CONFIDENTIAL and and COMMISSIONER OF TAXATION
[2012] AATA 408
•29 June 2012
[2012] AATA 407
Division
TAXATION APPEALS DIVISION
File Number
2011/3714
Re
CONFIDENTIAL
APPLICANT
And
COMMISSIONER OF TAXATION
RESPONDENT
[2012] AATA 408
Division
TAXATION APPEALS DIVISION
File Number
2011/4808
Re
CONFIDENTIAL
APPLICANT
And
COMMISSIONER OF TAXATION
RESPONDENT
DECISION
Tribunal Egon Fice, Senior Member
Date 29 June 2012 Place Melbourne Matter 2011/3714
The Tribunal decides that the objection decision made by the Commissioner of Taxation on 20 July 2011 disallowing the applicant's objection to the Private Ruling was correct. It affirms that decision.
Matter 2011/4808
The Tribunal decides that the objection decision made by the Commissioner of Taxation on 27 September 2011 disallowing the applicant’s objection to the Private Ruling was correct. It affirms that decision.
...[sgd Egon Fice]...........................................................
Egon Fice, Senior Member
TAXATION – Private Ruling – Goods and Services Tax – input tax credits – member of a GST group – acquisitions of second-hand goods – hire purchase agreement – creditable acquisition – goods acquired or held before the introduction of GST – goods acquired or held for the purposes of sale or exchange (but not for manufacture) in the ordinary course of business – purposes for acquiring the aircraft – application of the GST grouping provisions – taxable supply – second-hand aircraft – leasing of aircraft
Acts Interpretation Act 1901 (Cth) s 13
A New Tax System (Goods and Services Tax) Act 1999 (Cth) ss 9-5, 9-20, 9-40, 11-10, 11-15, 11-20, 13-15, 48-1, 48-5, 48-40, 48-45, 48-55, 66-5, 195-1
A New Tax System (Goods and Services Tax Transition) Act 1999 (Cth) ss 16, 18, 19A
Income Tax Assessment Act 1936 (Cth) s 6
Income Tax Assessment Act 1997 (Cth) ss 70-10, 995-1
Taxation Administration Act 1953 (Cth) ss 14ZZ, 357-110, 359-1, 359, 359-5, 359-60
CIC Insurance Ltd v Bankstown Football Club Ltd (1987) 187 CLR 384
Commissioner of Taxation (Cth) v GKN Kwikform Services Pty Ltd (1991) 91 ATC 4336
Commissioner of Taxation v Hyteco Hiring Pty Ltd (1992) 39 FCR 502
Commissioner of Taxation v McMahon (1997) 79 FCR 127
Downs Distributing Company Pty Ltd v Associated Blue Star Stores Pty Ltd (In Liquidation) (1948) 76 CLR 463
Hope v The Council of the City of Bathurst (1980) 144 CLR 1
Imperial Bottleshops Pty Ltd & Egerton v Federal Commissioner of Taxation (1991) 22 ATR 148
John v Commissioner of Taxation of the Commonwealth of Australia (1989) 166 CLR 417
LeasePlan Australia Ltd v Federal Commissioner of Taxation (2009) 74 ATR 33
N.S.W. Associated Blue-Metal Quarries Ltd v Federal Commissioner of Taxation (1956) 94 CLR 509
Project Blue Sky Inc and Others v Australian Broadcasting Authority (1998) 194 CLR 355
Saeed v Minister for Immigration and Citizenship (2010) 84 ALJR 507
Taylor and Another v White and Another (1964) 110 CLR 129
The Commissioner of Taxation of the Commonwealth of Australia v Suttons Motors (Chullora) Wholesale Pty Ltd (1985) 157 CLR 277
The Taxpayer and Commissioner of Taxation [2010] 76 ATR 917
A New Tax System (Goods and Services Tax) Bill 1998 (Cth) Explanatory Memorandum
Krever R, GST Legislation Plus (Thomson Reuters, 2012)
Pearce D C and Geddes R S, Statutory Interpretation in Australia (7th ed, LexisNexis Butterworths, 2011)
The Shorter Oxford English Dictionary (3rd ed, 1983)
REASONS FOR DECISION
Egon Fice, Senior Member
Although the applicants in these two matters are different entities, they were heard concurrently because of the extensive overlap of the factual and legal issues involved. They are primarily concerned with the application of A New Tax System (Goods and Services Tax Transition) Act 1999 (Transition Act). The second matter (2011/4808) also raises issues about the application of the special rules dealing with GST groups.
Matter 2011/3714
In a letter dated 10 December 2010 the applicant informed the Commissioner of Taxation (the Commissioner) of its intention to claim Goods and Services Tax (GST) input tax credits arising in relation to three second-hand aircraft purchased and sold by it in Australia. The applicant stated that it particularly wished to seek clarification as to the correct tax period in which the input tax credits should be claimed.
The Commissioner treated the letter from the applicant as a request for a Private Ruling. In a response dated 24 December 2010 the Commissioner stated he required further information. On 25 January 2011 PricewaterhouseCoopers (PwC) responded on behalf of the applicant and provided the further information requested by the Commissioner.
On 29 March 2011 the Commissioner issued to the applicant a Notice of Private Ruling (Private Ruling) together with reasons for decision. The Private Ruling was said to be based on the facts in the description of the scheme that was set out in the Private Ruling.
By letter dated 29 April 2011 the applicant lodged an objection to the Private Ruling pursuant to s 359-60 of Schedule 1 to the Taxation Administration Act 1953 (the Administration Act).
In a letter dated 20 July 2011 the Commissioner notified the applicant that, having considered its objection, it disallowed it. The letter set out the Commissioner's reasons for doing so.
On 5 September 2011 the applicant lodged an application for review by the Tribunal in accordance with s 14ZZ of the Administration Act.
The issues which I must determine on this application are:
(a)the precise description of the scheme referred to in the Private Ruling issued by the Commissioner;
(b)whether the applicant acquired the aircraft for the purposes of sale or exchange (but not for manufacture) in the ordinary course of business;
(c)whether the applicant held the aircraft on 1 July 2000 for the purposes of sale or exchange (but not for manufacture) in the ordinary course of its business; and
(d)whether the applicant had previously held the aircraft (ie, prior to 1 July 2000) for any other purpose.
THE SCHEME REFERRED TO IN THE PRIVATE RULING
Section 359 of Schedule 1 in the Administration Act deals with Private Rulings. Section 359-5 provides:
359-5 Private rulings
(1)The Commissioner may, on application, make a written ruling on the way in which the Commissioner considers a relevant provision applies or would apply to you in relation to a specified *scheme. Such a ruling is called a private ruling.
Note: Section 357-55 specifies the relevant provisions.
(2)A *private ruling may cover any matter involved in the application of the provision.
The word scheme is a defined term and its meaning is found in s 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997). It means:
(a)any *arrangement; or
(b)any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise.
The significance of determining the precise nature of the scheme is explained in s 359-1 of the Administration Act. It states:
A private ruling is an expression of the Commissioner's opinion of the way in which a relevant provision applies, or would apply, to you in relation to a specified scheme.
The Full Court of the Federal Court of Australia (Lockhart, Beaumont and Emmett JJ) in Commissioner of Taxation v McMahon (1997) 79 FCR 127 was required to deal with a Private Ruling on appeal from a decision of this Tribunal. Although that case dealt with Private Rulings as they were then found in Part IV of the Administration Act, s 14ZAF was in similar terms to that now set out in s 359-1. Lockhart J explained that the Private Ruling regime is different from the process of assessment to tax under the Assessment Act. His Honour said, at 132-133:
The arrangement is but a complex of assumed or identified facts. It may also involve assumptions which, if made by the Commissioner, must be stated in his identification of the relevant arrangement. Indeed, in the present case it was expressly stated in the private ruling that no assumptions were made by the Commissioner.
When making a private ruling the Commissioner does not make findings of fact. He simply identifies facts and then states his opinion about the way in which the relevant tax laws apply to the applicant in relation to those identified facts.
…
If a taxpayer seeks a review of the private ruling before the Tribunal, the subject matter of that review is the arrangement as identified by the Commissioner in his private ruling. That arrangement is constant throughout the process of the private ruling and any review or appellate process that ensues.… But the review is not a review in the usual sense that applies to the processes of administrative review when it is dealing with actual facts. These are hypothetical facts. They may turn out to be the real facts; but the whole notion of a private ruling is that the facts are not necessarily the facts which will underlie the making of any ultimate assessment. If the factual matrix as explained to the Commissioner in aid of a request for a private ruling are suspicious, the Commissioner has ample powers to decline to make a private ruling.…
In making his decision about the private ruling the Commissioner is bound by the facts said by him to constitute the arrangement as identified in the ruling. Nor can the Tribunal travel beyond those facts as identified in the ruling. What the Tribunal does is to “go over again” the objection decision to consider what it thinks should be the proper answer to the question about the way in which the relevant tax law operated on the identified facts constituting the arrangement: Comptroller-General of Customs v Akai Pty Ltd (1994) 50 FCR 511 at 521 and the cases there cited.
In his Notice of Private Ruling, the Commissioner set out the relevant facts and circumstances upon which his opinion was based. The Commissioner also stated that if the applicant's circumstances were materially different from the facts as he had stated, the ruling had no effect and the applicant could not rely on it. The arrangement or scheme upon which the Commissioner relied for the purposes of the Private Ruling was that which was provided by the applicant and PwC following the request for further information. The Commissioner described it as follows:
(a)the applicant had been registered for GST since 1 October 2005;
(b)from 1 October 2005 the applicant had been a member of a GST group of which the group representative was X company;
(c)the applicant had advised the Commissioner that in the course of carrying on its enterprise of the leasing and sale of aircraft, it acquired three second-hand aircraft with the intention to lease and sell;
(d)each of the aircraft were subsequently sold to Australian entities as taxable supplies; and
(e)the applicant was now seeking to claim a GST credit under Subdivision 66-A of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).
As part of the description of the arrangement, the Commissioner also included details relating to each of the aircraft. They are as follows:
Aircraft E3194
·The aircraft was originally acquired by the applicant on 20 December 1991.
·On 1 December 1992 the applicant entered into a financing agreement regarding this aircraft. The aircraft was sold to a bank which, on 23 December 1992, on-sold the aircraft to a trustee company. The trustee company leased the aircraft back to the applicant.
·The lease agreement embodied an option to purchase the aircraft at the end of the lease term and therefore was a hire purchase agreement.
·The applicant on-leased the aircraft to a number of operators between 1992 and 1995. In 1995 the applicant leased the aircraft to an overseas leasing company which sublet the aircraft to an Australian company which imported the aircraft into Australia in 1995.
·Under the terms of the hire purchase/lease agreement, title to the aircraft transferred from the trustee company to the applicant on 22 June 2004. At the time of transfer of the aircraft to the applicant, neither the applicant nor the group representative accounted for GST on supply on the basis that the relevant supply and acquisition occurred prior to 1 July 2000 for GST purposes in respect of the hire purchase arrangement.
·On 7 October 2009 the applicant sold the aircraft while the aircraft was in Australia. The purchaser accounted for the GST on sale of the aircraft via the reverse charge provisions under Division 83 of the GST Act.
Aircraft E3198
·An overseas leasing company acquired the aircraft from the manufacturer on 30 July 1992.
·On 30 July 1992 the applicant entered into an agreement with the leasing company to lease the aircraft with an option to purchase it at the end of the lease term. The agreement was therefore a hire purchase agreement. At the time the applicant acquired the aircraft it was second-hand, having previously been owned and used. No GST was charged to the applicant as the transaction took place prior to the introduction of GST.
·The applicant on-leased the aircraft to a number of operators between 1992 and 1995. In 1995 the applicant leased the aircraft to another overseas aircraft leasing company which sub-leased the aircraft to an Australian company.
·The Australian company imported the aircraft into Australia in 1995.
·Under the terms of the hire/purchase/lease agreement, title in the aircraft transferred from the original lessor to the applicant on 29 July 2002. The aircraft was located in Australia at the time of transfer of title. Neither the applicant nor the lessor accounted for GST in respect of the transfer on the basis that the relevant supply and acquisition occurred prior to 1 July 2000 for GST purposes in respect of the hire purchase arrangement.
·On 7 October 2009 the applicant sold the aircraft while the aircraft was in Australia. The purchaser accounted for GST on the sale via a Division 83 reverse charge.
·The purchaser then sold the aircraft to the Australian company as a taxable supply with GST being reported under Division 83 of the GST Act.
Aircraft E1002
·This aircraft was used by the manufacturer for nine years as a demonstrator at air shows and on short-term leases before the applicant purchased it in 1991.
·The applicant leased the aircraft to two further lessees, the second of these subletting the aircraft to an Australian company on 30 August 1995. The Australian company imported the aircraft into Australia in 1995 and continued to lease the aircraft until 2009.
·The applicant sold the aircraft on 7 October 2009 while the aircraft was in Australia. GST was accounted for by the purchaser under the reverse charge provisions under Division 83 of the GST Act.
·The purchaser of the aircraft on-sold it to the Australian company as a taxable supply with GST being reported under Division 83 of the GST Act reverse charge provisions.
THE APPLICANT’S PURPOSES FOR ACQUIRING THE AIRCRAFT
Mr C Sievers of Counsel, who appeared on behalf of the applicant, submitted that the Commissioner chose to make the Private Ruling on the basis that the arrangement included, as a fact, that the applicant acquired each of the aircraft for the purpose of sale or exchange. In his oral submissions, Mr Sievers said that the arrangement upon which the Commissioner ruled was a bunch of hypothetical facts. He submitted it was not the role of the Tribunal to ascertain whether those facts were correct. Mr Sievers also submitted that the Commissioner had sought further information regarding the applicant's intention for purchasing the aircraft and at no stage until this proceeding, did the Commissioner raise any question about any of the factual matters in the arrangements.
Mr Sievers referred to the statements made by Lockhart J in McMahon's case. He also noted that the Commissioner, in making the Private Ruling, relied on the advice given by the applicant that the aircraft in question were acquired as second-hand aircraft with the intention to lease and sell. In the objection decision, the Commissioner expressed that statement in the positive sense and said: You carry on an enterprise of the sale and leasing of aircraft. Mr Sievers submitted that if the Commissioner wanted to raise this issue, an assessment and the review procedure was the correct place for that, but not on this application. Mr Sievers reiterated that the facts in the arrangement are the facts in the arrangement. By their very nature, they are hypothetical. He submitted that it was not the Tribunal’s role to determine whether those facts were correct.
Mr T Flynn of Counsel, who appeared on behalf the Commissioner, submitted that the Commissioner has never accepted that the applicant acquired any of the aircraft for the purpose of sale or exchange. He said that the applicant cannot compel the Commissioner or the Tribunal to assume that it carried on the business of selling aircraft, and that it acquired the aircraft in the ordinary course of that business. Mr Flynn referred to the statement made by the Commissioner in the Private Ruling which I have set out at paragraph 13(c) above. He submitted that just because the applicant had advised the Commissioner that its enterprise was one of leasing and sale, and it acquired the aircraft with the intention of lease and sale, did not establish those matters as facts. He said the Commissioner was not prepared to make the ruling on the assumption that those assertions were accurate, as was demonstrated by his request for further information.
According to Mr Flynn, whether a taxpayer is carrying on a business, and the nature of that business, is a mixed question of fact and law to be answered by scrutinising the primary facts, in particular the taxpayer’s activities and its purposes. He referred me to the High Court of Australia decision in Hope v The Council of the City of Bathurst (1980) 144 CLR 1.
Prior to dealing with that case, I should mention that the GST Act contains a definition of the word business in s 195-1. It provides:
business includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee.
The word enterprise is also a defined term and its meaning is found in s 9-20 GST Act. Insofar as it is relevant for these purposes, it means:
(1)An enterprise is an activity, or series of activities, done:
(a)in the form of a *business; or
(b)in the form of an adventure or concern in the nature of trade; or
(c)on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property;…
In Hope's case the issue which the High Court was required to determine was whether a parcel of land used by the appellant was rural land and therefore entitled to the benefit of the lower general rate levied by the Bathurst City Council. The expression rural land was defined in the Local Government Act to mean land which was wholly or mainly used by the occupier for carrying on one or more of the businesses or industries of grazing etc. Mason J pointed out it was common ground that the term business was used in its ordinary meaning in s 118(1) of the Local Government Act. However, the appellant submitted that the question whether its activities as found answered the statutory description was a question of law.
Mason J said, at 7:
Many authorities can be found to sustain the proposition that the question whether facts fully found fall within the provisions of a statutory enactment properly construed is a question of law.
His Honour also referred to the judgement of Kitto J in N.S.W. Associated Blue-Metal Quarries Ltd v Federal Commissioner of Taxation (1956) 94 CLR 509 which he described as illuminating. He said, at 7-8:
Kitto J observed that the question whether certain operations answered the description "mining operations upon a mining property" within the meaning of s. 122 of the Income Tax Assessment Act 1936, as amended, was a mixed question of law and fact.
Mason J proceeded to analyse the meaning of word business on the ground that its ordinary meaning was that used in s 118(1). He then said, at 8-9:
I accept, then, that "business" in the sub-section has the ordinary or popular meaning which it would be given in the expression "carrying on the business of grazing". It denotes grazing activities undertaken as a commercial enterprise in the nature of a going concern, that is, activities engaged in for the purpose of profit, on a continuous and repetitive basis.… On the facts as found, I conclude that the appellant's activities amounted to a business and that no other conclusion was reasonably open.
Mr Flynn also referred me to the Full Court of the Federal Court decision in Commissioner of Taxation v Hyteco Hiring Pty Ltd (1992) 39 FCR 502. Hyteco was a company which carried on a business of hiring forklift trucks. Generally, Hyteco purchased the forklift trucks which it hired to other entities. On one occasion, Hyteco obtained a forklift truck under a lease from the financier and at the expiration of the lease, it purchased the forklift at its residual value. When forklift trucks were considered unsuitable for further hiring, they were sold for the benefit of Hyteco. The Commissioner included in Hyteco's assessment the profit it received on the sale of unsuitable trucks. He claimed that while the main business activity of Hyteco was the leasing of forklift trucks to its customers, nevertheless, the sale of the trucks at the time they had become unsuitable for further hiring was an ordinary incident of its business activities. Therefore, profits made on the sales were assessable as income.
The judge at first instance found that Hyteco's policy was to make new or, occasionally, as new, forklifts available for long-term hiring. The rental on those hirings was calculated so as to return between 20 and 30% on funds invested. The average useful hiring life of the forklift was in the range from 5 to 8 years, although examples were given of hiring life up to 15 years. On a few occasions when the lease was paid out by Hyteco paying the residual value, the forklift truck which was the subject of the lease might be sold soon after although such a case was regarded as exceptional. The parties conceded that inevitably a time would come when a forklift truck would need to be disposed of.
The Full Court analysed a number of cases which determined the nature of the transactions said to have been conducted either within or outside the ordinary course of business. In arriving at its conclusion, the Full Court examined in some detail the facts in the case before it and distinguished it from other cases where the facts were clearly different. The court examined matters such as whether what occurred was a regular and ordinary incident of the business; whether the profit derived from the sale of the goods in question following a period of leasing was inevitable; whether the leased items were held on capital account; and whether the sales of equipment from rental inventory to customers were treated differently.
Mr Flynn submitted that what I should draw from the Hope and Hyteco cases is that whether the applicant in this case was carrying on a business of selling aircraft, and whether it acquired or held those aircraft in the ordinary course of business for a purpose of sale, are conclusions that can be drawn by the Tribunal from whatever facts there are that form part of the arrangement. He submitted that such a conclusion cannot be fixed by an assertion made by the taxpayer in an application for a Private Ruling.
In my opinion, Mr Flynn’s submissions should be accepted. While I have no doubt that it is correct to say that the Tribunal must rely upon the facts as stated in coming to its conclusion, what has been described by the applicant as facts in its application for a Private Ruling, clearly goes beyond merely the facts. Whether the applicant was carrying on an enterprise of leasing and sale of aircraft is, in my opinion, a mixed question of fact and law. Both of the terms, business and enterprise, are defined in the statute. They are also words which have been interpreted by the courts in a number of different contexts and have acquired an accepted legal meaning. The nature of the business conducted by the applicant needs to be determined after a careful analysis of the factual material which comprises the activities conducted by the applicant. Whether those facts permit a finding that the applicant carried on an enterprise or conducted the business of leasing and sale of aircraft is a question of law.
Mr Flynn also referred to s 357-110 of the Administration Act which deals with assumptions in making private or oral rulings. He submitted that the Commissioner had the power to assume that the applicant was carrying on a business of leasing, and that it acquired the aircraft in the ordinary course of the business, but nowhere in the Private Ruling did he indicate he was exercising the power. Section 357-110 provides:
357-110 Assumptions in making private or oral ruling
(1)If the Commissioner considers that the correctness of a *private ruling or an *oral ruling would depend on which assumptions were made about a future event or other matter, the Commissioner may:
(a)decline to make the ruling; or
(b)make such of the assumptions as the Commissioner considers to be most appropriate.
(2)Before making the ruling, the Commissioner must:
(a)tell the applicant which assumptions (if any) the Commissioner proposes to make; and
(b)give the applicant a reasonable opportunity to respond.
Note: The Commissioner should make a private ruling within 60 days. However, if the Commissioner tells the applicant about assumptions the Commissioner proposes to make under this section, that period is extended: see subsection 359-50(2).
I agree with Mr Flynn's submission that the Commissioner did not make any assumptions regarding the ruling in this matter. He did not decline to make the ruling or tell the applicant which assumptions he proposed to make, giving the applicant a reasonable opportunity to respond.
SPECIAL RULES REGARDING ACQUISITIONS OF SECOND-GOODS
Under s 11-20 of the GST Act, a taxpayer is entitled to an input tax credit for any creditable acquisition that the person makes. In order for there to be a creditable acquisition, there must be a taxable supply. Therefore, without special rules to overcome this restriction, where a person making taxable supplies acquires second-hand goods from private sellers or non-registered persons, no input tax credits would be available. Division 66 of the GST Act provides those special rules allowing persons acquiring second-hand goods to claim input tax credits for the acquisition of those goods. Section 66-5 of the GST Act provides:
66-5 Creditable acquisitions of second-hand goods
(1)If you acquire *second-hand goods for the purposes of sale or exchange (but not for manufacture) in the ordinary course of *business, the fact that the supply of the goods to you is not a *taxable supply does not stop the acquisition being a *creditable acquisition.
(2)However, this section does not apply, and is taken never to have applied, to the acquisition if:
(a)the supply of the goods to you was a *taxable supply, or was *GST-free; or
(b)you *imported the goods; or
(c)the supply of the goods to you was a supply by way of hire; or
(d)Subdivision 66-B applies to the acquisition; or
(e)you make a supply of the goods that is not a taxable supply.
(3)This section has effect despite section 11-5 (which is about what is a creditable acquisition).
Division 66 of the GST Act may also apply to goods purchased before its commencement as a result of the transition provisions contained in the Transition Act. Section 18 of the Transition Act provides:
18 Second-hand goods
(1)Division 66 of the GST Act applies to second-hand goods you acquired before 1 July 2000 only if:
(a)you held them at the start of that day for the purposes of sale or exchange (but not for manufacture) in the ordinary course of business; and
(b)you had not previously held them for any other purpose.
(1A) However, if:
(a)because of this section, you are entitled to an input tax credit for an acquisition of second-hand goods; and
(b)the *consideration for the acquisition was $300 or less; the input tax credit is treated as though it were an input tax credit attributable to any one tax period of your choice.
(2)This section does not apply to second-hand goods in respect of which you are entitled to a special credit under former section 16.
The term acquisition is defined in the GST Act as follows:
11-10 Meaning of acquisition
(1)An acquisition is any form of acquisition whatsoever.
(2)Without limiting subsection (1), acquisition includes any of these:
(a)an acquisition of goods;
(b)an acquisition of services;
(c)a receipt of advice or information;
(d)an acceptance of a grant, assignment or surrender of *real property;
(e)an acceptance of a grant, transfer, assignment or surrender of any right;
(f)an acquisition of something the supply of which is a *financial supply;
(g)an acquisition of a right to require another person:
(i) to do anything; or
(ii) to refrain from an act; or
(iii) to tolerate an act or situation;
(h)any combination of any 2 or more of the matters referred to in paragraphs (a) to (g).
(3)However, an acquisition does not include an acquisition of *money unless the money is provided as *consideration for a supply that is a supply of money.
The facts regarding the acquisition of each of the aircraft which are the subject of this matter are set out above at paragraph 14. Aircraft E1002 was purchased by the applicant in 1991. The remaining two aircraft were acquired by the applicant through leasing arrangements which contained within them an option to purchase the aircraft at the expiry of the lease. According to the applicant, those remaining two aircraft were the subject of a hire purchase agreement. Although the Commissioner initially contended that the exclusion set out in s 66-5(2)(c) of the GST Act applied because the applicant had already acquired those aircraft by way of hire prior to title being transferred to the applicant, he conceded this point at the time of hearing. Mr Sievers submitted that while there was no definition of the expression hire in the GST Act, the expression hire purchase agreement is defined in s 195-1 of the GST Act by reference to s 995-1 of the ITAA 1997. Section 995-1 defines the expression hire purchase agreement as follows:
hire purchase agreement means:
(a)a contract for the hire of goods where:
(i) the hirer has the right, obligation or contingent obligation to buy the goods; and
Note: An example of a contingent obligation is a put option.
(ii) the charge that is or may be made for the hire, together with any other amount payable under the contract (including an amount to buy the goods or to exercise an option to do so), exceeds the price of the goods; and
(iii) title in the goods does not pass to the hirer until the option referred to in subparagraph (a)(i) is exercised; or
(b)an agreement for the purchase of goods by instalments where title in the goods does not pass until the final instalment is paid.
I had in evidence the two aircraft leasing agreements relating to E3198 and E3194. They both contain a purchase option exercisable at the time of expiry of the lease. Therefore, in my opinion, the Commissioner properly conceded this point. It follows that those two aircraft were acquired by the applicant at the time it entered into the respective hire purchase agreements.
The more difficult question which I am required to answer is whether Division 66 of the GST Act applies to the aircraft acquired by the applicant prior to its commencement. Tied to this question are the two questions posed by s 18 of the Transition Act. Section 18 draws into the GST provisions those second-hand goods which were acquired prior to 1 July 2000 and held on that date (the date on which the GST Act commenced) for the purposes set out in that section. According to R Krever, the author of the text, GST Legislation Plus, extending the GST rule provided by s 66-5 of the GST Act to second-hand goods acquired prior to 1 July 2000 provides surrogate recognition of wholesale sales tax borne in respect of these goods. Therefore, the purpose of the Transition provisions is to ensure that GST is not paid on any wholesale sales tax embedded in the cost of the goods acquired prior to the commencement of the GST Act.
Mr Krever's commentary is supported by the former s 16 of the Transition Act which was repealed in September 2006. This section dealt with a special GST credit for sales tax paid on stock. It provided that the amount of special credit was equal to the amount of sales tax that the taxpayer had borne in respect of the goods. Mr Sievers also directed my attention to s 19A of the Transition Act which remains operative. It relates to the supply of a motor vehicle and provides that the supplier of the vehicle is entitled to a special credit. One of the conditions attached to the application of that section of the Transition Act is that the motor vehicle must have been the subject of sales tax. Mr Sievers submitted that the current s 18 of the Transition Act contains no such limitation. Therefore, given that the words contained in s 18 make no reference whatsoever to a precondition that sales tax or wholesale sales tax was required to have been paid when the goods were initially acquired, a taxpayer need not demonstrate that this was the case in respect of those goods acquired prior to 1 July 2000. I accept Mr Siever’s submission on this point.
Mr Sievers submitted that the first enquiry should be directed to why the applicant held the aircraft as at 1 July 2000. He said that the answer to that question may be a different purpose to that for which the aircraft were initially acquired. Mr Sievers submitted that the answer to the question posed by s 66-5 of the GST Act would not necessarily be the same as the answer to the question posed by s 18 of the Transition Act. In other words, a taxpayer’s purpose for acquiring goods may change over time. He provided the example where a company purchased equipment to use in its own business with no intention of selling, or not having an intention of selling in the ordinary course of its business and then, on 30 June 2000, it decided to sell it at the end of July 2000 while using it for that month. On 1 July 2000 it would be holding the equipment for a purpose of selling and so could satisfy s 18(1)(a). That section of the Transition Act would be satisfied even if the applicant also concurrently held the aircraft for a purpose of leasing. Mr Sievers submitted that this result was arrived at by applying the analysis of Middleton J in the Federal Court case LeasePlan Australia Ltd v Federal Commissioner of Taxation (2009) 74 ATR 33.
Before examining this case in detail, I should point out that the question posed by s 66-5 of the GST Act is applicable only to acquisitions made after the commencement of that Act. The words used in that section are drafted in the present tense and it plainly has no retrospective effect. Section 18 of the Transition Act was introduced for that purpose. It provides for second-hand goods acquired prior to the commencement of the GST Act to be treated as creditable acquisitions if the circumstances set out in that section are satisfied. It is the timing difference which accounts for the different expressions used in each Act. Nevertheless, once the goods have been acquired, quite plainly they are held by the acquiring entity until it disposes of them.
LeasePlan carried on the business of motor vehicle fleet leasing and management. In the ordinary course of carrying on its business, LeasePlan purchased, leased, managed and sold second-hand motor vehicles, each of those activities being integral to the business of motor vehicle fleet leasing and management. Private individual employees sold the vehicles to LeasePlan and, because they were not registered or required to be registered for GST purposes, the sale by each employee to LeasePlan was not a taxable supply for the purposes of the GST Act and no GST was payable by LeasePlan on the supply. It leased the vehicles to employees under an operating lease. LeasePlan relied on documentary evidence to demonstrate that the leases specifically contemplated the disposal of the vehicles by sale at the conclusion of the lease period and further, that the contemplation of net proceeds of sale and residual value of the vehicles, at the time of acquisition, substantiated the claim that the sale was a purpose for which the vehicles were acquired.
Middleton J, at 39, said that all the terms and conditions of the arrangements needed to be taken into account, including the sale provisions and those provisions relied on by LeasePlan. He found that the evidence established LeasePlan's business purpose in acquiring the vehicles was to lease them and to sell them at the end of the leases. The sale at the conclusion of the lease was necessary to provide the forecast financial returns to LeasePlan's business. His Honour found that whether or not LeasePlan was motivated by an initial motive of leasing, its business being what it was, at least one purpose was to make a profit through eventual sale. He found that what LeasePlan intended to achieve in acquiring the vehicles was to derive income from allowing the vehicles to be leased and also deriving income from the sale of vehicles.
Of course the LeasePlan case was concerned with s 66-5(1) of the GST Act rather than
s 18 of the Transition Act. That was because the goods in question were acquired after the commencement of the GST Act. In this case we are concerned with whether the second-hand goods (aircraft) acquired prior to the commencement of the GST Act, were held on 1 July 2000 for the purposes of sale or exchange (but not for manufacture) in the ordinary course of business.
Middleton J noted that both parties in the LeasePlan case accepted that neither a sole purpose test nor a dominant purpose test applied for the purpose of s 66-5(1) of the GST Act. Rather, the test was whether the sale was a purpose for which the vehicles were acquired. His Honour referred to the High Court of Australia decision in John v Commissioner of Taxation of the Commonwealth of Australia (1989) 166 CLR 417. John's case involved the taxpayer claiming an allowable deduction for a proportionate part of a net loss of a partnership which was constituted by the difference between the sale price of shares and the cost of the original shares upon the footing that the shares were held as trading stock within s 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936). Section 6(1) of the ITAA 1936 defined trading stock as:
... includes anything produced, manufactured, acquired or purchased for purposes of manufacture, sale or exchange, and also includes live stock;…(emphasis added)
The reason why the parties in LeasePlan agreed that neither a sole purpose test nor a dominant purpose test applied for the purpose of s 66-5(1) of the GST Act was this statement made by the plurality at 430:
The definition of "trading stock", in speaking of the "purposes of manufacture, sale or exchange", clearly predicates that one such purpose shall attend the acquisition of the item in question. The definition does not require that the relevant purpose be the sole or even the dominant purpose. …
There is, however, in my opinion, a problem with the acceptance by Middleton J that the purpose referred to in s 66-5(1) is identical to that described in John's case. The definition of trading stock in s 6(1) of the ITAA 1936 does not contain the definite article (the). Nor, for that matter, does the definition of trading stock in Division 70 of ITAA 1997. The quotation to which I have referred in the preceding paragraph appears to have been read as if the definite article was included in the definition of trading stock. A careful reading of s 66 of the GST Act and s 18 of the Transition Act reveals that the definite article is used in both of these sections. Although I raised this apparent anomaly with Mr Sievers in the course of the hearing, I was told that it was simply not a matter in dispute.
The problem with acceptance by the parties that the meaning of the expression for purposes of is identical to the meaning of the expression for the purposes of is that it is contrary to the general principles of statutory interpretation. In fact, as D C Pearce and R S Geddes explain in their text, Statutory Interpretation in Australia, at 2.26, the courts have pointed out that they are not at liberty to consider any word or sentence as superfluous or insignificant. All words must prima facie be given some meaning and effect. The High Court decision in the case Project Blue Sky Inc and Others v Australian Broadcasting Authority (1998) 194 CLR 355 made that abundantly clear. The majority (McHugh, Gummow, Kirby and Hayne JJ), said, at 382:
Furthermore, a court construing a statutory provision must strive to give meaning to every word of the provision (52). In The Commonwealth v Baume (53) Griffiths CJ cited R v Berchet (54) to support the proposition that it was "a known rule in the interpretation of Statutes that such a sense is to be made upon the whole as that no clause, sentence, or word shall prove superfluous, void, or insignificant, if by any other construction they may all be made useful and pertinent".
More recently, the High Court in Saeed v Minister for Immigration and Citizenship (2010) 84 ALJR 507 confirmed the principle. The plurality said, at 516:
… The presumption is that words are used in a statute for a reason; they should be given their meaning and effect.
With respect to Middleton J, in my opinion, the use of the definite article in s 66-5 of the GST Act and s 18 of the Transition Act should result in a different meaning being given to those sections to that given to 6(1) of the ITAA 1936 where it does not appear. The meaning of the definite article, the, according to The Shorter Oxford English Dictionary is: Referring to an individual object (or objects). Therefore, it appears to me that second-hand goods held only for the purposes of sale or exchange in the ordinary course of business or acquired only for the purposes of sale or exchange in the ordinary course of business are those to which s 18 of the Transition Act and s 66-5 of the GST Act refer respectively. Despite this apparent problem, and mindful of the fact that I am bound by the decision of Middleton J in the LeasePlan case, I am nevertheless of the view that the outcome in this matter will not be affected by the anomalies raised by the LeasePlan case.
PURPOSE OF ACQUISITION AND HOLDING OF THE AIRCRAFT
Although Mr Sievers submitted that at the time the applicant acquired the aircraft, its intention was that they would be sold at some stage in the future, the only evidence of this intention before me was a statement made by an authorised representative of the applicant, in a letter dated 10 December 2010 to the Commissioner. The representative said that in the course of carrying on its enterprise of leasing and sale of aircraft, the applicant acquired three second-hand aircraft with the intention to lease and sell them. He then set out the details of each of the aircraft which I have described above. The Commissioner sought further information regarding the acquisition of the second-hand aircraft. In a letter dated 25 January 2011 from PwC, the author of the letter, a Director at PwC, repeated what was stated by the representative that, in the applicant's course of business, an intention always existed at the time of acquisition and throughout the leasing period to sell the aircraft at a later time. He then said:
The leases between [the applicant] and its lessees for the relevant aircraft do not typically contain a provision for the leased aircraft to be sold to the lessee at a later stage. The existence of such a provision is not necessary for [the applicant] to have had the necessary intention to sell, and that question is to be established by reference to the evidence; see LeasePlan…. We consider this statement to acknowledge that, generally, the commercial intent (and profit-making necessity) of leasing businesses is to sell the lease assets at some stage of their useful life, and consequently it would be rare for a leasing enterprise not to have this intention.…
It is clear that [the applicant's] concurrent intention was to sell the asset at the time of the acquisition and we have been able to locate the following evidence to support the existence of this intention:…
The Director on behalf of the applicant then noted the following evidence of an intention to sell the aircraft at the time they were acquired:
·The notes of two internal meetings within the applicant's tax teams and others on 19 May 2010 supported a finding that at the time of acquiring the aircraft, there was an intention to sell the aircraft subsequent to leasing them.
·PwC's instructions were that sales of aircraft by the applicant had increased over the more recent years primarily due to an ageing fleet causing the sale of aircraft becoming more commercially beneficial than leasing them. This was apparently due, in part, to lower rentals obtainable to older aircraft resulting in lease, marketing and administration costs becoming relatively high.
·All aircraft owned by the applicant are eventually sold after a period of leasing except in rare and unexpected circumstances where an event occurs resulting in the total loss of the aircraft.
·Further support for this contention is found in a KPMG report dated 13 July 2006 regarding another company within the applicant's corporate group which undertakes aircraft leasing activity is equivalent to those of the applicant. That report states that the ultimate sale of aircraft forms part of the intended business of that company which includes the initial aircraft acquisition, leasing of the aircraft and then the disposal of the aircraft. Reference was also made to the calculation of a Defined Portfolio Income for the company's Financial Risk Insurance Policy.
With respect to what the applicant has said about the purpose for acquiring the aircraft in question, the evidence I have referred to above amounts to nothing more than self-serving statements. Although I accept that such evidence should not be excluded (see Imperial Bottleshops Pty Ltd & Egerton v Federal Commissioner of Taxation (1991) 22 ATR 148, at 155), it must be treated with caution. There was no objective evidence before me regarding the purpose underlying the acquisition of these aircraft. More significantly, there was no objective evidence before me that these aircraft were acquired for the purposes of sale or exchange in the ordinary course of business. The expression, in the ordinary course of business, was described by Dixon CJ in the High Court decision Taylor and Another v White and Another (1964) 110 CLR 129 at 136:
The time-honoured phrase "in the ordinary course of business" is meant to refer to transactions regularly taking place in a sustained course of activity or some usual process naturally passing without examination.
Rich J described it in this way in Downs Distributing Company Pty Ltd v Associated Blue Star Stores Pty Ltd (In Liquidation) (1948) 76 CLR 463, at 477:
It speaks of the course of business in general. But it does suppose that according to the ordinary and common flow of transactions in affairs of business there is a course, an ordinary course. It means that the transaction must fall into place as part of the undistinguished common flow of business done, that it should form part of the ordinary course of business as carried on, calling for no remark and arising out of no special or particular situation.
Although the applicant referred to the facts and circumstances set out in the LeasePlan case, even a cursory reading of that case discloses significant factual differences in LeasePlan’s operation from that which is conducted by the applicant.
The evidence in the LeasePlan case was that LeasePlan entered into an obligation to sell every motor vehicle which was acquired for the purposes of leasing and sale. LeasePlan produced documentary evidence to demonstrate that the leases specifically contemplated the disposal of the vehicles by sale. At the conclusion of the lease period, when the vehicle was sold by LeasePlan at a value less than the Residual Value of the vehicle, the lessee was required to pay LeasePlan the shortfall. If the sale realised more than the Residual Value, LeasePlan was required to pay the lessee the excess.
As was stated by PwC, the leases between the applicant and its lessees did not typically contain a provision for the leased aircraft to be sold to the lessee at a later stage. That, in my opinion, is a significant distinction. Furthermore, between the time the aircraft were first acquired in 1991 and 1992, and the time of their sale in 2009, all of the aircraft were leased a number of times to a number of different operators. It was only at the end of their commercial life for the purposes of leasing that these assets were sold. These facts more closely resemble those in the Hyteco case. In Hyteco, the forklift trucks were inevitably sold, but only when they were no longer suitable for leasing. This led the Judge at first instance to conclude that Hyteco was carrying on a business of hiring out forklifts rather than a business of hiring out forklifts and selling them. The forklifts were fixed assets of the applicant, not part of its trading stock.
On appeal, Hill J, with whom Black CJ and Wilcox J agreed, said, at 508:
We were referred to a number of cases involving sales of items which, at some stage in their useful life, had been plant and which had been the subject of depreciation, but which subsequently had been sold at a profit. While a consideration of these cases is not unhelpful, it must be borne in mind that the resolution of each case ultimately depended upon its own facts.
His Honour then proceeded to analyse a number of cases which dealt with whether the profit made by a taxpayer had the character of income. Those cases dealt with the hire and sale of scaffolding and the sale and leasing of computers. Hill J then referred to Commissioner of Taxation (Cth) v GKN Kwikform Services Pty Ltd (1991) 91 ATC 4336. His Honour said, at 511:
The present case is clearly distinguishable from GKN Kwikform. The profit in question in the present case was not inevitable; nor did it arise as part of the leasing transaction itself. What the present case is concerned with is a profit arising on a sale to third parties of the very apparatus with which the taxpayer conducted its business, not a profit from the process by which the taxpayer operated to obtain regular returns by means of regular outlays: cf Sun Newspapers Ltd v Commissioner of Taxation (Cth) (1938) 61 CLR 337 at 359; GKN Kwikform at 4339. It is a profit of a capital nature and not revenue profit.
Hill J concluded that the sale of forklift trucks at a profit was not an ordinary incident of the business activity of a company hiring out such trucks, any more than the sale of redundant typewriters or word processing equipment is an ordinary incident of the business of a solicitor or accountant.
I should add that in this matter, other than a bare statement made by PwC, I had no evidence of the way in which the applicant dealt with the undoubtedly many other aircraft which it acquired or leased in the course of its business. The only factual material provided to the Tribunal related to the three aircraft which I have identified above.
In my opinion, the facts described by the applicant in the material relied upon for the purposes of the Private Ruling bear considerable similarity to the facts in the Hyteco case. The leasing activities, by the applicant's own admission, did not necessarily require the lessee to purchase the equipment at the conclusion of the lease. The sales it made were not an integral part of its leasing activities. The aircraft acquired by the applicant were leased to a number of lessees over a period of some 17 years. There was no evidence of regular acquiring and selling of aircraft. It was only when the returns from the leasing of aircraft had fallen to such an extent that it was no longer a sound commercial proposition to continue leasing that the applicant sold the aircraft. The various leases which it entered into with third parties did not contain a requirement that the lessee purchase the aircraft at the end of the lease term for any particular sum or residual value.
I find that the applicant did not sell the aircraft in the ordinary course of its business as that expression is generally understood. In the ordinary course of its business, it leased aircraft. Therefore, despite the submissions made by the applicant about its intention when it acquired the aircraft, I find that on the evidence before me, on the balance of probabilities, the applicant did not acquire the aircraft for the purposes of sale or exchange in the ordinary course of its business.
However, as Mr Sievers correctly pointed out, in this matter we are concerned with the application of s 18 of the Transition Act. Where the second-hand goods in question were acquired prior to 1 July 2000, it is the purposes for which they were held at that date which matters. Mr Sievers also submitted that the purpose or purposes may not necessarily be identical with the purpose for which the goods were acquired prior to 1 July 2000.
Mr Flynn submitted that the purposes described in s 18(1)(a) are identical to those in the definition of the expression trading stock in s 70-10 of the ITAA 1997, save for the exclusion of manufacture. Mr Sievers, in response to the Commissioner’s submissions, said that there was no good reason why the words which appear in s 18(1)(a) of the Transition Act limited the goods therein described to trading stock.
In my opinion, the words used in s 18(1)(a) of the Transition Act are apt to describe the goods acquired as trading stock as that expression is generally understood. Trading is generally understood and defined as buying and selling (The Shorter Oxford English Dictionary). Section 13(1) of the Acts Interpretation Act 1901 provides that headings of Parts are deemed to be part of the Act. Section 18 of the Transition Act falls under Part 4 which is headed: Stock on hand on 1 July 2000. The goods (or stock) to which s 18 of the Transition Act refers are limited to those which were held on 1 July 2000 for the purposes of sale or exchange in the ordinary course of business. Section 18(1)(b) of the Transition Act supports this interpretation. The expression stock-in-trade is defined in The Shorter Oxford English Dictionary as: The goods kept on sale by a dealer, shopkeeper or pedlar. In my opinion, s 18 of the Transition Act is intended to deal with trading stock.
Although Mr Sievers submitted that the purpose of acquisition prior to the commencement of the GST Act and the subsequent purpose for which the goods were held may differ, it appears to me that once goods are acquired, they are held by the person acquiring them even if they are not owned by that person (see The Commissioner of Taxation of the Commonwealth of Australia v Suttons Motors (Chullora) Wholesale Pty Ltd (1985) 157 CLR 277). Although I accept that if the goods were acquired some time prior to the commencement of the GST Act, the purpose for the acquisition may have altered over time, it does not follow that a subsequent change of purpose prior to
1 July 2000 which results in the goods continuing to be leased but with the intention of selling them at a later date results in the goods falling within s 18(1)(a) of the Transition Act. The goods must be held on 1 July 2000 for sale or exchange in the ordinary course of the taxpayer’s business.
Mr Sievers submitted that if I accepted that reference to the expression for the purposes of indicated that the purpose need not be either the sole or dominant purpose, then if one of the purposes of holding the aircraft as at 1 July 2000 was for sale or exchange, the applicant also satisfied s 18(1)(b). Mr Sievers arrived at this conclusion by reasoning that the word purpose in paragraph (b) refers to one of the purposes described in paragraph (a). He explained that by using this approach: the words previously held for any other purpose must mean previously held for any other purpose that did not include a purpose of sale or exchange. Because one of the purposes for which the applicant held the aircraft was sale, it satisfied the requirements set out in s 18(1)(b).
Mr Flynn submitted that the interpretation suggested by Mr Sievers could not possibly be correct because it required a significant rewriting of the provision. He submitted that the plain words of s 18(1)(b) excludes Division 66 if the taxpayer held second-hand goods for any purpose other than the purposes of sale or exchange in the ordinary course of its business. Had the drafter of the provision intend it to be as broad as that described by Mr Sievers, he or she would have worded the provision differently. Mr Flynn suggested that if the word purpose were given the same meaning in paragraph (b) as it has in paragraph (a), the paragraph would read: you have not previously held them for any… purpose [other than for the purposes of sale or exchange in the ordinary course of business].
With respect to both Mr Sievers and Mr Flynn, the problem which underlies both interpretations is the fact that s 18(1)(a) is read as if the definite article did not exist. If that section were read in the way I believe it should be read, the question regarding the operation of s 18(1)(b) would not arise. However, because of the view which I have already expressed that the applicant did not hold the aircraft on 1 July 2000 for the purposes of sale or exchange in the ordinary course of business, I need say nothing further about these submissions.
In my opinion, the applicant remains confronted with the problem that the evidence does not disclose that the aircraft in question were held for a purpose of sale on 1 July 2000 in the ordinary course of its business. At that time, all of the aircraft were leased to third parties and had been on lease to various parties since 1991-1992. Its ordinary course of business had not changed since it acquired those aircraft and the leasing activities continued for a further 9 years after the introduction of the GST Act. For the reasons I have already stated, its ordinary business on 1 July 2000 remained that of leasing aircraft. Therefore, I find that the applicant does not satisfy the provisions relating to second-hand goods in s 18(1)(a) of the Transition Act. Division 66 of the GST Act does not apply to the applicant's aircraft.
CONCLUSION
This matter concerns the review of an objection decision made by the Commissioner in relation to a Private Ruling. Although I accept that in reviewing that decision, I am constrained by the arrangement identified by the Commissioner in his Private Ruling, that constraint is limited to the facts identified by the applicant. It does not, in my opinion, constrain me from determining whether those stated facts lead to particular legal conclusions. Therefore, whether the activities conducted by the applicant constitute a business or enterprise of selling aircraft and whether it acquired or held those aircraft in the ordinary course of business for the purposes of sale or exchange, are matters which I must determine on the facts as stated and the evidence provided by the applicant.
Division 66 of the GST Act contains special rules regarding the supply and acquisition of second-hand goods. The aircraft acquired by the applicant were second-hand. In effect, Division 66 does not prevent an acquisition of second-hand goods, which is not a taxable supply, from being regarded as a creditable acquisition. The Transition Act extends the application of Division 66 to second-hand goods acquired before the commencement of the GST Act. The aircraft in question in this matter were acquired eight or nine years prior to the commencement of the GST Act.
Relying on the Federal Court decision in LeasePlan, the applicant contended that at the time of acquisition of the aircraft, its intention was to lease the aircraft and to subsequently sell them. Therefore, the applicant submitted that I should find it acquired the aircraft for the required purposes described in s 66-5 of the GST Act. However, I have found that the applicant did not acquire the aircraft for the purposes of sale or exchange in the ordinary course of its business. Its ordinary course of business was the leasing of aircraft. The sale of the aircraft was not an integral part of its leasing operations even though the applicant sold the aircraft when they were no longer a commercially viable leasing proposition.
Although the applicant contended that in this matter, we were concerned with the application of s 18 of the Transition Act, and that the purposes for acquiring the aircraft prior to the commencement of the GST Act may have changed over the course of time so that on 1 July 2000, the applicant held the aircraft for the purposes of sale or exchange, the Transition Act also requires the goods to be held for the purposes of sale or exchange in the ordinary course of business and that they had not previously been held for any other purpose. As at 1 July 2000, the applicant's business activities had not altered since the aircraft were acquired. It continued to lease the aircraft for a further nine years before finally disposing of them by way of sale. They were sold because it was no longer commercially viable to lease them. Those sales were not an integral part of the ordinary business of the applicant.
I find that the Commissioner's decision made on 20 July 2011 disallowing the applicant's objection to the Private Ruling made on 29 March 2011 was correct. I affirm that decision.
REASONS FOR DECISION
Egon Fice, Senior Member
Matter 2011/4808
As I have already stated in my reasons for decision in the 2011/3714 matter, this matter was heard concurrently. The issues which I have addressed in 2011/3714 matter are also issues in this proceeding. In addition to those issues, this matter raises questions about the operation of the so called grouping provisions found in Division 48 of the GST Act. Having made the findings I have in the 2011/3714 matter, given the similarity of the circumstances involved in this matter, the outcome must be identical. Therefore, it is not necessary for me to proceed to address the Division 48 issue. However, in the event that my analysis of the operation of s 18 of the Transition Act is incorrect, and in deference to the submissions made by both parties, I will set out my views regarding the operation of the grouping provisions.
I need to briefly set out the facts in this matter as the applicant is not the same entity as that in matter 2011/3714. There are also some differences due to the fact that members of a GST group were involved in the acquisition and subsequent sale of the two aircraft, the goods in question in this matter.
In a letter dated 10 December 2010 the applicant, as the group representative for J company, informed the Commissioner of its intention to claim GST input tax credits arising under Division 66 of the GST Act regarding two second-hand aircraft purchased and sold by the applicant in Australia. The Commissioner treated the applicant's letter as a request for a Private Ruling.
In this case, the Commissioner did not request further information from the applicant. Instead, he issued to the applicant a Notice of Private Ruling on 22 March 2011 (the Private Ruling) along with reasons for his decision. However, the Private Ruling did not take into account the fact that J company was a member of a GST group of which the applicant was the representative member. Therefore, the applicant requested a second Private Ruling on 29 March 2011 to take into account the fact that the applicant was a member of a GST group.
On 23 May 2011 the Commissioner issued a second Notice of Private Ruling denying the applicant an entitlement to input tax credits following the sale of the two second-hand aircraft. The Commissioner stated that his ruling was based on the facts which I have set out below.
·The applicant was the GST group representative for J company. J company was a non-resident entity.
·J company was registered for GST as a non-resident company for the period 29 April 2005 to 30 June 2005.
·The applicant was also the GST group representative for B company and had been since 1 July 2007. The company was also a non-resident entity.
·J company, in the course of carrying on its enterprise of leasing and sale of aircraft as a non-resident company, acquired outside of Australia two second-hand aircraft with the intention to lease and sell.
·Each of the aircraft was finally sold to Australian entities external to the GST group as taxable supplies.
The details of each aircraft are as follows:
Aircraft E2097
·This aircraft was originally sold by British Aerospace to J company on 8 April 1988.
·On 16 July 1988 J company entered into a sale and leaseback arrangement with a bank.
·The sale of the aircraft to the bank and subsequent leaseback took place on 3 August 1988.
·The lease from the bank to J company contained an option to purchase the aircraft at the end of the lease term. At the time of acquisition, the aircraft was second-hand as it had been previously owned and used. No GST was charged to J company by the bank as the transaction took place prior to the introduction of GST.
·J company onward leased the aircraft to B company which subleased the aircraft to N company. N company acted as the importer of the aircraft into Australia in 2005.
·Title in the aircraft transferred from the bank to J company on 2 January 2009. The aircraft was located in Australia at the time of the title transfer. Neither the bank nor J company accounted for GST in respect of the title transfer because the relevant supply and acquisition occurred prior to 1 July 2000 for GST purposes.
·J company sold the aircraft to B company on 2 January 2009 while the aircraft was in Australia. As J company and B company were members of the same GST group at the time of the sale, no GST was accounted for on the sale.
·B company then sold the aircraft to N company. GST was accounted for by N company via a reverse charge in accordance with Division 83 of the GST Act.
Aircraft E 2107
·This aircraft was originally sold by British Aerospace to a bank on 3 August 1988. The bank leased the aircraft to J company on that day.
·The lease provided for an option for J company to purchase the aircraft at the end of the lease term. This was a hire-purchase agreement. At the time of acquisition the aircraft was second-hand as it had been previously owned and used. No GST was charged to J company on the acquisition as the transaction took place prior to the introduction of GST.
·J company onward leased the aircraft to B company which subleased the aircraft to N company. N company acted as the importer of the aircraft into Australia in 2005.
·Under the terms of the hire purchase agreement, title in the aircraft transferred from the bank to J company on 2 January 2009. The aircraft was located in Australia at the time of title being transferred to J company. Neither the bank nor J company accounted for GST in respect of the title transfer because the relevant supply and acquisition occurred prior to 1 July 2000 for GST purposes.
·J company on-sold the aircraft to B company on 2 January 2009 while the aircraft was in Australia. Because J company and B company were members of the same GST group at the time of sale, no GST was accounted for on the sale.
·B company then sold the aircraft to N company. GST was accounted for by N company by means of a reverse charge in accordance with Division 83 of the GST Act.
In his reasons for decision accompanying the second Notice of Private Ruling, the Commissioner confirmed his opinion in the first ruling that the applicant was not entitled to input tax credits because it failed to satisfy s 18(1) of the Transition Act. The reasons given by the Commissioner are those to which I have referred in matter 2011/3714. In addition, the Commissioner also provided a further reason for denying the input tax credits.
The Commissioner stated that s 48-45(3) of the GST Act provided that an acquisition made from a member of the same GST group was not a creditable acquisition unless the supply of the things acquired was a taxable supply because of Division 84 of the GST Act. The Commissioner stated that Division 84 related to offshore supplies other than goods or real property and because the aircraft were goods, that Division of the GST Act did not apply. Accordingly, s 48-45(3) denied the input tax credits.
On 13 July 2011 the applicant lodged an objection against the second Private Ruling. In the objection which was prepared by PwC on behalf the applicant, the applicant stated that J company onward leased both aircraft to a number of operators between 1988 and 2005.
The Commissioner issued the objection decision on 27 September 2011. He disallowed the objection on the ground that s 48-45(3) of the GST Act disallowed any input tax credits.
APPLICATION OF THE GST GROUPING PROVISIONS
This analysis proceeds on the assumption that, contrary to my findings in matter 2011/3714 regarding the application of s 18 of the Transition Act, which apply equally to this matter, the applicant held the aircraft for the purposes of sale or exchange in the ordinary course of its business and not for any other purpose.
The applicant is the representative member of the GST group of which B company and J company are members. Division of 48 of the GST Act contains special rules dealing with GST groups. Section 48-1 explains what the Division is about. It provides:
48-1 What this Division is about
Companies within a 90% owned group, and in some cases other entities (such as non-profit bodies), can form a GST group. One member of the group then deals with all the GST liabilities and entitlements (except for GST on most taxable importations) of the group, and (in most cases) intra-group transactions are excluded from the GST.
Note:Provisions for members of GST groups apply for the wine equalisation tax (see Subdivision 21-B of the A New Tax System (Wine Equalisation Tax) Act 1999) and the luxury car tax (see Subdivision 16-A of the A New Tax System (Luxury Car Tax) Act 1999).
The formation of GST groups is provided for in s 48-5 of the GST Act. Essentially, it provides that two or more entities may form a GST group when certain conditions are met. Each of the entities must agree in writing to the formation of the group and one of those entities must notify the Commissioner of the formation of the group. That entity is nominated to be the representative member of the group. The entity must be an Australian resident. Although I did not have any evidence before me regarding when the GST group was formed, it is safe to say that it must have been on or after 1 July 2000.
Section 48-40 provides that the representative member of the GST group is liable to pay GST on any taxable supply and on any taxable importation.
48-40 Who is liable for GST
(1)GST that is payable on any *taxable supply an entity makes and that is attributable to a tax period during which the entity is a *member of a *GST group:
(a)is payable by the *representative member; and
(b)is not payable by the entity that made it (unless the entity is the representative member).
Note: However, each member may be jointly and severally liable to pay the GST that is payable by the representative member (see section 444-90 in Schedule 1 to the Taxation Administration Act 1953).
(1A) GST that is payable on any *taxable importation an entity makes while the entity is a *member of a *GST group:
(a)is payable by the *representative member; and
(b)is not payable by the member that made it (unless the member is the representative member).
Note: However, each member may be jointly and severally liable to pay the GST that is payable by the representative member (see section 444-90 in Schedule 1 to the Taxation Administration Act 1953).
(2)However:
(a)a supply that an entity makes to another *member of the same *GST group is treated as if it were not a *taxable supply, unless:
(i) it is a taxable supply because of Division 84 (which is about offshore supplies other than goods or real property); or
(ii) the entity is a participant in a *GST joint venture and acquired the thing supplied from the *joint venture operator for the joint venture; and
(b)this section only applies to GST payable on a *taxable importation made, by a member of the GST group other than the *representative member, if the GST on the importation is payable at a time when GST on *taxable supplies is normally payable by the representative member.
(3)This section has effect despite sections 9-40 and 13-15 (which are about liability for GST).
Section 48-45 deals with who is entitled to input tax credits. It provides:
48-45 Who is entitled to input tax credits
(1)If an entity makes a *creditable acquisition or *creditable importation the input tax credit for which is attributable to a tax period during which the entity is a *member of a *GST group:
(a)the *representative member is entitled to the input tax credit on the acquisition or importation; and
(b)the entity making the acquisition or importation is not entitled to the input tax credit on the acquisition or importation (unless the entity is the representative member).
(2)In deciding, for the purposes of subsection (1), whether an acquisition or importation by an entity is a *creditable acquisition or *creditable importation, the acquisition or importation is treated as being solely or partly for a *creditable purpose if, and only if, it would be so treated if:
(a)the GST group were treated as a single entity; and
(b)the GST group were not treated as a number of entities corresponding to the members of the GST group.
(3)However, an acquisition that an entity makes from another *member of the same *GST group is not a *creditable acquisition unless the supply of the thing acquired by the entity was a *taxable supply because of Division 84 (which is about offshore supplies other than goods or real property).
(4)This section has effect despite sections 11-5 and 15-5 (which are about what are creditable acquisitions and creditable importations), and sections 11-20 and 15-15 (which are about who is entitled to input tax credits).
Both of the aircraft, the subject of this application, were acquired by J company in 1988. Quite clearly, because that preceded the introduction of GST, at that time J company was not a member of a GST group. Nevertheless, assuming that J company satisfied the provisions in s 18 of the Transition Act, Division 66 of the GST Act would apply to the acquisition of the two aircraft in question. They were both second-hand aircraft at the time they were acquired. Therefore, the fact that the supply of the aircraft to J company was not a taxable supply, did not prevent the acquisition being a creditable acquisition for the purposes of s 66-5 of the GST Act. However, as Mr Flynn submitted on behalf of the Commissioner, s 66-5 does not apply if the supply subsequently made by J company was not a taxable supply. That is because s 66-5(2)(e) expressly provides that s 66-5 does not apply, and is taken never to have applied, to the acquisition if the subsequent supply of the goods by the party acquiring the goods was not a taxable supply.
Although neither of the parties made submissions regarding the words is taken never to have applied, quite clearly they have work to do in respect of the exclusionary provisions contained in s 66-5(2). As I attempted to explain in matter 2011/3714, s 66-5(1) is drafted in the present tense and therefore, except for the transitional provisions in the Transition Act, would only apply to acquisitions made following the commencement of the GST Act. In my opinion, the words is taken never to have applied have work to do because s 18 of the Transition Act effectively gives s 66-5 a retrospective operation where goods have been acquired prior to the commencement of the GST Act.
J company sold the aircraft to B company on 2 January 2009 at a time when both companies were members of the same GST group. Therefore, according to Mr Flynn, applying s 48-40(2)(a) results in that sale not being treated as a taxable supply.
Mr Sievers on behalf of the applicant advanced three arguments in support of the contention that the applicant, as the representative member of the GST group, was entitled to the GST credit following the taxable supply of the aircraft by B company to N company in 2009. They are:
(a)the applicant should be treated as having made the taxable supply of the aircraft – the single entity argument;
(b)alternatively, each of the entities involved should be treated as separate entities and J company should be taken to have made the creditable acquisition because its sale of the aircraft to B company was a taxable supply; and
(c)alternatively, B company, as the entity which made the taxable supply, was entitled to the second-hand goods credit.
Regarding the first argument, Mr Sievers, relying on what is stated in s 48-1 of the GST Act, submitted that the purpose of the GST group is to effectively make the GST representative responsible for taxes and entitled to the input tax credits. Any intra-group transactions should be ignored. There seemed to be no argument about that statement. The problem arises when one considers which entity is liable for GST and which entity is entitled to input tax credits.
Section 48-40 deals with who is liable for payment of GST. Section 48-40 makes it clear that where an entity is a member of the GST group, the GST payable on a taxable supply is payable by the representative member. Mr Sievers then directed my attention to s 48-40(3) of the GST Act. That section provides that s 48-40 has effect despite what is set out in ss 9-40 and 13-15, which deal with liability for GST. Mr Sievers submitted that the section is concerned about modifying liability to pay GST. If it was intended that
s 48-40(2) would have the result that no taxable supply was made, then s 48-40(3) would have provided that the section had effect despite s 9-5 of the GST Act which deals with when there has been a taxable supply. In my opinion, that is plainly correct.Mr Sievers submitted that the Commissioner sought to give s 48-40 a significantly broader application than that provided for in the legislation. In my opinion, that submission is also correct. As I understood Mr Flynn’s submissions, the Commissioner relied specifically on s 48-40(2) to support his contention that the supply by one entity to another member of the same GST group could not be a taxable supply unless it was a taxable supply because of Division 84 (which has no application to this matter). In my opinion, it does not do that. Section 48-40 is concerned with liability for GST, rather than whether the supply of goods between members of the GST group are taxable supplies. It is plainly a deeming provision made for the purposes of modifying the usual liability to pay the GST. That is the context in which the expression, is treated as if it were not a taxable supply, must be read.
In support of his submission, Mr Sievers also directed my attention to s 48-45, which deals with who is entitled to input tax credits. He noted in particular that the words used in s 48-45(3), which deals with the acquisition an entity makes from another member of the same GST group, are not in the form of a deeming provision (as is s 48-40(2)), but rather it provides that such an acquisition is not a creditable acquisition unless the supply of the thing acquired by the entity was a taxable supply because of Division 84. Furthermore, s 48-45(4) provides that the section has effect despite the two sections which are about what are creditable acquisitions and creditable importations, and the two sections which are about who is entitled to input tax credits.
Once again, I accept Mr Sievers’ submissions as being correct. The words in s 48-40(2) (as if it were not a taxable supply) clearly are concerned only with the question of liability for GST as that is what the section deals with, and it is supported by the references in s 48-40(3) to ss 9-40 and 13-15. Also, as Mr Sievers submitted, the effect of reading s 48-40(2) as broadly as the Commissioner has would mean that in all situations where a member of a GST group purchased second-hand goods and there was an intra-group transaction before the taxable supply of those goods, the exclusions set out in s 66-5(2)(e) would result in acquisitions of second-hand goods not being regarded as creditable acquisitions under that section of the GST Act. Quite clearly, that cannot have been the intention of the legislature when enacting the GST grouping provisions.
The Commissioner also referred to the Tribunal decision in the case The Taxpayer and Commissioner of Taxation [2010] 76 ATR 917. That case dealt with the application of the GST grouping provisions to Division 75 which is concerned with the sale of freehold interests in land. The Commissioner argued that the GST grouping rules had the effect of creating a statutory fiction for the purposes of the GST Act generally. A member of the GST group is taken to be part of the single entity comprised of the representative member and all other members of the group. The Tribunal rejected that argument as well as the proposition that activities, in that case, acquisitions, undertaken by one group member can be ascribed or attributed to other group members, or the GST group as a single entity. The Tribunal referred to s 75-10(2) which uses the words your acquisition. The Tribunal held that references in the Explanatory Memorandum to the Bill (A New Tax System (Goods and Services Tax) Bill 1998 (Cth)) did not warrant advancing a single entity concept which would allow the term your acquisition to be construed as an acquisition by another entity.
Mr Sievers submitted that the Tribunal made a mistake and that I should not adopt its line of reasoning. In fact the Tribunal decision was also contrary to the Commissioner's view concerning the use of the grouping or margin scheme provisions of the GST Act. In this case, Mr Flynn submitted that a single entity treatment was contemplated for GST groups for the limited purposes of ss 48-45(2) and 48-55. As far as s 48-45(2) is concerned, it was contemplated for the purpose of ascertaining whether an acquisition made by a group member is made for a creditable purpose in accordance with s 11-15, and secondly, under s 48-55 when calculating the amount of input tax credits to which the representative member of the group is entitled.
However, Mr Flynn submitted that the single entity treatment contemplated in Division 48 does not extend to determining, other than in the limited context of deciding the extent to which a creditable purpose exists, whether a member of the GST group makes a creditable acquisition. He then submitted that as s 48-45(1) gives the representative member of the group, in this case the applicant, entitlement to input tax credits that would otherwise be an entitlement of a member of the group, in this case J company, it is first necessary to determine whether J company made a creditable acquisition in acquiring the aircraft so as to be entitled to input tax credits in respect of that acquisition. For this requirement to be satisfied, s 66-5(1) must be satisfied by J company and none of the exceptions in s 66-5(2) can apply to J company. What follows, according to Mr Flynn, is that J company failed to satisfy s 66-5(1) because the exception in s 66-5(2)(e) applies for the reason that the supply of the aircraft it made was not a taxable supply by reason of the provisions in s 48-40(2).
With respect to Mr Flynn, I cannot accept that submission. As I have already indicated above, s 48-40 deals with liability for GST. For that purpose, a supply that an entity makes to another member of the same GST group is treated as if it were not a taxable supply. Section 48-40(2) cannot be extended so as to be regarded as a reference to taxable supplies generally. To read it in that way is to take it out of context. That, in the process of statutory construction, is impermissible. There are many authorities which support this proposition. In the High Court decision in CIC Insurance Ltd v Bankstown Football Club Ltd (1987) 187 CLR 384, Brennan CJ, Dawson, Toohey and Gummow JJ said, at 408:
… the modern approach to statutory interpretation (a) insists that the context be considered in the first instance, not merely at some later stage when ambiguity might be thought to arise, and (b) uses "context" in its widest sense to include such things as the existing state of the law and the mischief which, by legitimate means such as those just mentioned, one may discern the statute was intended to remedy (47). Instances of general words in a statute being so constrained by their context are numerous. In particular, as McHugh JA pointed out in Isherwood v Butler Pollnow Pty Ltd (48), if the apparently plain words of a provision are read in the light of the mischief which the statute was designed to overcome and of the objects of the legislation, they may wear a very different appearance. Further, inconvenience or improbability of result may assist the court in preferring to the literal meaning an alternative construction which, by the steps identified above, is reasonably open and more closely conforms to the legislative intent (49).
In my opinion, I should not have regard to the Tribunal decision in The Taxpayer case I have referred to above. It is concerned with the application of the grouping provisions to Division 75 of the GST Act. It can be distinguished on that basis and, in any event, I do not find it necessary to consider whether the decision was correct. That is because of what I consider to be the clear intention which is manifested by s 48-40(2) regarding the treatment of a taxable supply by a member of the GST group.
The second argument put forward by Mr Sievers assumes that the single entity argument is incorrect and that the entities must be treated as separate entities. He submitted that J company made the creditable acquisition because its sale to B company was a taxable supply. That argument of course assumes his interpretation of s 48-40(2) is correct. Mr Flynn of course maintained the argument that s 48-40(2) applied generally and therefore the sale from J company to B company was not a taxable supply. Therefore, the exclusion set out in s 66-5(2)(e) of the GST Act applied. As I have already indicated in respect of Mr Sievers' first argument, my view is that the approach suggested by Mr Flynn cannot be correct because it would disentitle the representative member to an input tax credit under Division 66. I agree with Mr Sievers that such an outcome conflicts with the context and purpose of the division.
The third alternative proposed by Mr Sievers focuses on the supply made by a member of the GST group to an entity outside the group. The taxable supply was made by B company when it sold the aircraft to N company. Mr Sievers submitted that B company satisfied s 66-5 when it acquired second-hand goods from J company, assuming of course that it was carrying on the business of selling and leasing aircraft and it had made a taxable supply. However, the problem with this argument is that s 48-45(3) provides that a transaction between members of the GST group is not a creditable acquisition. Mr Sievers acknowledged that this argument raised conflict between s 66-5 and s 48-45 (3). Section 48-45 is said to have effect despite s 11-5 which deals with what is a creditable acquisition. Section 66-5(3) also refers to s 11-5. According to Mr Sievers, that conflict is resolved by giving effect to the purpose of Division 66 in relation to second-hand goods. If that were not the case, the transfer of goods between members of the same GST group would result in the loss of the GST credit.
Mr Flynn submitted that the Tribunal should try to avoid finding that s 48-45(3) conflicts with s 66-5. He submitted that on a literal reading of the provisions, there was no conflict. Section 66-5(1) removes one of the obstacles to claiming an input tax credit under s 11-5. Otherwise, it leaves undisturbed Division 11 and the other provisions in the GST Act governing input tax credits. It is therefore not a conflict if
s 48-45(3) disallows the input tax credits. The GST input tax credits would be allowed following the sale of the second-hand goods when they leave the GST group.In my opinion, the submissions made by both Mr Sievers and Mr Flynn regarding this third possible argument simply highlight the problem of dealing with members of a GST group as if they were discrete entities. It reinforces my view that the single entity argument advanced by Mr Sievers must be correct.
CONCLUSIONS
In my opinion, the grouping provisions in the GST Act do not alter the way in which Division 66 operates. Where a creditable acquisition is made by an entity, whether or not at the time of acquisition that entity is a member of a group, if that creditable acquisition is attributable to a tax period during which the entity is a member of a GST group, then it is the representative member which is entitled to the input tax credit. That is the effect of s 48-45(1).
If the goods initially acquired are subsequently supplied to another entity which is a member of the same GST group, the entity subsequently acquiring the goods does not make a creditable acquisition unless Division 84 applies. Division 84 has no application to this case.
Section 48-40 of the GST Act deals with liability for GST. Section 48-40(2) deems a supply made by an entity to another member of the same GST group not to be a taxable supply for the purposes of determining who is liable for GST. It does not have a wider effect as contended by the Commissioner. The exclusion set out in s 66-5(2)(e) does not come into play by reason of the deeming provision in s 48-40(2).
Therefore, were it not for the fact that I have found the applicant in this case and the applicant in matter 2011/3714 cannot satisfy the transitional provisions set out in s 18 of the Transition Act, I would find that the applicant in this case would be entitled to claim the input tax credits in its capacity as the representative member of the GST group following the sale of the two aircraft to N company.
However, given my findings in respect of the operation of s 18 of the Transition Act, I find that the Commissioner's objection decision made on 27 September 2011 in respect of the application by the applicant for a Private Ruling was correct. I affirm that decision.
2011/3714
I certify that the preceding seventy-five (75) paragraphs are a true copy of the reasons for the decision herein of Egon Fice, Senior Member.
2011/4808
I certify that the preceding thirty-eight (38) paragraphs are a true copy of the reasons for the decision herein of Egon Fice, Senior Member.
..[sgd]........................................................................
Associate
Dated 29 June 2012
Date of hearing - 2011/3714 1 May 2012 Date of hearing - 2011/4808 2 May 2012 Counsel for the Applicant Mr C M Sievers Solicitor for the Applicant PricewaterhouseCoopers Counsel for the Respondent Mr T Flynn Solicitor for the Respondent Australian Taxation Office
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