LeasePlan Australia Ltd v Commissioner of Taxation
Document type: Decision Impact Statement
Venue: Federal Court of Australia (VID 252/2009)
Judgment date: 13 November 2009
Date published: 16 June 2011
Decision outcome: Adverse

Summary of decision:
Outlines the Tax Office response to this matter which concerned whether the applicant was entitled to input tax credits on the purchase of second-hand motor vehicles from unregistered persons to be leased back and then sold.

Overview of facts:
1. The applicant (LeasePlan) carried on the business of motor vehicle fleet leasing and management. 2. In the ordinary course of carrying on that business, LeasePlan purchased, leased, managed and sold second-hand motor vehicles. 3. Private individual employees sold their vehicles to LeasePlan. As none of the employees were registered, or were required to be registered, for GST purposes, the sale by each employee to LeasePlan was not a taxable supply for the purposes of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). 4. LeasePlan in turn leased the vehicles to the employees under either an operating lease or a finance lease. 5. At the end of each lease, LeasePlan sold the vehicles. In accordance with the terms of the agreements, if the sale price was less than the agreed residual value, the employees were required to pay the difference to LeasePlan. If the sale price exceeded the residual value, LeasePlan was required to pay the difference to the employees. 6. LeasePlan claimed input tax credits in respect of each purchase from the employees pursuant to subsection 66-5(1) of the GST Act. 7. The Commissioner assessed LeasePlan on the basis that it was not entitled to the input tax credits. 8. LeasePlan objected to the assessments and, upon its objections being disallowed, appealed to the Federal Court against the objection decision. | 1. The applicant (LeasePlan) carried on the business of motor vehicle fleet leasing and management. 2. In the ordinary course of carrying on that business, LeasePlan purchased, leased, managed and sold second-hand motor vehicles. 3. Private individual employees sold their vehicles to LeasePlan. As none of the employees were registered, or were required to be registered, for GST purposes, the sale by each employee to LeasePlan was not a taxable supply for the purposes of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). 4. LeasePlan in turn leased the vehicles to the employees under either an operating lease or a finance lease. 5. At the end of each lease, LeasePlan sold the vehicles. In accordance with the terms of the agreements, if the sale price was less than the agreed residual value, the employees were required to pay the difference to LeasePlan. If the sale price exceeded the residual value, LeasePlan was required to pay the difference to the employees. 6. LeasePlan claimed input tax credits in respect of each purchase from the employees pursuant to subsection 66-5(1) of the GST Act. 7. The Commissioner assessed LeasePlan on the basis that it was not entitled to the input tax credits. 8. LeasePlan objected to the assessments and, upon its objections being disallowed, appealed to the Federal Court against the objection decision. | Issues decided by the court | 1 At issue in the proceeding was whether subsection 66-5(1) of the GST Act was satisfied; in particular, whether LeasePlan purchased the vehicles 'for the purposes of sale'. 2 The Commissioner submitted that LeasePlan's acquisition of the vehicles was actuated by lease rather than sale. 3 The Court decided that LeasePlan did purchase the vehicles for a purpose of sale and, there being no other issue between the parties, allowed LeasePlan's appeal. 4 In so deciding, the Court noted that the case turned on the evidence (see [25]). The Court noted evidence that: 4.1 in each contract under which LeasePlan acquired a vehicle, it entered into an obligation to sell the vehicle, with the respective rights and obligations of the parties being determined by reference to the actual sale price only once the vehicle was sold [29]; 4.2 LeasePlan monitored expected sale proceeds for each type of vehicle proposed to be leased in order to determine the residual value [30]; 4.3 each vehicle was in fact sold immediately upon termination of the leases (on average within 19 days) [30]; 4.4 sale of the vehicles was necessary to provide the forecasted financial returns to LeasePlan's business [39]. 5 Having regard to this evidence, the Court concluded that contractual arrangements were for a 'composite transaction' in which LeasePlan acquired the vehicles for lease and sale. | 1 At issue in the proceeding was whether subsection 66-5(1) of the GST Act was satisfied; in particular, whether LeasePlan purchased the vehicles 'for the purposes of sale'. 2 The Commissioner submitted that LeasePlan's acquisition of the vehicles was actuated by lease rather than sale. 3 The Court decided that LeasePlan did purchase the vehicles for a purpose of sale and, there being no other issue between the parties, allowed LeasePlan's appeal. 4 In so deciding, the Court noted that the case turned on the evidence (see [25]). The Court noted evidence that: 4.1 in each contract under which LeasePlan acquired a vehicle, it entered into an obligation to sell the vehicle, with the respective rights and obligations of the parties being determined by reference to the actual sale price only once the vehicle was sold [29]; 4.2 LeasePlan monitored expected sale proceeds for each type of vehicle proposed to be leased in order to determine the residual value [30]; 4.3 each vehicle was in fact sold immediately upon termination of the leases (on average within 19 days) [30]; 4.4 sale of the vehicles was necessary to provide the forecasted financial returns to LeasePlan's business [39]. 5 Having regard to this evidence, the Court concluded that contractual arrangements were for a 'composite transaction' in which LeasePlan acquired the vehicles for lease and sale. | 4.1 in each contract under which LeasePlan acquired a vehicle, it entered into an obligation to sell the vehicle, with the respective rights and obligations of the parties being determined by reference to the actual sale price only once the vehicle was sold [29]; 4.2 LeasePlan monitored expected sale proceeds for each type of vehicle proposed to be leased in order to determine the residual value [30]; 4.3 each vehicle was in fact sold immediately upon termination of the leases (on average within 19 days) [30]; 4.4 sale of the vehicles was necessary to provide the forecasted financial returns to LeasePlan's business [39].

Issues decided:
1 At issue in the proceeding was whether subsection 66-5(1) of the GST Act was satisfied; in particular, whether LeasePlan purchased the vehicles 'for the purposes of sale'. 2 The Commissioner submitted that LeasePlan's acquisition of the vehicles was actuated by lease rather than sale. 3 The Court decided that LeasePlan did purchase the vehicles for a purpose of sale and, there being no other issue between the parties, allowed LeasePlan's appeal. 4 In so deciding, the Court noted that the case turned on the evidence (see [25]). The Court noted evidence that: 4.1 in each contract under which LeasePlan acquired a vehicle, it entered into an obligation to sell the vehicle, with the respective rights and obligations of the parties being determined by reference to the actual sale price only once the vehicle was sold [29]; 4.2 LeasePlan monitored expected sale proceeds for each type of vehicle proposed to be leased in order to determine the residual value [30]; 4.3 each vehicle was in fact sold immediately upon termination of the leases (on average within 19 days) [30]; 4.4 sale of the vehicles was necessary to provide the forecasted financial returns to LeasePlan's business [39]. 5 Having regard to this evidence, the Court concluded that contractual arrangements were for a 'composite transaction' in which LeasePlan acquired the vehicles for lease and sale. 1 At issue in the proceeding was whether subsection 66-5(1) of the GST Act was satisfied; in particular, whether LeasePlan purchased the vehicles 'for the purposes of sale'. 2 The Commissioner submitted that LeasePlan's acquisition of the vehicles was actuated by lease rather than sale. 3 The Court decided that LeasePlan did purchase the vehicles for a purpose of sale and, there being no other issue between the parties, allowed LeasePlan's appeal. 4 In so deciding, the Court noted that the case turned on the evidence (see [25]). The Court noted evidence that: 4.1 in each contract under which LeasePlan acquired a vehicle, it entered into an obligation to sell the vehicle, with the respective rights and obligations of the parties being determined by reference to the actual sale price only once the vehicle was sold [29]; 4.2 LeasePlan monitored expected sale proceeds for each type of vehicle proposed to be leased in order to determine the residual value [30]; 4.3 each vehicle was in fact sold immediately upon termination of the leases (on average within 19 days) [30]; 4.4 sale of the vehicles was necessary to provide the forecasted financial returns to LeasePlan's business [39]. 5 Having regard to this evidence, the Court concluded that contractual arrangements were for a 'composite transaction' in which LeasePlan acquired the vehicles for lease and sale. 4.1 in each contract under which LeasePlan acquired a vehicle, it entered into an obligation to sell the vehicle, with the respective rights and obligations of the parties being determined by reference to the actual sale price only once the vehicle was sold [29]; 4.2 LeasePlan monitored expected sale proceeds for each type of vehicle proposed to be leased in order to determine the residual value [30]; 4.3 each vehicle was in fact sold immediately upon termination of the leases (on average within 19 days) [30]; 4.4 sale of the vehicles was necessary to provide the forecasted financial returns to LeasePlan's business [39].

ATO view of decision:
The Tax Office view in respect of section 66-5 is set out in GSTR 2005/3: 43. Section 66-5 requires that the second-hand goods are acquired for the purposes of sale or exchange in the ordinary course of business. We consider that this means that the acquirer must be in the business of buying and selling these goods. If second-hand goods are acquired for any other purpose, for example, for use and eventual sale in the course of business, the acquisition of the goods does not meet this requirement. 44. Further, section 66-5 was amended to ensure that input tax credits for acquisitions of second-hand goods from unregistered suppliers can only be claimed where those goods are acquired for sale or exchange in the ordinary course of business (excluding materials used in manufacture).15 This is confirmed by paragraph 1.26 of the Explanatory Memorandum to the A New Tax System (Indirect Tax and Consequential Amendments) Bill (No. 2) 1999 which says: Item 77 amends section 66-5 to ensure that input tax credits for acquisitions of second-hand goods from unregistered suppliers can only be claimed where those goods are acquired as trading stock (excluding materials used in manufacture). 45. Although 'trading stock' is not mentioned in Division 66, the words in section 66-5 that are similar to the meaning of trading stock in the Income Tax Assessment Act 1997, reflect this intention of Parliament. That is, to limit the application of the Division to second-hand goods acquired by entities in the business of trading in those goods. | 43. Section 66-5 requires that the second-hand goods are acquired for the purposes of sale or exchange in the ordinary course of business. We consider that this means that the acquirer must be in the business of buying and selling these goods. If second-hand goods are acquired for any other purpose, for example, for use and eventual sale in the course of business, the acquisition of the goods does not meet this requirement. 44. Further, section 66-5 was amended to ensure that input tax credits for acquisitions of second-hand goods from unregistered suppliers can only be claimed where those goods are acquired for sale or exchange in the ordinary course of business (excluding materials used in manufacture).15 This is confirmed by paragraph 1.26 of the Explanatory Memorandum to the A New Tax System (Indirect Tax and Consequential Amendments) Bill (No. 2) 1999 which says: Item 77 amends section 66-5 to ensure that input tax credits for acquisitions of second-hand goods from unregistered suppliers can only be claimed where those goods are acquired as trading stock (excluding materials used in manufacture). 45. Although 'trading stock' is not mentioned in Division 66, the words in section 66-5 that are similar to the meaning of trading stock in the Income Tax Assessment Act 1997, reflect this intention of Parliament. That is, to limit the application of the Division to second-hand goods acquired by entities in the business of trading in those goods. | The Tax Office accepts that vehicle leasing companies that regularly purchase vehicles from unregistered parties on terms that provide for a period of leasing followed by sale by reference to an agreed residual value that reflects an estimate of the value of the vehicle at the end of the lease are entitled to input tax credits under Division 66 on the acquisition of the vehicles if the other requirements of that Division are satisfied. The same principles would apply if other second-hand goods are acquired in similar circumstances. | As the Court specifically noted that the case was decided on the evidence, the Tax Office does not consider that the decision is authority for the broader proposition that input tax credits are available under section 66-5 in any case where there is an intention that the goods will ultimately be sold. | For instance, a tradesperson may purchase a second-hand vehicle (from an unregistered person) for use in his or her business but also with a view to selling it at some future time. In those circumstances, the Tax Office view remains that it would not be accurate to characterise the tradesperson as purchasing with the purpose of sale. On these facts, the purpose is to use the vehicle in the business of the tradesperson. An entity that purchases second-hand goods for use in its enterprise and sells those goods after they are no longer required is not a trader in second-hand goods and is not entitled to input tax credits under section 66-5. | It has been suggested to us that this decision is relevant to questions of apportionment under section 11-15 and adjustments under Division 129. Those provisions are concerned with 'creditable purpose' which in turn is concerned with the extent to which an acquisition is acquired in carrying on your enterprise or relates to making supplies that would be input taxed or is of a private or domestic nature. In contrast, this decision was concerned with determining the purposes of the acquisition for the purposes of section 66-5. We do not consider the case to be relevant to the interpretation of the differently-worded provisions of Divisions 11 and 129.

Administrative treatment:
The Tax Office will implement the decision in accordance with the views set out under the immediately preceding section. | Taxpayers who consider that they have overpaid GST on comparable transactions may seek a refund of the overpayment to the requirements of sections 105-55 and 105-65 of Schedule 1 to the Taxation Administration Act 1953 . | Implications on current Public Rulings & Determinations | An Addendum to GSTR 2005/3 was published on 13 October 2010 to reflect this decision.

Legislative references: A New Tax System (Goods and Services Tax) Act 1999 Division 11 11-15 Division 66 66-5 66-5(1) Division 129 Taxation Administration Act 1953 105-55 105-65
Case references: John v Federal Commissioner of Taxation (1989) 166 CLR 417 [1989] HCA 5 89 ATC 4101 20 ATR 1
Subject references: Input tax credits Second-hand goods Division 66