McKinnon Holdings (NSW) Pty Ltd as Trustee for the McKinnon Equipment Trust and Commissioner of Taxation (Taxation)
[2016] AATA 917
•17 November 2016
McKinnon Holdings (NSW) Pty Ltd as Trustee for the McKinnon Equipment Trust and Commissioner of Taxation (Taxation) [2016] AATA 917 (17 November 2016)
Division
TAXATION & COMMERCIAL DIVISION
File Number(s)
2014/5544
Re
McKinnon Holdings (NSW) Pty Ltd as Trustee for the McKinnon Equipment Trust
APPLICANT
And
Commissioner of Taxation
RESPONDENT
DECISION
Tribunal Professor R Deutsch, Deputy President
Date 17 November 2016 Place Sydney The decision under review is affirmed.
...................................[sgd].....................................
Professor R Deutsch, Deputy President
CATCHWORDS
TAXATION – Goods and Services Tax – input tax credits – agreement for the sale and purchase of assets – liabilities on the assets exceed the value of the assets – whether consideration paid for the assets – whether the liabilities on the assets were assumed by the Applicant – decision affirmed
LEGISLATION
A New Tax System (Goods and Services Tax) Act 1999 (Cth) ss 9-15, 9-75, 11-5, 29-10
REASONS FOR DECISION
Professor R Deutsch, Deputy President
17 November 2016
THE FACTUAL BACKGROUND
The Applicant is seeking review of the objection decision of the Respondent dated 27 August 2014 which disallowed the Applicant’s objection dated 31 March 2014 and determined that the Applicant was not entitled to claim input tax credits in the amount of $83,818.18 and $9,265.05 during the quarters ended 30 September 2010 and 31 December 2011.
According to the Applicant, at all relevant times, it carried on a business in Australia providing excavation and earthmoving services to the public.
On 1 July 2010, the Applicant entered into an “Asset Sale and Purchase Agreement” (the Agreement) with an associated entity called Clinton and Michelle McKinnon Excavation Pty Ltd (Excavation).
Prior to 1 July 2010, Excavation owned certain plant and equipment (the Assets) most of which were subject to charges held by third party financiers.
According to the Applicant, the Agreement transferred the legal title and risk in the Assets from Excavation to the Applicant. In other words, the Applicant acquired the Assets as part of its business operations.
According to the Respondent, there is no evidence before the Tribunal to support the view that the Applicant acquired the Assets in particular because certain critical clauses of the Agreement were not complied with. Thus, it cannot be said that the risk and title to the Assets passed to the Applicant. Rather the Respondent says that it could be construed on the basis that Excavation made a supply to the Applicant of the right to use the Assets.
On or about 24 September 2010, Excavation was placed into liquidation.
Excavation did not collect or remit GST for the supply of the Assets that it purported to make to the Applicant under the Agreement.
However, the Applicant did subsequently claim input tax credits in respect of the acquisition of the Assets.
The parties are in agreement that as at 1 July 2010:
·the aggregate liabilities of Excavation exceeded the value of the Assets that were the subject of the Agreement; and
·as a result no monies were actually paid by the Applicant to Excavation to acquire the Assets.
The terms of the Agreement are important to consider in this case as they have some bearing on the appropriate GST treatment that might flow from the transaction which is affected by the Agreement.
The starting point would seem to be clause 2.0 which provides as follows:
“The Vendor agrees to sell the Assets to the Purchaser and the Purchaser agrees to buy the Assets for the Purchase Price on the terms set out in this Agreement.”
The Purchase Price is defined in clause 1.1 as follows:
““Purchase Price” means the total consideration for the purchase of all the Assets which is the amount determined by the Independent Valuer and in accordance with clause 4.1 including GST.”
Clause 4.1 provides:
“An Independent Valuer has determined the unencumbered value of all the Assets if sold at auction (“Purchase Price”).”
It appears to be the case that on or about 1 July 2010 the Assets were valued by an independent valuer and it was determined that the unencumbered value of the Assets if sold at auction would be $922,000.
The Applicant has thereby concluded that the purchase price was $922,000 inclusive of GST and accordingly the GST applicable in respect of which the Applicant would be entitled to claim input tax credit would be the amount of $83,818.18 being one-eleventh of the amount of $922,000.
Indeed, if the analysis were to stop there and the Applicant had indeed paid $922,000 for the purchase of the Assets, there would be no argument that such an input tax credit would be available.
However, this overlooks a number of other provisions in the Agreement which provide as follows:
Clause 3.2
“At completion, the Purchaser must pay to the Vendor the Purchase Price as set out in the defined terms (clause 1.1 “Completion Amount”) in Immediately Available Funds.”
Clause 1.1
““Completion Amount” means the difference between the market value and the outstanding Liability attached to the Assets. Should the Liability be greater than the Asset value, then the Completion Amount will be $1.00.”
Further, as if to re-emphasise the point, clause 5.3 provides as follows:
“The Purchaser will on Completion pay to the Vendor the Purchase Price as detailed in the defined terms and interpretations. Should the liability on the Assets exceed the Purchase Price, the amount payable on Completion will be nil.”
There is one further definition that may be relevant in this context namely the definition of Payment in clause 1.1 which is as follows:
““Payment” means the amount of any monetary consideration which is equal to the market value of the Assets as set out by the Independent Valuer less the outstanding Liability attached to the Assets in total as set out in Schedule 3. Should the outstanding liability be greater than the market value then payment will be $1.00.”
It is not entirely clear where this definition of Payment links to in the operative part of the Agreement but it is nonetheless relevant in demonstrating intent on the part of the parties.
The aggregate liabilities of Excavation as at 1 July 2010 (ie $1,206,272.70) was an amount that clearly exceeded the agreed unencumbered value of the Assets if sold at auction as determined by the Independent Valuer (ie $922,000).
As a result, the Applicant was required to pay the reduced amount under the Agreement. Consequently, no monies were paid by the Applicant to Excavation at completion of the Agreement as the liability on the Assets exceeded the Purchase Price.
DID THE APPLICANT PROVIDE CONSIDERATION TO EXCAVATION FOR THE SUPPLY IN ORDER TO CLAIM INPUT TAX CREDITS FOR THE PERIOD ENDED 30 SEPTEMBER 2010?
The Applicant argues that it either provided consideration of:
(a)$922,000 being the unencumbered value of the Assets if sold at auction as determined by the Independent Valuer (the First Argument); or
(b)$1,206,272.70 being the liabilities of the Applicant assumed under the Agreement (the Second Argument).
The First Argument
In regard to the first argument, the Applicant claimed an input tax credit of $83,818.18 being one-eleventh of the agreed unencumbered value of the Assets.
Having regard to the terms of the Agreement, especially clause 3.2, the definitions of both Completion Amount and Payment in clause 1.1, and clause 5.3, the manifest intention of the parties was to ensure that the amount paid on settlement is no more than nil or possibly $1.00 if the liability attaching to the Assets exceeds the Purchase Price.
That was the clear and intended effect of the Agreement and as a result no monies were paid by the Applicant to Excavation on completion of the Agreement.
Accordingly, the Tribunal concludes that under section 9-15 of A New Tax System (Goods and Services Tax) Act 1999 (the GST Act), there was no payment made under the Agreement in connection with the supply of anything.
However, even if that conclusion were wrong, section 29-10(2)(c) of the GST Act provides that :
“….. if you account on a cash basis, then:
(c) if, in a tax period, none of the consideration is provided—none of the input tax credit for the acquisition is attributable to that tax period.”
Thus, as none of the consideration was provided in the period to 30 September 2010 none of the input tax credit for the acquisition of the Assets is attributable to that tax period.
The Second Argument
In regard to the second argument, the Applicant claims that the liabilities the Applicant assumed under the Agreement are the consideration. Accordingly, an input tax credit of $109,661.15, being one-eleventh of $1,206,272.70, should be available in the quarter to 30 September 2010.
Where the consideration is made up purely of non-monetary amounts, section 9-75(1)(b) of the GST Act is to the effect that the price of the non-monetary consideration is the “GST inclusive market value of that consideration”.
The Applicant, in putting this argument, bears the onus to show:
(a)what was the consideration; and
(b)what is the economic value of that consideration.
Here, the Applicant contends that the assumption of the liabilities was the consideration and then simply asserts that the economic value of that consideration was the face value of those liabilities ie $1,206,272.70.
No explanation is provided as to how the assumption of liabilities arises on the facts, how the economic value of such liabilities is determined and why the economic value is the face value of the assumed liabilities.
On the question of the assumption of liabilities there are immediate and seemingly insurmountable problems for the Applicant in that:
(a)the Agreement did not in and of itself legally assign the liabilities of Excavation to the Applicant. The most that can be said is that clause 8 of the Agreement provided for Excavation to “use its reasonable endeavours to assist” the Applicant to obtain prior to completion or as soon as possible after completion the assignment or novation of each Equipment Lease and consents from other parties as needed; and
(b)according to the liquidators of Excavation no such assignment or novation ever occurred; and
(c)according to the same liquidators, the finance companies did not consent to the transfer of assets and liabilities.
Thus, on a proper construction of the Agreement it seems that there was neither a legal, nor an effective, assumption of liabilities as suggested was the case by the Applicant. This is made demonstrably clear by the fact that the liabilities never in fact moved to the Applicant either in a legal sense or in a practical sense.
There was and is nothing that Excavation can do about the failure of the assumption of liabilities as the Agreement gives Excavation no rights to ensure that the liabilities are in fact shifted to the Applicant such that the Applicant becomes legally bound to satisfy those liabilities. The Applicant was free to sit back and do nothing if no such assumption of liabilities occurred and that in fact is exactly what it did – nothing!
There is a further clause (clause 8.0(b)(ii)) which provides that the Applicant will indemnify Excavation “from and against any Loss arising in connection with, or as a result of any exercise of such right or entitlement”. “Loss” is further defined in clause 1.1 such that:
““Loss” means any damage, loss, cost, Liability or expense of any kind and howsoever arising (including as a result of any Claim) including penalties, fines and interest.”
It is not at all clear that this indemnity would apply in respect of any outstanding liabilities that are owing by Excavation such as to shift the effect of responsibility for the liability to the Applicant and no evidence was given to the Tribunal in this regard. Furthermore from the evidence that is available, it is clear that the indemnity was never called upon.
In these circumstances little if any weight can be given to the benefit of the indemnity in clause 8.0.
Accordingly, there is no assumption of liabilities and therefore there is no non-monetary consideration provided in this case.
That would be enough to dispose of this substantive issue.
However for the sake of completeness and in case the conclusions on the interpretation of the Agreement and the assumption of liabilities is not correct, I add that if there had been an assumption of liabilities as a result of the Agreement, in my view it would follow that the Applicant has provided consideration for the supply of the Assets in order to ensure that the Applicant has made a creditable acquisition for the purposes of section 11-5 of the GST Act.
The next question raised would then be the value of that consideration and whether that value would be the face value of the assumed liabilities or some lesser amount based on the fact that an actual payment is not required until some later point in time. In my view, some appropriate discount must be applied having regard to the delay occasioned by the deferred nature of any payment required under the assumed liabilities. Neither party addressed this issue so I make no further comment on this aspect of the case.
More importantly, however, even if the Tribunal were to find that there was consideration in the form of the assumption of liabilities by the Applicant, an issue arises as to the correct attribution of the income tax credits that would arise having regard to section 29-10 of the GST Act which relevantly provides as follows:
“(1) The input tax credit to which you are entitled for a creditable acquisition is attributable to:
(a) the tax period in which you provide any of the consideration for the acquisition; or
(b) if, before you provide any of the consideration, an invoice is issued relating to the acquisition—the tax period in which the invoice is issued.
(2) However, if you account on a cash basis, then:
(a) if, in a tax period, you provide all of the consideration for a creditable acquisition—the input tax credit for the acquisition is attributable to that tax period; or
(b) if, in a tax period, you provide part of the consideration—the input tax credit for the acquisition is attributable to that tax period, but only to the extent that you provided the consideration in that tax period; or
(c) if, in a tax period, none of the consideration is provided—none of the input tax credit for the acquisition is attributable to that tax period.”
The Applicant was at all relevant times a taxpayer who accounted for GST on a cash basis. Accordingly subsection (2) of section 29-10 of the GST Act is enlivened and creditable acquisitions are attributable to a tax period only to the extent to which the Applicant provided the consideration in that period. Thus, input tax credits are attributable to the tax period to which the consideration is provided.
Thus, in this case the Applicant must attribute each input tax credit to the particular tax period in which the consideration was provided to Excavation.
The Respondent suggests that the consideration was provided not when the liabilities were alleged to have been effectively assumed on or about 1 July 2010 but rather only when the payment in discharge of those liabilities were made by the Applicant or made on behalf of the Applicant. I see no basis for making that assertion. The consideration is provided in the quarter when the liabilities were assumed.
However, section 29-10(4) of the GST Act provides that:
(4) If the GST return for a tax period does not take into account an input tax credit attributable to that tax period:
(a) the input tax credit is not attributable to that tax period; and
(b) the input tax credit is attributable to the first tax period for which you give the Commissioner a GST return that does take it into account.
Thus, if there is no GST return which takes into account the input tax credit referrable to the assumption of liabilities, it must follow that the input tax credit cannot be attributed to that period.
The Applicant in this case has not in fact lodged any GST returns for the relevant tax period which takes into account the relevant input tax credit. Therefore, as a result of section 29-10(4) of the GST Act, the input tax credit for the creditable acquisition can only be attributable to the first tax period for which the Applicant gives the Respondent a GST return that takes into account an input tax credit based on the assumption of liabilities.
OTHER MATTERS
Further submissions were made in relation to a refinancing which took place on or about 1 December 2011 regarding certain financing arrangements for the plant and equipment with St George Finance Limited.
In relation to these arrangements the Applicant claimed input tax credits of $6,445.05 in respect of the acquisition of one asset and $2,820 in respect of the acquisition of another asset.
The Applicant submits that the amended assessment should allow input tax credits in respect of the GST instalments for this quarter.
The Respondent asserts that the Applicant has produced no probative evidence for the period to substantiate creditable acquisitions of taxable supplies in the amount claimed and that the agreements that have been produced in the payment schedules do not substantiate that such creditable acquisitions were in fact made.
The Tribunal has been presented with no evidence to support the position taken by the Applicant and there is no way that the Tribunal can confirm that such amounts were in fact paid as is suggested by the Payment Schedule that has been made available.
If evidence of such payments is forthcoming, subject to any applicable time limit constraints and the requirement for the Applicant to hold a tax invoice at the relevant time, an input tax credit should be allowed but because the Applicant accounts on a cash basis, only in the quarter in which payment is actually made.
DECISION
The decision under review is affirmed.
I certify that the preceding 59 (fifty -nine) paragraphs are a true copy of the reasons for the decision herein of Professor R Deutsch, Deputy President ....................................[sgd]....................................
Associate
Dated 17 November 2016
Date(s) of hearing 29 June 2016 Counsel for the Applicant A Russoniello Advocate for the Applicant J Rodgers, Accolade Advisory Counsel for the Respondent G O'Mahoney
Key Legal Topics
Areas of Law
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Tax Law
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Statutory Interpretation
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