The Recoveries Trust and Commissioner of Taxation
[2004] AATA 1075
•15 October 2004
Administrative
Appeals
Tribunal
DECISION AND REASONS FOR DECISION [2004] AATA 1075
ADMINISTRATIVE APPEALS TRIBUNAL )
) No NS2003/35-37
SMALL TAXATION CLAIMS DIVISION ) Re THE RECOVERIES TRUST Applicant
And
COMMISSIONER OF TAXATION
Respondent
DECISION
Tribunal Justice Garry Downes, President
Mr Julian Block, Deputy PresidentDate15 October 2004
PlaceSydney
Decision
In so far as the assessments allow reduced input tax credits for acquisitions associated with debt collections, they are affirmed. In so far as the assessments allow reduced input tax credits for acquisitions associated with the due diligence advice, they are set aside. In lieu, the Tribunal decides that full input tax credits are allowed for those acquisitions.
........(sgd G Downes) ........
President
CATCHWORDS
INDIRECT TAXATION – Goods and Services Tax – acquisition of debts for collection – deemed financial supply by acquirer – financial supplies not subject to Goods and Services Tax but input taxed – expenses incurred in managing debt collection and for advice on acquisition of debts – claim for full input tax credits – no full input tax credits where the acquisition relates to supplies that would be input taxed – no full input tax credits for costs of collecting debts – full input tax credits for costs of advice
A New Tax System (Goods and Services Tax) Act 1999 (Cth) ss 9-30, 11-1, 11-15, 40-1, 40-5, 182-1
Acts Interpretation Act 1901 (Cth) ss 15AA, 15AB
Administrative Appeals Tribunal Act 1975 (Cth) s 44
Income Tax Assessment Act 1936 (Cth) s 51
Income Tax Assessment Act 1997 (Cth) s 8-1
Taxation Administration Act 1953 (Cth) ss 37, 63
A New Tax System (Goods and Services Tax) Regulations 1999 (Cth) regs 40-5.06, 40-5.09, 70-5.02, 70-5.03
A New Tax System (Goods and Services Tax) Bill 1998, No. 97 1998-99 (Cth) Explanatory Memorandum
A New Tax System (Goods and Services Tax) Regulations 1999, No. 245 1999 (Cth) Explanatory Memorandum
Goods and Services Tax Ruling (GSTR 2002/2) – Goods and services tax: GST treatment of financial supplies and related supplies and acquisitions
Australian Competition and Consumer Commission v Maritime Union of Australia (2001) 114 FCR 472
Drake and Minister for Immigration and Ethnic Affairs (No 2) (1979) 2 ALD 634
Joye v Beach Petroleum NL (1996) 67 FCR 275
Ryan and Federal Commissioner of Taxation 2004 ATC 2181
Tooheys Ltd v Commissioner of Stamp Duties (NSW) (1961) 105 CLR 602
REASONS FOR DECISION
15 October 2004 Justice Garry Downes, President
Mr Julian Block, Deputy PresidentINTRODUCTION
1. The applicant is a trust that carried on an enterprise which involved acquiring debts for collection. By agreement dated 31 August 2001 the Trust acquired debts from M Pty Limited. Although payment of part of the purchase money was deferred, the debts were transferred at the time the agreement was made.
2. The Trust set about collecting the debts. No Goods and Services Tax was payable on any recoveries. The Trust incurred expense in attempting to collect the debts. It paid S Pty Limited to manage the debt collecting process. It paid V & Co for legal services. It incurred other expenditure. It had also incurred expenses for due diligence advice from S as to whether it should acquire the debts. All these transactions gave rise to GST. The Trust claims input tax credits for the whole of the GST.
3. The transfer of the debts was a financial supply under the Goods and Services Tax legislation (A New Tax System (Goods and Services Tax) Act 1999). It was an actual supply by M. It was a deemed supply by the Trust. Financial supplies are not subject to GST. They are “input taxed”. This is a way of saying that suppliers cannot claim a credit for GST paid on related acquisitions of goods and services. The question in this case is whether the Trust is entitled to claim full GST input tax credits in respect of the goods and services it acquired. We have decided that the Trust is not entitled to full credits for the costs of collecting the debts but that it is entitled to full credits for the cost of the due diligence advice.
GOODS AND SERVICES TAX
4. GST is generally paid at each step in the progress of goods and services to market. It is paid by the supplier on the total price of the supply and usually recovered from the acquirer. Intermediate suppliers are entitled to credits for GST paid on acquisitions made by them. For example, manufacturers of paper clips pay GST on the acquisition of wire. Retailers pay GST on the acquisition of the manufactured paper clips. Ultimate consumers pay GST on the retail price of the paper clips. The manufacturer claims credit for the GST paid on the wire when it collects and accounts for GST on the sale of the paperclips. The retailer claims a similar credit. GST has been paid at every step but is ultimately borne by the consumer.
INPUT TAXATION
5. Input taxation does not involve the paying of tax but the denial of an input tax credit. The process is described in the explanatory memorandum accompanying the GST regulations as follows:
“Under the GST Act, financial supplies are input taxed. This means that no GST is charged on the financial supply and that the financial supply provider is not entitled to any input tax credits for any GST included in the price of anything acquired or imported to make the supply.”
6. The effect of input taxation is thus potentially to leave the burden of tax paid on some acquisitions at an intermediate point.
THE ISSUES
7. In 2001 the Trust commissioned S to undertake a due diligence assessment and provide a recommendation as to whether the Trust should acquire the debts. The debts arose in connection with certain tax related agricultural schemes, in favour of associates of the promoters of those schemes. S recommended the acquisition of the debts. On 31 August 2001 the Trust entered into a written agreement with M to acquire the debts. The consideration payable to S in respect of its due diligence and recommendation was, conditionally on acquisition by the Trust of the debts, $150,000 payable over a period. The purchase consideration for the debts was $160,000: $10,000 was paid on execution of the agreement when title to the debts passed to the Trust. Further amounts of $100,000 and $50,000 were payable subject to certain conditions.
8. After acquiring the debts the Trust took steps to recover them. To this end it engaged V as its solicitors and it engaged S to manage the recovery of the debts. In carrying on its enterprise the Trust incurred other expenses of a minor nature, such as payments to Australia Post and Kwik Kopy.
9. The objection decision under review is the disallowance dated 11 March 2003 by the respondent of the applicant’s objection dated 10 January 2003 against assessments of GST in respect of the periods ending 31 December 2001, 31 March 2002 and 30 June 2002. The applicant claimed credits for $6,115, $2,777 and $10,582 respectively. The respondent allowed reduced input tax credits under Division 70 of the Act and reg 70-5.02 (Item 17) of the A New Tax System (Goods and Services Tax) Regulations 1999, equivalent to 75 per cent of the input tax credits claimed (reg 70-5.03).
10. The question before us is whether the Trust is entitled to full input tax credits for GST paid by it for services supplied to collect the debts it had acquired and for the prior advice it had been given as to whether it should acquire the debts.
11. The complexity of the present case arises because it does not fit the conventional mould. There is no sequence of supplies leading to an ultimate taxed supply. If the transfer of the debts had been a taxable supply by M to the Trust and if the collection of the debts had been taxable then input credits might conventionally have been available for the GST paid for services acquired to collect the debts. However, the present facts cannot be understood in this way. First, the collection of the debts was not a supply. No GST is attracted. Secondly, the acquisition of the debts was a financial supply. It was an actual supply by the transferor and a deemed supply by the transferee. It is not subject to GST but is input taxed.
12. These matters create difficulties in arriving at a resolution of the issues before us. This is particularly so because much of the argument focussed on parts of the legislation said to be referring to sequence and time.
13. Financial supplies are input taxed (subs 40-5). Whether or not full input tax credits are to be allowed in the present matter is determined by s 11-15 of the Act. Input tax credits are attracted by creditable transactions (s 11-1). The question is whether the debt collection services and the due diligence advice were acquired for creditable purposes. Section 11-15 provides:
“(1)You acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise.
(2)However, you do not acquire the thing for a creditable purpose to the extent that:
(a)the acquisition relates to making supplies that would be input taxed; or
(b) the acquisition is of a private or domestic nature.”
14. The Commissioner maintains that although the transactions in issue in the present case fall within subs 11-15(1) they are not creditable transactions because they fall within par 11-15(2)(a). That paragraph contains two elements:
(i)The acquisition must relate to making supplies.
(ii)They must be supplies that would be input taxed.
15. The acquisitions with which we are concerned are advice as to whether to proceed with a proposal to acquire the debts and, after the debts had been acquired, services associated with the collection of the debts. The bulk of the argument before us related to the second matter. We will deal with that first.
THE DEBT COLLECTION SERVICES
16. The Trust notes that the supply occurred before the acquisitions and says that the second element is not attracted unless the acquisition occurs first. It also says that there is no sufficient relationship between the acquisitions and the supply in any event.
The Futurity Argument
17. The Trust argues that the phrase “would be” in par 11-15(2)(a) involves futurity. One takes the moment of each relevant acquisition and asks, will this be followed by a related input taxed supply?
18. The Trust relies for support upon s 40-1 of the Act in Division 40 “Input taxed supplies”:
“40-1 What this Division is about
This Division provides for the supplies that are input taxed. If a supply is input taxed, then:
· no GST is payable on the supply;
· there is no entitlement to an input tax credit for anything acquired or imported to make the supply (see sections 11-15 and 15-10).
For the basic rules about supplies that are input taxed, see sections 9-30 and 9-80.”
19. The Trust also points to subs 9-30(2):
“(2) A supply is input taxed if:
(a)it is input taxed under Division 40 or under a provision of another Act; or
(b)it is a supply of a right to receive a supply that would be input taxed under paragraph (a).
Note:If a supply is input taxed, there is no entitlement to an input tax credit for the things that are acquired or imported to make the supply (see sections 11-15 and 15-10).”
The note has statutory force by virtue of s 182-1.
20. The Trust also relies for support upon the passage set out in para [5] above and the explanatory memorandum to the Bill, and particularly the following passage:
“However, you are not entitled to an input tax credit for acquiring a thing if your acquisition of the thing relates to an input taxed supply you are going to make. No tax will be charged on that supply. Therefore, you do not have a creditable purpose if your acquisition of a thing relates, either directly or indirectly, to a supply you make that is input taxed. Input taxed supplies are discussed at 5.4.” (Emphasis added)
21. There are, however, a number of problems with this submission. First, the words of the legislation do not require a person applying the legislation to address a particular moment. The draftsman has attempted to render the text in simple English. The text does not adopt the conventional approach of identifying events which will attract or avoid tax. It addresses taxpayers in the second person: “You acquire a thing for a creditable purpose to the extent that …” The two forms of legislative drafting can be seen by comparing the provisions of the Income Tax Assessment Act 1936 and the Income Tax Assessment Act 1997 relating to allowable deductions in income tax law. Subsection 51(1) of the 1936 Act was in this form: “All losses and outgoings to the extent … shall be allowable deductions …” Section 8-1 of the 1997 Act is in this form: “You can deduct from your assessable income any loss or outgoing to the extent that …” The former focuses on transactions and directs attention to time. The latter focuses on taxpayers and their rights and obligations and is less focussed on time, particularly time sequences. The words of s 11-15 describe taxable and non-taxable transactions in general terms. Literally, the phrases “you acquire” and “you do not acquire” are not apt to describe past transactions or their sequence. They simply describe transactions which, when subsequently examined, will be taxable or not according to whether they satisfy the description.
22. Secondly, notwithstanding the draftsman’s attempt to use simple English the structure: “You do not acquire … for a creditable purpose to the extent that … the acquisition relates to making supplies that would be …taxed” is anything but simple. The entry for the modal auxiliary verb “will” in the Internet version of the Oxford English Dictionary prints out to 38 pages. A substantial part of this relates to the form “would”. The proposition that “would” connotes futurity needs examination. “Would” is the past tense of “will”. Its usual role is to address the future from the past (anterior future). Documentary film makers like this form: “Alexander the Great would face his greatest challenge in 324 BC”. However, “would” can be used without futurity but rather to indicate uncertainty (“That would be right”). The Oxford English Dictionary gives this meaning:
“42. In the apodosis of a conditional sentence (expressed or implied), in the 2nd or 3rd pers., forming the auxiliary of the simple ‘conditional mood’, expressing merely a possibility or contingency in the supposed case …”
It includes the following illustration:
“1920 Act 10 & 11 Geo. V c. 50 §22 (1) Any documents such as would be subject to production in a court of law.”
23. We conclude that “would be” is used in the section in this sense. It does not connote futurity. It recognises that some, but not all, supplies are input taxed supplies. The use of “would” reflects the “possibility or contingency” arising from the fact that not all supplies are input taxed.
24. Thirdly, even if “would be” does connote futurity it speaks at the point of taxation. The relevant act of input taxation, if it be correct to regard such as an act, is the denial of input tax credits on acquisitions. It follows that although the acquisitions did not occur before the supply, if there was input taxation the taxation occurred at the same time as the acquisition. If “would be” did connote futurity it would still apply to a taxing which occurred at the same time as the acquisition. Strictly, however, input taxing may occur after the acquisition, when the GST is actually paid. For this further reason the present facts are attracted by the phrase “would be input taxed” even if “would be” does connote futurity. Notwithstanding that this argument has a degree of circularity, it is a proper basis for construing the section.
25. Fourthly, although there may be sufficient ambiguity or obscurity in the legislation to enable us to consider the explanatory memorandum to determine its meaning (s 15AB of the Acts Interpretation Act 1901) we do not consider that the passages relied upon in the explanatory memorandum, or, for that matter, in other parts of the legislation, should lead us to a different conclusion. The explanatory memorandum is addressing the conventional sequential process. In the ordinary course acquisition will precede supply. However, it is the legislature which has provided that a deemed and artificial supply shall exist which will not ordinarily be preceded by acquisition. The deemed supply as an acquisition will ordinarily be the first transaction with the taxpayer who claims the input tax credit. We consider that the result we have arrived at is required by the words of the section. We also consider that it promotes the purpose or object of the legislation in accordance with s 15AA of the Acts Interpretation Act 1901.
26. That this is the correct interpretation is supported by reg 70-5.02 (Item 17):
“70-5.02 Acquisitions that attract reduced input tax credits: general (Act s 70-5)
(1) For subsection 70-5(1) of the Act, an acquisition mentioned in subregulation (2) that relates to making financial supplies gives rise to an entitlement to a reduced input tax credit.
(2) The following acquisitions (within the meaning of subsection 70-5(1) of the Act) are reduced credit acquisitions:
…
Debt Collection Services
[Item] 17 The following debt collection services:
(a) debt recovery;
(b) litigation;
(c) lodgement of documents;
(d)by financial supply facilitator, managing the recovery of sums due by borrowers”
27. Title to sue on a debt must obviously arise before recovery commences. Accordingly, the regulations treat collection costs incurred after a financial supply represented by the transfer of a debt as attracting less than full input tax credits.
28. We accordingly conclude that the argument put by the Trust that the acquisitions are not covered by s 11-15 because the supply preceded the acquisitions must fail. The second element of the section is present here. We must accordingly address the first element, namely, whether the acquisition of the services associated with the collection of the debts relates to the supply.
The Relationship Argument
29. The nature of GST and the way in which it progressively taxes steps in the process of manufacture and supply of goods and services has the consequence that acquisition and supply will usually be sequential. Where acquisition is followed by supply in a sequence, the acquisition will generally relate to the subsequent supply. The problem in the present case is that the supply was a deemed supply (it was actually an acquisition) and the supply preceded the acquisitions.
30. By reg 40-5.09 of the Regulations the “provision, acquisition or disposal” of a debt for consideration is a financial supply. By reg 40-5.06(2) “the entity that acquires that interest is also the financial supply provider of the interest”.It is in this context that we must determine whether the acquisition of services to recover debts relates to the acquisition of the debts.
31. The phrase “relates to” is widely construed. It has been called “extremely wide but … also vague and indefinite” (Tooheys Ltd v Commissioner of Stamp Duties (NSW) (1961) 105 CLR 602 at 620 per Taylor J). It is construed in its context (Joye v Beach Petroleum NL (1996) 67 FCR 275 at 285 per Beaumont and Lehane JJ and Australian Competition and Consumer Commission v Maritime Union of Australia (2001) 114 FCR 472 at 487 per Hill J). It can require a direct or substantial connection but may be satisfied by an indirect or less than substantial connection (Joye). In ACCC at 487, Hill J said “the words ‘in relation to’ are wide words which do no more, at least without reference to context, than signify the need for there to be some relationship or connection between two subject matters”.
32. Having regard to the words of s 11-15 the precise question in the present case seems to be whether the acquisition of, for example, legal services to recover a debt, relates to the “making supply” which is the acquisition of the debt.
33. It is tempting to focus on the phrase “making supplies” in s 11-15 and to understand it, in the present case, as equivalent to the transferor’s act of transferring the debts. The argument continues that collecting debts does not relate to the transferor’s act of disposing of them. However, the relevant supply is deemed to be the acquisition of the debts (reg 40-5.09) and the supply provider is the acquirer (reg 40-5.06). Accordingly, making supplies is relevantly acquiring the debts. Collecting debts does relate to acquiring them even if it does not relate to disposing of them or transferring them.
34. Steps taken in aid of the collecting of a debt particularly relate to the acquisition of the debt where the two events form part of the one business or enterprise. Selling trading stock will relate to its acquisition and its acquisition will relate to its sale. Events occurring in the conduct of a business or enterprise will generally be related even though they are sequential. When one adds the context of the nature of GST legislation the presence of a relevant relationship becomes clearer. First, the nature of GST is to attach to sequential events. Secondly, the phrase “input taxed” relating to an acquisition is a statement that the impact of the Act, misleadingly described by the word “taxed”, will occur at a different point in time when input credits will be denied.
Conclusion
35. The Commissioner’s decision that the acquisitions associated with the debt collection were not creditable transactions and that the Trust was not entitled to full input tax credits in respect of the transactions must be affirmed.
THE DUE DILIGENCE ADVICE
The Futurity Argument
36. The due diligence advice was given prior to the acquisition of the debts. Accordingly, the futurity argument has no relevance. The question is whether the procuring of advice whether to make supply by acquiring debts is related to the acquiring of the debts when the advice is accepted and implemented.
The Relationship Argument
37. Just as the cost of collection of debts relates to the acquisition of the debts, so, it can be said, the cost of receiving advice whether to acquire debts relates to the subsequent acquisition. In a sense, the relationship between advice to acquire and acquisition might be thought to be as close or perhaps even closer than the relationship between acquisition and collection. In the former both components are concerned with acquisition; in the latter they are not. The fact that there may never have been any acquisition of the debts so that there is nothing for the advice to relate to at the time it is given cannot be determinative. The same can be said of every future step in a GST sequence. However, that is not an end to the matter.
38. The Commissioner has offered a view about this very matter in a Goods and Services Tax Ruling (GSTR 2002/2) which is still in effect. The Ruling informs readers they “can rely on the information presented” in the Ruling. The effect of the Ruling is that the due diligence advice was acquired for a creditable purpose and would accordingly give rise to full input tax credits.
39. The Ruling contains the following proposition:
“When does an acquisition relate to making a financial supply?
266. Where a financial supply provider acquires the services of a financial supply facilitator to effect a financial supply, the complexity of the transaction may require that the facilitator supply services over an extended period. The financial supply provider is entitled to reduced input tax credits from the time it has formed the intention to make a financial supply. That is, the financial supply provider does not have to wait until the financial supply has been concluded before the entitlement arises.”
40. Later in the Ruling, an illustration is given using a takeover transaction. In the illustration Belvedere Ltd seeks advice from Eagle Corp as to how it might expand its operations into mineral exploration. Eagle ultimately advises that it should take over Rochester Enterprises. The acquisition is a financial supply. The illustration, as analysed in the Ruling, contains the following:
“The services rendered prior to Belvedere Ltd forming an intention to acquire the shares of Rochester Enterprises (at the Board meeting) are for a creditable purpose while services after that date are not for a creditable purpose as they relate to making supplies that would be input taxed.”
41. In these proceedings, the Commissioner has adopted the surprising and unusual course of maintaining that the ruling does not bind or, at least, is inapplicable. The Ruling is expressed to be a public binding ruling. However, the effect of ss 63 and 37 of the Taxation Administration Act 1953 is that the Commissioner does not, despite the breadth of s 63, have the power to issue public binding rulings in relation to an indirect tax such as GST. Section 37 obliges a taxpayer to establish reliance on the ruling in order to utilise it but there was no evidence as to reliance before us. The attitude of the Commissioner nevertheless creates problems for the Tribunal. On the one hand we stand in the shoes of the Commissioner to make the correct or preferable decision in the matter and it is appropriate that we should take policy into account in carrying out this task (Drake and Minister for Immigration and Ethnic Affairs (No 2) (1979) 2 ALD 634 at 645 per Brennan J). As the Tribunal said in Ryan and Federal Commissioner of Taxation 2004 ATC 2181 at [38], it is appropriate that the Tribunal should have the benefit of the Commissioner’s views “on matters of principle and policy” in exercising its functions. To have submissions for the Commissioner which contradict a ruling purporting to bind the Commissioner is not helpful. We should give weight to the reasoning in the ruling. On the other hand, s 44 of the Administrative Appeals Tribunal Act 1975 provides for an appeal from the Tribunal to the Federal Court of Australia on a question of law. In any such appeal the Court will concern itself with the legal question rather than a ruling of the Commissioner. This Tribunal ought not to put parties to the cost of an appeal by deciding a matter in accordance with policy on a basis which is wrong in law.
42. We are accordingly forced to look at the question ourselves. While we will not follow the Commissioner automatically it is appropriate to examine the reasoning in his Ruling. In the illustration in the Ruling, the Commissioner has repeated the phrase “relate to making supplies that would be input taxed” from subs 11-15(2). He cites that as the reason why transactions after the decision to acquire are creditable. It follows that his reasoning must be that prior transactions do not “relate to making supplies that would be input taxed”. The essence of the reasoning must relate to “making supplies”. On analysis, the phrase relates to the act of making supply not to deliberation as to whether or not to make the supply. The advice referred to in the Commissioner’s illustration and the due diligence advice in the present case did not relate to making supply but to deliberations which may have led to a decision not to make the relevant supply.
43. We accept that differing views could be held on this matter. However, we are not persuaded that the view expressed in the Ruling is wrong and we adopt it. Accordingly, the Trust acquired the due diligence advice for a creditable purpose and is entitled to full input tax credits.
Conclusion
44. The Commissioner’s decision that the acquisitions associated with the due diligence advice were not acquisitions for a creditable purpose must be set aside and the Trust allowed full input tax credits in respect of those transactions.
DECISION
45. In so far as the assessments allow reduced input tax credits for acquisitions associated with debt collections, they are affirmed. In so far as the assessments allow reduced input tax credits for acquisitions associated with the due diligence advice, they are set aside. In lieu, the Tribunal decides that full input tax credits are allowed for those acquisitions.
I certify that the 45 preceding paragraphs are a true copy of the reasons for the decision herein of Justice Garry Downes, President, and Mr Julian Block, Deputy President
Signed: ........(sgd S Toomey)........
Associate
Date of Hearing 20 August 2004
Date of Decision 15 October 2004Counsel for the Applicant DB McGovern SC with IS Young
Solicitor for the Applicant Versace McKenzieCounsel for the Respondent AH Slater QC with R Quinn
Solicitor for the Respondent Australian Government Solicitor
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