deal
with one subject of taxation only' – s 55 of
the Constitution. However, the Federal Court has now upheld
validity on two occasions – Halliday v Commonwealth (2000) 45 ATR 458, O'Meara v FCT 2003 ATC 4406. This
confirms that GST will be part of the fiscal landscape
for years to come – perhaps forever. Agencies need
to review and refine their GST management strategies for
the long term.

The GST law applies to agencies in very
much the same way as it does to commercial and other entities.
It is true
a range of taxes, fees and charges are put beyond the scope
of GST by a determination under s 81-5(2). However, a number
of other provisions impose additional requirements on government
entities. That agencies
are only subject to GST on a 'notional' basis
under s 177-1 does not mean the GST law is some 'toothless
tiger' in its application to them. General tax exemptions
found in earlier legislation are invariably excluded by
s 177-5.

What, then, are departments and agencies now faced
with? It may be conceded that the GST law is well-structured
and drafted in a modern accessible style. To say that it
is lengthy and complex, however, is not to overstate things – cf.
Richardson & Smith 30 Federal Law Review 47. Overseas,
routine commercial transactions are being observed to produce
often exotic VAT and GST outcomes – Peugeot Motor
Company plc v CEC [2003] STC 1438 (at 80) illustrates.
An English appeal judge recently described the arguably
simpler VAT law, for example, as a 'kind of fiscal
theme park in which factual and legal realities are suspended
or inverted' – Royal & Sun Alliance Insurance
Group plc v CEC [2002] BTC 5046 (at 5058).

We also see
the GST law producing somewhat exotic results. Agencies
need to be aware that GST can affect them, as
well as the programs they administer, in sometimes remote
or unforeseen ways. A series of social security benefit
cases illustrate this – Re Downs (2003) 73 ALD 235,
Re Ford (2002) 69 ALD 534, Re Stephens (2001) 32 AAR 430,
Secretary v Allan (2001) 66 ALD 147, Re Giannekas (2001)
66 ALD 787, Re Coxon [2001] AATA 294, Van Welsem
v Secretary (2003) 74 ALD 772. So does the public ruling on the GST
treatment of grants – GSTR 2000/11.

Real money is at stake

GST is imposed on suppliers for
taxable supplies made by them, calculated as 1/11th of
the consideration provided.
Ordinarily, the supplier will collect an amount on account
of GST from the recipient, which is on-paid to the ATO
via BAS processes. Assuming no input taxation, a registered
recipient will be entitled to an input tax credit for
the GST amount involved. In commercial minds, the 'GST' travels
in a little circle of tax neutrality between registered
parties and the ATO – the 'money-go-round',
as some have called it. For legal purposes, however,
the tax liability and credit entitlement are quite separate.
In no legal sense does a supplier collect GST from the
recipient on behalf of the ATO – cf. CSR v Royal & Sun
Alliance Insurance Australia Ltd 2003 ATC 4998 (at 5013).

What is important for agencies at this most basic of
levels is that they understand fully the precise GST
basis on
which they are contracting for, or providing, supplies.
Is your agency paying amounts on account of GST in addition
to the agreed price for procurements or under a lease?
Are you sure the GST inclusive amount you will charge for
any services provided fully factors in the extent of your
GST liability? Parties to any agreement need to ensure
they are in all respects 'on the same page' when
it comes to their GST position on pricing – cf. Howard
Smith & Co Ltd v Varawa (1907) 5 CLR 68 (at 76), Air
Great Lakes Pty Ltd v K S Easter (Holdings) Pty Ltd (1985)
2 NSWLR 309 (at 335).

Recent Australian cases show how easy it is for parties
to be at cross purposes on price. They testify to the legal
angst which may result if the issue cannot be resolved
peaceably. In one case, the supplier was adamant the price
negotiated for certain mining work was always GST exclusive – Eroc
Pty Ltd v Amalg Resources NL [2003] QSC 74. The customer
argued mutual and unilateral mistake based largely on extrinsic
factors (notes of telephone conversations, and the like)
for GST inclusivity. In the end, the customer had to pay
an extra $261,000 for the work. In another case, the agent
for a lessor mistakenly told the solicitor that rent was
GST inclusive (contrary to an earlier agreement). Technical
rectification arguments failed and the lessor was left
out-of-pocket – Cermak v Ruth Consolidated Industries
Pty Ltd [2004] NSWSC 38. Communication breakdown can exact
its own toll in GST terms.

In yet another case, an option
agreement over five properties stated 'all GST is
for the account of the [purchaser]',
though the underlying sale contract had said 'price
includes GST (if any) payable by the vendor' – Fineglow
Pty Ltd v Anastasopoulos 2002 ATC 5158. Not having focused
on this 'fine print', the purchaser had to
pay an extra $140,000. This episode shows the need for
GST consistency in documents, and for all parties to ensure
that they know exactly where they stand on GST matters.
This may be a problem in government contracts incorporating
a range of documents with schedule overlays, or where a
number of people are responsible for different elements
in a negotiation.

In response to these types of situations,
some are attracted by the 'but you get it all back' idea.
It is true registered entities 'recoup' GST
amounts paid (assuming no input taxation). But the net
financial
impact involved depends on the base price to which GST
is added. In Fineglow Pty Ltd v Anastasopoulos, for example,
the purchaser was always entitled to an input tax credit
for 1/11th of the price. On a GST inclusive price of $1.4m,
a credit of $127,273 leaves the purchaser paying a net
$1,272,727 for the properties. Having to pay GST on top
of $1.4m made the purchaser worse off by $127,273 in net
terms. The 'but you get it all back' idea neglects
the fact that the recipient of a taxable supply is entitled
to an input tax credit. Agencies need to be alert to this.

In more complex arrangements, like infrastructure acquisitions
and major offshore procurements, agencies also need to
be aware of types of GST planning strategies which may
sometimes be promoted by commercial and financial parties.
This will typically arise where such a party is denied
input tax credits for third party acquisitions on the basis
that they are used to make financial supplies. Strategies
of this nature, particularly where they operate to transfer
GST risks, need to be scrutinised carefully and in advance
of signing. The deliberately extended scope of GST anti-avoidance
provisions should also be kept in mind in this context.

Both in the design of tender documentation and later evaluation
of bids, care has to be taken to ensure the GST position
is clear, and that all bids are evaluated on the same GST
assumptions. In an early case involving residential land
in Canberra, there was confusion among both tenderers and
evaluators regarding the basis on which bids were made
and the potential impact of the GST law on the transactions – MBA
Land Holdings Pty Ltd v Gungahlin Development Authority [2000] ACTSC 89. As a result, Higgins J set aside the tender
award, and new development lease provisions were inserted
into the GST law. Failure to analyse GST outcomes had the
effect of invalidating the tender, causing undue expense
and setting back the land release by over 12 months.

Inclusive
and exclusive pricing

Something also needs to be said about
whether pricing to or by agencies should be on a GST inclusive
or GST exclusive
basis. There is a belief in some quarters that the ordinary
law requires all prices to be set on a GST inclusive basis.
The ACCC guidelines once mandated GST inclusivity in retail
contexts, but it was never the case that general pricing
under commercial agreements must conform to that model.
An agency engaging a consultant, for example, is free to
agree that the price paid for the services is GST exclusive,
then to concede recovery of GST amounts in addition to
of this base price – cf. Network Distributors
Pty Ltd v Proctor and Gamble Australia Pty Ltd [2002] QSC 425
(at 15).

GST exclusive pricing is also the most natural
approach to adopt in most situations, as well as the one
least susceptible
to simple error. Parties habitually negotiate by reference
to the net amount they bargain to receive or will be out-of-pocket.
GST inclusivity can often lead to 'silly numbers' which
make no commercial sense and are difficult to remember.
The net figure of $1,272,727 in the Fineglow Pty Ltd
v Anastasopoulos example above illustrates this. In retail
contexts, the main yardstick is that treatment of GST must
not be 'misleading or deceptive' under s 52(1)
of the Trade Practices Act 1974 – ACCC
v Signature Security Group Pty Ltd (2003) 52 ATR 1, ACCC
v Goldy Motors Pty Ltd (2001) ATPR ¶41-801. The critical thing on which
to be absolutely clear is that prices either include or
exclude GST.

Tax invoices and cash equivalence

Agencies should be in
no doubt about the importance of tax invoices in their
GST management. A tax invoice for
a taxable supply to an agency is virtual cash. Being
on an accruals basis for GST accounting purposes means
agencies can claim input tax credits as soon as they
physically hold a tax invoice – cf. Lancut (Aust)
Pty Ltd v FCT 2003 ATC 2204 (at 2206). Section 11-5(c)
of the GST law allows credits to be claimed on the basis
that the entity is simply 'liable to provide' consideration.
It does not matter that the supply is yet to be paid
for. It is important, therefore, that agreements compel
the giving of tax invoices in correct terms to agencies
up front as a pre-condition to payment – cf. ETO
Pty Ltd v Idameneo (No 123) Pty Ltd 2004 ATC 4013 (currently
on appeal). The cash-flow advantages of such a strategy
should be clear enough.

The GST law obliges the giving
of tax invoices within 28 days of a request being made
by the recipient – section
29-70(2), cf. Ambience (Arncliffe) Pty Ltd v CCSR 2002
ATC 2257 (at 2261). An agreement which obliges the supplier
to give an agency the tax invoice up-front enables the
agency to realise the benefit of the credit sooner than
it perhaps otherwise would. Transactions have been structured
so the recipient gets the benefit of the input tax credit
from the ATO before having to pay the GST amount to the
supplier. It does not matter that an agency may not have
any GST liabilities against which the credit is offset
in its BAS return. The 'net amount' is paid
electronically by the ATO into the bank account nominated
by the agency, as required by s 35-5.

Outsourcing and double-dipping

Double-dipping on input
tax credits may occur in diverse situations. One example
is where the consultant to an
agency in a reimbursement context seeks to pass on the
GST inclusive amount of out-of-pocket expenses to which
a further amount on account of GST is then added. Doing
the calculations, the net effect is that the consultant
has just made a 10% windfall gain at agency expense.
If the accommodation being reimbursed cost the consultant
$2200 GST inclusive, for example, that person is obtaining
an extra $200 for nothing. The reason for this is that,
while the reimbursement attracts GST as part of the services
provided, the consultant has already had (or will be
entitled to) the benefit of an input tax credit for the
$200 from the ATO. In major outsourcing contexts, double-dipping
which goes undetected over a long period can impose significant
and ongoing budgetary burdens on government agencies.

The ACCC guidelines cautioned against double-dipping by
this means. It may also be a practice against which
the
general law would provide a remedy. Arguments against the
practice may also arise on the terms of a particular contract.
The best and most direct way to deal with the issue, however,
is to prohibit double-dipping altogether in a way which
provides a contractual remedy up-front to the agency. Nothing
elaborate in terms of clauses is necessary to achieve such
a desirable outcome.

Something along the following lines
will be adequate in most cases – 'Neither party
may claim from the other an amount for which the first
party may claim
an input tax credit'. It should be noted that the
prohibition on claiming in this regard is usually invoked
on the mere basis an input tax credit may be claimed. An
agency should not be prejudiced by laxity or other delay
in claiming practices adopted by the consultant. Nor should
the agency be put in the position of having to get back
amounts after an event of which it will have no independent
knowledge. Double-dipping is an issue which underscores
the need for tight and effective systems to be in place
for managing GST compliance.

Countertrade and valuations

The GST law explicitly recognises
that 'consideration' for
a supply may be monetary or non-monetary. This means GST
can be payable by reference to things other than money.
The provision of software development services in return
for an IP licence over what results is an example of countertrade
(often also described as barter, 'in-kind' or
contra). Each leg of the transaction itself is both a 'supply' and 'consideration'.
The IP licence is 'consideration' for the services
and vice versa. GST is payable by each party on the 'GST
inclusive market value' of what is received. How
should GST compliance be managed here?

Importantly, the
ATO accepts that, where parties are at arm's length,
in most cases the 'GST inclusive
market value' of what they each receive from the
other may be equated – GSTR 2001/6 (at 138), cf.
Solomon Pacific Resources NL v Acacia Resources Ltd (1996)
131 FLR 179 (at 186), Re Matine Ltd (1998) 28 ACSR 268
(at 290), Allstate Explorations NL v Beaconsfield Gold
NL (1996) 20 ACSR 165 (at 168). If the things exchanged
are deemed to be of equal value, the parties may simply
swap tax invoices and net out their respective GST liability
and input tax credit in their next BAS return. Simple,
straightforward clauses can be used to facilitate this
result, and no money at all need change hands.

The only
thing left in such an exercise is to attribute market value
to what is provided. For tangible assets,
the classical approach is to ask what price willing but
not anxious parties would agree on – Spencer v
Commonwealth (1907) 5 CLR 418 (at 432), cf. Orti-Tullo
v Sadek 2001
ATC 4688 (at 4696). Comparable sales is the preferred benchmark.
However, a discounted cashflow approach may be acceptable
for intangible assets like IP licences above – cf.
Albany v Commonwealth (1976) 12 ALR 201 (at 206). But what
about an obligation to abide by some code of conduct, or
to provide limited assistance on a needs basis? Some things
are inherently difficult to value, if not impossible.

Valuation
texts suggest that, in fixing a value for intangible assets,
those assets must first be 'capable of being
both individually identified and specifically brought to
account' – for example, Lonergan Valuation
of Businesses, Shares & Other Equity (at 136). In a
similar vein, the ATO accepts that some acts, rights and
obligations can be disregarded for GST purposes 'as
they do not have economic value and independent identity
separate from the transaction' – GSTR 2001/6
(at 80). This practical approach assists generally by protecting
the exclusion for compliance purposes of trivial, remote
and non-economic things which may each be technically a 'supply' under
s 9-10(2) of the GST law.

Such an approach relieves any
need for agencies to try to account for what may be described
here as 'peripheral' supplies
in countertrade and other contexts. However, this would
not exclude the need to market value either the software
development services or the IP licence in our example above.
What it means in practice is that most of the peripheral
rights and obligations which go to make up the 'legal
machinery' of agreements can generally be disregarded
for GST purposes.

The final point is that things provided
which merely facilitate supplies in return are not regarded
as resulting in countertrade,
and are not independently taxable for this reason. A common
situation of this type occurs where an agency makes available
computer facilities and office space for the consultant
it has engaged. These things can be valued, of course,
but they are not regarded as being provided by the agency 'for
consideration' as s 9-5(a) requires – cf. CIR
v New Zealand Refining Co Ltd (1997) 18 NZTC 13187 (at
13193), Chatham Islands Enterprise Trust v CIR (1999) 19
NZTC 15075 (at 15081). The ATO accepts that nexus requirements
are not met in these circumstances – GSTR 2001/6
(at 91–92). This means minor facilitation of consultants
can be disregarded.

Scope of 'supply' concept

Leaving aside the
limited exemptions and countertrade situations just discussed,
most agencies are aware that GST may
be imposed on almost anything which is a 'supply'.
This key term is defined in s 9-10(2) to include things
far removed from the traditional categories of 'goods' or 'services' – cf.
O'Meara v FCT 2003 ATC 4406 (at 4409). Back in
year 2000, advisers were concerned GST may be payable
independently on each and every thing which was technically
a 'supply'. Long and worrisome clauses were
drafted with this in mind. If (say) 37 separate supplies
could be identified in a contract, some advisers were
suggesting the total consideration had to be apportioned
to each of these with GST being payable according to
when the right or whatever was activated or performed.
Had this approach proved to be the correct one legally,
GST compliance would have been all but impossible.

One
factor which relieves against such a result is 'single
supply theory', a doctrine borrowed from VAT learning.
UK courts have long been against the artificial dissection
of transactions for VAT purposes – CEC v Pippa-Dee
Parties Ltd [1981] STC 495 (at 501), Card Protection
Plan Ltd v CEC [2001] 2 WLR 329 (at 337). On this practical
basis, supplies which are properly incidental to an identified
principal supply are not to be taxed independently – CEC
v Wellington Private Hospital Ltd [1997] BVC 251 (at 266).
The usual test to be applied in this context is whether
the minor supply does 'not constitute an object for
customers or a service sought for its own sake, but a means
of better enjoying the principal service' – CEC
v Madgett & Baldwin [1998] STC 1189 (at 1206).

The
ATO, by embracing this doctrine in a public ruling, has
simplified GST compliance to a degree – GSTR
2001/8. Australian courts are yet to be asked to adopt
single supply theory, though one tax judge has already
indicated a measure of extra-judicial acceptance – Hill
J (2000) The Tax Specialist 304 (at 307–308), cf.
Cordell v Second Clanfield Properties Ltd [1969] 2 Ch 9
(at 16–17), Zeta Force Pty Ltd v FCT 98 ATC 4681
(at 4690). Agencies can generally rely on the 'safe
harbour' tests which GSTR 2001/8 provides. Attempted
GST compliance based on technical disaggregation of diverse
supplies is not normally called for. In cases involving
any degree of complexity, however, it is recommended that
GST outcomes be verified before documents are signed.

Another
important principle has also emerged to qualify the 'supply' concept.
This is that some voluntary conduct is necessary before
there can be a taxable supply – Shaw
v Director of Housing (No 2) 2001 ATC 4054 (at 4057–4058),
Interchase Corporation Ltd v ABN 010 087 573 Pty Ltd 2000
ATC 4552 (at 4554), Walter Construction Group Ltd v
Walker Corporation Ltd (2001) 47 ATR 48 (at 49). Payment in satisfaction
of a court order, for example, results in no 'supply' by
either party, because the payee does nothing in return.
Neither does the compulsory acquisition of property under
provisions like s 41 of the Lands Acquisition Act 1989,
as the ATO now acknowledges – ID 2003/1173. The need
for voluntary action is a significant qualification to
the 'supply' concept.

Offshore connection issues

Agencies procuring equipment
from overseas need to keep in mind that GST is not imposed
only on 'taxable
supplies' but also on 'taxable importations'.
Two taxing points, therefore, arise in most offshore
procurement contexts. How these are managed from a GST
point of view can have important implications for agencies.
This may arise most commonly where the offshore supplier
imports the equipment prior to performance testing but
that party is not GST registered and cannot claim the
input tax credit. If the unrecouped liability on the
importation is simply reflected in the raw price, the
agency will be paying a premium for the equipment. Care
needs to be taken at the negotiation and drafting stages
to minimise any financial 'black hole' which
may arise in this way.

If the offshore supplier is simply
obliged by the contract to meet all Australian taxes
other than GST (which is common),
an appreciation of importation consequences on the part
of the supplier may lead to cost-reduction in other areas – development
or manufacture, for example. Offshore parties are often
loathe to register for GST purposes. In these situations,
there are options available within the GST law which can
prevent loss of the input tax credit attaching to the importation.
One involves having title to the equipment pass prior to
importation. In such a case, the agency as the importer
(assuming access to the deferral scheme) would generally
net out the liability and credit in its next BAS return.
If installation and testing is to occur before handing
over, other structuring options need to be considered.
In all cases, appropriate attention needs to be given to
the transfer of risk and insurance.

Another offshore issue
for agencies to be aware of is that services physically
provided in Australia will be GST-free
where they are 'directly connected with goods or
real property situated outside Australia' – item
1 of the s 38-190(1) table. The direct connection required
in a real property context means that, in effect, the work
done must relate specifically to an identified site offshore – GSTR
2003/7 (at 32), cf. Trustees for the MacMillan Cancer
Trust [1998] BVC 2320 (at 2324–2325). Valuation services
provided in Australia by a registered entity specifically
in relation to an embassy site already acquired by the
Australian Government in a foreign country, for example,
pass the statutory test in this regard.

In all export (and
certain other) contexts, the special definition of 'Australia' needs
to be borne in mind. It does not include any external Territory,
but
extends to installations deemed by s 5C of the Customs
Act 1901 to be part of Australia. Supplies to foreign embassies
in Australia are not exports – cf. Radwan v Radwan [1972] 3 All ER 967 (at 973), R
v Turnbull, Ex parte Petroff (1971) 17 FLR 438, Minister
v Magno (1992) 37 FCR 298 (at
321), Brannigan v Commonwealth (2000) 110 FCR 566 (at 573).
However, GST law references to a 'non-resident' need
to be approached carefully, given section 17(a) of the
Acts Interpretation Act 1901 and cross-links to definitions
in the income tax law.

Correcting GST errors

A type of 'precautionary' practice
may have evolved in some areas in response to the perceived
complexity
of the GST law, difficulties in predicting GST outcomes,
and the need to minimise compliance costs. This practice
is designed to ensure that no supply between registered
entities which might be taxable escapes the payment of
GST. The idea is that, if everything is treated as taxable,
no-one will under-assess their GST position for BAS purposes,
and no-one may be held to account for not paying GST. After
all, the ATO will not have been deprived of any revenue
(quite the opposite in many cases), the 'money-go-round' described
above will operate, and no party is out-of-pocket to any
extent.

The short answer to those who would promote this
idea is that the GST is not some sort of 'discretionary
tax' – cf.
General Practitioners Society v Commonwealth (1980) 145
CLR 532 (at 561). It is imposed on entities by reference
to the legal effect of transactions tested against criteria
in the GST law. Despite perceived policy attractions, there
is no room for the 'precautionary' practice
mentioned. It adoption may also put the entity involved
at a competitive disadvantage in the market. The legal
position is that parties have a general obligation to unwind
GST compliance steps where they get things wrong. An example
of this is provided by the GST-free valuation services
described above. If GST had been charged in this situation,
unwinding may require lodgment by each of the parties of
a substitute BAS return or a correction entry in the next
BAS return due.

However, the ATO does allow reliance on
a practice statement avoiding the need in many cases to
unwind where there is
no prejudice to revenue and certain other conditions are
met – PS 2002/12. The policy statement applies where
parties treat as taxable a supply which is not so (either
because it is GST-free, input taxed, or 'out-of-scope').
The danger for many recipients of supplies who adopt the 'precautionary' practice
described in these circumstances lies in the fact that
they will have over-claimed input tax credits. This creates
an immediate exposure to the general interest charge, though
not for the Commonwealth or its authorities – s 8AAB(3)
of the Taxation Administration Act 1953. This, however,
does not relieve agencies of the need to properly assess
supplies they contract for, to correct any GST compliance
errors detected, and to rely on the practice statement
wherever possible.

Amounts 'on account of' GST
paid to a supplier under mistake of law may also be recoverable
from that
party even where input tax credits have been claimed by
the recipient – Fazzolari v Couchouron (2003) V ConvR
¶58-572 (at 65203), cf. Roxborough v Rothmans of
Pall Mall Australia Ltd (2001) 185 ALR 335 (at 343), CSR
v Royal Insurance Australia Ltd (1994) 182 CLR 51 (at 75). In Fazzolari
v Couchouron, a lessee had paid separate GST amounts on
top of rent to the lessor in the mistaken belief the lease
did not attract transitional relief. The fact that the
lessee had claimed input tax credits equal to the separate
GST amounts paid over earlier made no difference to the
position.

Settlement of disputes

A number of cases decided relate
to what GST may become payable in litigation contexts.
In the first one, decided
the week before the GST law came into force, an application
for a GST indemnity in negligence proceedings was refused
on the basis that payment of the judgment sum involved
no 'supply' to anyone – Interchase
Corporation Ltd v ABN 010 087 573 Pty Ltd 2000 ATC 4552
(at 4554), cf. Osric Investments Pty Ltd v Woburn
Downs Pastoral Pty Ltd (2001) 48 ATR 184 (at 236). Since then,
it has been accepted generally by the ATO that settlement
of damages disputes involve no taxable supplies – GSTR
2001/4 (at 110–111), cf. CMC Cairns Pty Ltd
v Macrossan [2003] QSC 249.

In dispute contexts, it is prudent in
a settlement deed to set out the understanding of the
parties and to provide
for what should happen if a court or the ATO was to take
a contrary view. It also 'tells the story' for
tax audit purposes. Such a clause can appear in the operative
part or in the recitals. Where parties are in dispute over
the price for an earlier supply, settlement of the dispute
may give rise to adjustment events. An agency settling
a claim by a consultant for a lesser sum on the basis that
not all the work was done will have an 'increasing
adjustment' (assuming input tax credits were claimed).
Correspondingly, the consultant will have a 'decreasing
adjustment' (assuming GST was paid), and the settlement
deed should require payment of this back to the agency
involved.

Another thing to keep in mind in settlement situations
is the potential for 'double-dipping' on input
tax credits. Where a party is being reimbursed for legal
or other costs (preparation of expert witness reports perhaps)
in a damages action, for example, an ability of that party
to claim input tax credits for the things to which those
costs relate means that only the GST exclusive amount of
those costs should be reimbursed. Where the other party
cannot claim input tax credits, the full GST inclusive
amount should be paid over. It is advisable in almost every
litigation situation to independently verify that the GST
treatment to be adopted is correct. After the settlement
is in place may be too late to revisit GST issues.

Long term arrangements

Four years ago, departments and
agencies were reviewing their agreements to identify which
ones attracted transitional
relief from GST. Access to relief depended on two main
things – when the agreement was made, and when
any 'review opportunity' arose. If the recipient
would have been entitled to a full input tax credit for
the supply, the agreement had to have been made before
9 July 1999 (the day the legislation received Royal Assent).
In other cases, it had to be made before 2 December 1998
(the day the draft legislation was first publicly released).
A long term lease of commercial office space, for example,
had to be entered into before 9 July 1999 to attract
transitional relief.

A review opportunity is an ability
arising 'under
the agreement' for the supplier to 'change
the consideration directly or indirectly because of the
imposition of GST' or to conduct a 'general
review, renegotiation or alteration of the consideration'.
If one arose before 1 July 2005, transitional relief would
be lost, with GST payable by the supplier from the date
the opportunity arose – Orti-Tullo v Sadek 2001 ATC
4688 illustrates. If the parties merely re-negotiated the
contract, that would automatically operate to make relief
cease in most cases. If no review opportunity arose, relief
would cease in any case from 1 July 2005 – Fazzolari
v Couchouron (2003) V ConvR ¶58-572 illustrates. Suppliers
would then be subject to GST from 1 July 2005 without any
ability to recoup GST amounts from recipients. Those recipients
entitled to input tax credits, however, would make windfall
gains to that extent.

The government has recently announced,
therefore, that it would 'introduce an arrangement
that will accommodate all suppliers with pre-existing long
term contracts …' Unless
the recipient agrees to accept an 'appropriate price
adjustment proposed by the supplier', GST at the
ordinary rate of 10% will be imposed on the recipient from
1 July 2005 but collected by the supplier and remitted
to the ATO via BAS processes … as happens generally
in Canada – cf. Pebruk Nominees Pty Ltd v Woolworths
(Vic) Pty Ltd 2003 ATC 4932 (at 4940). What is 'appropriate' is
determined by the 'net impact of the New Tax System reforms' in which the following factors will be taken
into account:

  • direct cost to the supplier of the imposition of GST
    on the supplies
  • net recurrent GST compliance costs of the supplier,
    and
  • cost reductions to supplier arising from abolition
    of other taxes.

Available data suggests compliance costs have been high
in most industry sectors, with cost reductions being both
minimal and difficult to isolate. Except in clear cases
where suppliers have benefited significantly from New
Tax System reforms, it is likely recipients will agree to a
flat 10% price increase. The announcement envisages new
regulations will define more precisely what is an 'appropriate
price adjustment', and that this is to be determined
in individual cases by an independent assessor. This person
will be agreed by the parties or appointed externally.

Agencies
with long term arrangements covered by the recent announcement
need to consider the options to be made available
in the coming legislation. These may be summarised as follows:

  1. amend
    the agreement to allow the supplier full GST recovery
  2. accept 'appropriate
    price adjustment' by
    independent assessor, or
  3. maintain position and
    subject recipient to GST liability.

Suppliers will naturally want to pass on the full tax
burden imposed on them. Both A and C achieve that general
outcome, but A is preferable given that C results in a
direct liability being imposed on the recipient. The chance
an independent assessor might find something less than
a 10% increase to be 'appropriate' makes B
an attractive option for many recipients. It seems remote
that an increase above the GST rate of 10% could properly
be considered 'appropriate' in this context.

Agencies may be party to agreements to which the new legislation
will apply in a vast variety of situations. Long term
commercial leases of premises to them are but one possible
example.
In all situations, of course, agencies need to consider
the options in order to secure the most favourable GST
outcome going forward from 1 July 2005. The first step
will involve identifying agreements which will become
subject to the new amendments. It may then be necessary
to seek
further advice on what to do, with an eye to the final
form of the new amendments.

Ensure that GST is on your radar

The range of practical
issues discussed in this Legal briefing should be sufficient
to put departments and agencies
on notice that GST should be constantly on their corporate
radar. It cannot be safely assumed that an approach
adopted in year 2000 continues to meet all compliance obligations.
The GST law, its interpretation, decided cases, and
public
rulings have all moved on substantially. In many instances,
those who were responsible for GST management in government
agencies will also have moved on. Discontinuity in
this respect, plus indications the government sector generally
has lower compliance rates, should serve as a timely
reminder of the importance of GST management in the
longer
term.

Gordon Brysland is a Senior General Counsel
based in AGS Canberra. He was recently recruited to
AGS after a
number
of years in private practice, where he specialised in
complex GST advising and structuring. Gordon's
clients have included major domestic and multinational
corporations, as well as government departments, agencies
and those who deal with them. He is now involved in the
delivery of GST advisory and other services to AGS clients.
Gordon has published widely in GST, other taxation fields,
and various public law areas. He is also the founder
and convenor of an independent GST discussion group in
Canberra called the Reverse Charge Club.

This briefing was prepared by Gordon Brysland of our Canberra
office. For further information please contact Gordon
on tel (02) 6253 7286,
email <gordon.brysland@ags.gov.au> or any of the
following lawyers:

Sydney

Catherine Leslie

(02) 9581 7481

Melbourne

Frank Vitale

(03) 9242 1373

Brisbane

Lesley Ziukelis

(07) 3360 5747

Perth

Graeme Windsor

(08) 9268 1102

Adelaide

Sarah Court

(08) 8205 4231

Hobart

Peter Bowen

(03) 6220 5474

Darwin

Jude Lee

(08) 8943 1405

ISSN 1448-4803 (Print)
ISSN 2204-6283 (Online)

The material in these notes is provided to AGS clients
for general information only and should not be relied
upon for the purpose of a particular matter. Please
contact
AGS before any action or decision is taken on the
basis of any of the material in these notes.

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