The Private Tutor and Commissioner of Taxation
Document type: Decision Impact Statement
Venue: Administrative Appeals Tribunal (2012/0114)
Judgment date: 14 March 2013
Date published: 9 May 2013

Summary of decision:
Outlines the ATO's response to this case which concerns whether the taxpayer was carrying on an enterprise and entitled to input tax credits for expenses, and it makes comments about the Commissioner's approach in raising assessments.

Overview of facts:
The taxpayer contended he was carrying on an enterprise of tutoring, computer repair, website design and resale of mobile phones during the period 1 April 2007 and 30 March 2011, and that he was entitled to input tax credits (ITCs) for various business expenses. The taxpayer conducted his tutoring activities primarily in two ways: (a) through tutoring agencies, and (b) by private means. Tutoring agencies generally found and passed on students to be tutored by the taxpayer. | The taxpayer agreed there were limitations to his tutoring activities, including seasonal variances, his employment situation (he was otherwise generally employed full time) and the fact that his tutoring activities were a "side line". The taxpayer provided only scant evidence to support his computer-based activities, and his mobile phone activities were carried on during just one year. | The taxpayer claimed ITCs for a number of expenses including private health insurance, mortgage and loan repayments, food, beverages, confectionery, magazines, clothing, cosmetics, cinema visits, gifts, mobile phone and motor vehicle expenses (fuel, maintenance, repairs, car modifications and insurance). The ITCs claimed by the taxpayer exceeded the GST payable by a significant amount. | The Commissioner found that the taxpayer was not carrying on an enterprise and accordingly cancelled his GST registration. Assessments were made disallowing the ITCs, but requiring the taxpayer pay to the Commissioner amounts on account of GST that the taxpayer had collected. This resulted in assessments of positive net amounts despite the taxpayer not being entitled to be registered for GST. | Issues decided by the tribunal | 1. The Tribunal found the taxpayer was carrying on an enterprise under section 9-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), and was entitled to be registered for GST. The Tribunal considered that the Commissioner had placed too much weight on the small scale of activities involved. The Commissioner also failed to consider the true financial position of the activities free from the inflated claims for ITCs in assessing profitability. | 2. The Tribunal found that the taxpayer's approach to claiming ITCs had been undisciplined and largely unprincipled. It disallowed the claim for ITCs in full for three main reasons: (a) relevant supplies to the taxpayer were not subject to GST; (b) there was no reliable evidence that certain ITCs were partly creditable; and (c) there was no reliable evidence of the creditable extent of certain ITCs. | 3. The Tribunal also criticised the Commissioner for attempting to "claw back" GST amounts declared by the taxpayer (on what the taxpayer thought were taxable supplies) by raising assessments of positive net amounts while maintaining that the taxpayer is not entitled to be registered for GST. The Tribunal said that, if a taxpayer is not entitled to be registered for GST, the net amount in each case must be nil. In these circumstances, in the view of the Tribunal, section 105-65 of Schedule 1 to the Taxation Administration Act 1953 (TAA) does not allow the Commissioner to assess taxpayers for positive net amounts in an attempt to "claw back" GST amounts declared by the taxpayer in their GST returns.

Issues decided:
1. The Tribunal found the taxpayer was carrying on an enterprise under section 9-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), and was entitled to be registered for GST. The Tribunal considered that the Commissioner had placed too much weight on the small scale of activities involved. The Commissioner also failed to consider the true financial position of the activities free from the inflated claims for ITCs in assessing profitability. 2. The Tribunal found that the taxpayer's approach to claiming ITCs had been undisciplined and largely unprincipled. It disallowed the claim for ITCs in full for three main reasons: (a) relevant supplies to the taxpayer were not subject to GST; (b) there was no reliable evidence that certain ITCs were partly creditable; and (c) there was no reliable evidence of the creditable extent of certain ITCs. 3. The Tribunal also criticised the Commissioner for attempting to "claw back" GST amounts declared by the taxpayer (on what the taxpayer thought were taxable supplies) by raising assessments of positive net amounts while maintaining that the taxpayer is not entitled to be registered for GST. The Tribunal said that, if a taxpayer is not entitled to be registered for GST, the net amount in each case must be nil. In these circumstances, in the view of the Tribunal, section 105-65 of Schedule 1 to the Taxation Administration Act 1953 (TAA) does not allow the Commissioner to assess taxpayers for positive net amounts in an attempt to "claw back" GST amounts declared by the taxpayer in their GST returns.

ATO view of decision:
On the enterprise issue, the Tribunal reached a different conclusion when applying the law to the facts. Whether the activities amounted to carrying on an enterprise turned on the particular facts of the case. The Commissioner accepts that the decision of the Tribunal on "enterprise" was open on the facts of the case. [1] | However, in relation to comments regarding the Commissioner's approach to section 105-65 and, in particular, that assessments in these circumstances may or will contain 'obvious (and, arguably, deliberate) errors' , the Commissioner respectfully maintains his views on section 105-65 as set out in MT 2010/1. These views formed the basis of the approach to raising assessments in the present case. The Commissioner considers that section 105-65 is predicated on an examination of individual transactions, rather than on overall net amounts for particular tax periods. | The Commissioner also notes that Tribunal comments about section 105-65 were not necessary to the resolution of any of the issues in dispute in this case. [2] While those comments raise questions of law, no appeal could be mounted in relation to them given that the decision of the Tribunal would remain unchanged even if the Commissioner was later to prevail. There is another case before the Tribunal, however, where a similar issue is raised directly in submissions and where the decision has been reserved. For the present, the Commissioner will maintain and continue to apply the view in MT 2010/1. However, he will review the position generally when the Tribunal hands down its decision in the other matter. | Proposed legislative amendments | On 26 February 2013, draft legislation was released, which if enacted would have the effect of repealing current section 105-65 and replacing it with a new Division in the GST Act dealing with refunds of overpaid amounts of GST. The proposed legislation would apply whenever an assessed net amount for a tax period takes into account an amount of GST exceeding that which is payable. It would apply for tax periods starting on or after 17 August 2012. The new law would operate to deem so much of the extra GST as has been passed on to another entity to be GST payable on a taxable supply, until the other entity is reimbursed. If the proposed legislation is passed, it would likely remove any uncertainty over the correct approach to cases like this one, insofar as they involve tax periods starting on or after 17 August 2012.

Administrative treatment:
The Commissioner will continue to apply views expressed in MT 2010/1 regarding the application of section 105-65. The position will be further reviewed when the Tribunal hands down its decision in another case where a similar issue is raised. | Implications for ATO precedential documents (Public Rulings & Determinations etc) | Nil | Implications for Law Administration Practice Statements | Nil | [1] The Commissioner's views on 'enterprise' are contained in MT 2006/1. | [2] If the Tribunal had found that the taxpayer was not carrying on an enterprise, as the Commissioner had argued, it presumably would have allowed the objection in part. This would have had the effect of reducing the correct net amount for each tax period to zero - see paragraph 20 of the Tribunal's reasons.

Legislative references: A New Tax System (Goods and Services Tax) Act 1999 9-5(b) 9-20 11-5 11-15 17-5 17-15 25-55 Taxation Administration Act 1953 105-65 105-5 Indirect Tax Laws Amendment (Assessment) Act 2012 The Act
Case references: Commissioner of Taxation v Multiflex Pty Ltd [2011] FCAFC 142 2011 ATC 20-292 (2011) 82 ATR 153 Thomas v FCT (1972) 3 ATR 165 72 ATC 4094
Subject references: GST Enterprise Registration Input tax credits Net amounts