Applicant and Commissioner of Taxation
Document type: Decision Impact Statement
Venue: Administrative Appeals Tribunal (2011/3714, 2011/4808)
Judgment date: 29 June 2012
Date published: 30 October 2013

Summary of decision:
Outlines the Tax Office response to these matters which concerned whether an entitlement to input tax credits arose for second-hand aircraft acquired before 1 July 2000.

Overview of facts:
(a) The two taxpayers were members of GST groups. The second taxpayer was also the representative member of its GST group. By letter dated 10 December 2010, the taxpayers requested that the Tax Office clarify the correct tax period in which to claim input tax credits for second-hand aircraft acquired before 1 July 2000. (b) The correspondence was treated as a request for a private binding ruling on entitlement to the input tax credits. (c) An unfavourable notice of private binding ruling issued to the first taxpayer on 29 March 2011 and to the second taxpayer on 23 May 2011. The rulings were based on the scheme described in each notice. (d) Those schemes included as facts that: • the Tax Office was advised by the taxpayer, that in the course of carrying on an enterprise of leasing and selling aircraft, the first applicant, and J company, a member of the second taxpayer's GST group, acquired the relevant second-hand aircraft with the intention to lease and sell; • the first taxpayer and J company acquired the aircraft between 1988 and 1992 by way of sale and entry into hire-purchase agreements; • the option to obtain title in the aircraft acquired under the hire-purchase agreements was exercised after 1 July 2000. No GST was accounted for upon the transfer of title on the basis that the supply and acquisition of the aircraft occurred before 1 July 2000; • the first taxpayer leased the aircraft to numerous lessees throughout the seventeen year period between their acquisition and sale in 2009 to an entity outside the first taxpayer's GST group; • J company also leased the aircraft before selling them in 2009 to B company, another member of the second taxpayer's GST group. B company sold the aircraft to an entity outside the GST group; and • the aircraft were in Australia when sold. The purchasers accounted for GST on the sale under Division 83 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). (e) The taxpayers objected against the rulings. The second taxpayer previously received another unfavourable ruling on its entitlement to input tax credits that was not objected to. The objections were disallowed. Review by the Tribunal was sought. | (a) The two taxpayers were members of GST groups. The second taxpayer was also the representative member of its GST group. By letter dated 10 December 2010, the taxpayers requested that the Tax Office clarify the correct tax period in which to claim input tax credits for second-hand aircraft acquired before 1 July 2000. (b) The correspondence was treated as a request for a private binding ruling on entitlement to the input tax credits. (c) An unfavourable notice of private binding ruling issued to the first taxpayer on 29 March 2011 and to the second taxpayer on 23 May 2011. The rulings were based on the scheme described in each notice. (d) Those schemes included as facts that: • the Tax Office was advised by the taxpayer, that in the course of carrying on an enterprise of leasing and selling aircraft, the first applicant, and J company, a member of the second taxpayer's GST group, acquired the relevant second-hand aircraft with the intention to lease and sell; • the first taxpayer and J company acquired the aircraft between 1988 and 1992 by way of sale and entry into hire-purchase agreements; • the option to obtain title in the aircraft acquired under the hire-purchase agreements was exercised after 1 July 2000. No GST was accounted for upon the transfer of title on the basis that the supply and acquisition of the aircraft occurred before 1 July 2000; • the first taxpayer leased the aircraft to numerous lessees throughout the seventeen year period between their acquisition and sale in 2009 to an entity outside the first taxpayer's GST group; • J company also leased the aircraft before selling them in 2009 to B company, another member of the second taxpayer's GST group. B company sold the aircraft to an entity outside the GST group; and • the aircraft were in Australia when sold. The purchasers accounted for GST on the sale under Division 83 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). (e) The taxpayers objected against the rulings. The second taxpayer previously received another unfavourable ruling on its entitlement to input tax credits that was not objected to. The objections were disallowed. Review by the Tribunal was sought. | • the Tax Office was advised by the taxpayer, that in the course of carrying on an enterprise of leasing and selling aircraft, the first applicant, and J company, a member of the second taxpayer's GST group, acquired the relevant second-hand aircraft with the intention to lease and sell; • the first taxpayer and J company acquired the aircraft between 1988 and 1992 by way of sale and entry into hire-purchase agreements; • the option to obtain title in the aircraft acquired under the hire-purchase agreements was exercised after 1 July 2000. No GST was accounted for upon the transfer of title on the basis that the supply and acquisition of the aircraft occurred before 1 July 2000; • the first taxpayer leased the aircraft to numerous lessees throughout the seventeen year period between their acquisition and sale in 2009 to an entity outside the first taxpayer's GST group; • J company also leased the aircraft before selling them in 2009 to B company, another member of the second taxpayer's GST group. B company sold the aircraft to an entity outside the GST group; and • the aircraft were in Australia when sold. The purchasers accounted for GST on the sale under Division 83 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). | Issues decided by the tribunal | The Tribunal had to determine the following issues: 1. the precise description of the scheme referred to in the rulings; 2. whether in accordance with subsection 66-5(1) of the GST Act the first taxpayer and J company acquired the aircraft for the purposes of sale or exchange (but not manufacture) in the ordinary course of business; 3. whether in accordance with paragraph 18(1)(a) of the A New Tax System (Goods and Services Tax Transition) Act 1999 (GST Transition Act) the first taxpayer and J company held the aircraft on 1 July 2000 for the purposes of sale or exchange (but not manufacture) in the ordinary course of business; 4. whether under paragraph 18(1)(b) of the GST Transition Act, the first taxpayer and J company had held the aircraft prior to 1 July 2000 for any other purpose; and 5. whether, in the event J company satisfied section 18 of the GST Transition Act and subsection 66-5(1) of the GST Act, its sale of aircraft to B company was a supply of goods that was not a taxable supply for the purposes of paragraph 66-5(2)(e) of the GST Act. | 1. the precise description of the scheme referred to in the rulings; 2. whether in accordance with subsection 66-5(1) of the GST Act the first taxpayer and J company acquired the aircraft for the purposes of sale or exchange (but not manufacture) in the ordinary course of business; 3. whether in accordance with paragraph 18(1)(a) of the A New Tax System (Goods and Services Tax Transition) Act 1999 (GST Transition Act) the first taxpayer and J company held the aircraft on 1 July 2000 for the purposes of sale or exchange (but not manufacture) in the ordinary course of business; 4. whether under paragraph 18(1)(b) of the GST Transition Act, the first taxpayer and J company had held the aircraft prior to 1 July 2000 for any other purpose; and 5. whether, in the event J company satisfied section 18 of the GST Transition Act and subsection 66-5(1) of the GST Act, its sale of aircraft to B company was a supply of goods that was not a taxable supply for the purposes of paragraph 66-5(2)(e) of the GST Act. | The Tribunal found for the Commissioner as follows: 1. A conclusion about whether the aircraft were acquired and held for a purpose of sale in the ordinary course of business could not be fixed by an assertion made by the taxpayers in the private ruling application: [2012] AATA 407 at [29]. The conclusion must be based on the facts of the scheme that was the subject of the ruling: [2012] AATA 407 at [29] and [71]. 2. Whilst the decision in LeasePlan Australia Limited v Commissioner of Taxation [2009] FCA 1309 that neither a sole nor a dominant purpose test applied to subsection 66-5(1) of the GST Act was binding, the facts of that case were significantly different from those ruled on: [2012] AATA 407 at [49] and [54]. 3. Based on the facts ruled on, the aircraft were not sold in the ordinary course of business. In the ordinary course of business, the aircraft were leased. Consequently, paragraph 18(1)(a) of the GST Transition Act was not satisfied as the aircraft were not held on 1 July 2000 for the purposes of sale or exchange in the ordinary course of business: [2012] AATA 407 at [73]-[74]. | 1. A conclusion about whether the aircraft were acquired and held for a purpose of sale in the ordinary course of business could not be fixed by an assertion made by the taxpayers in the private ruling application: [2012] AATA 407 at [29]. The conclusion must be based on the facts of the scheme that was the subject of the ruling: [2012] AATA 407 at [29] and [71]. 2. Whilst the decision in LeasePlan Australia Limited v Commissioner of Taxation [2009] FCA 1309 that neither a sole nor a dominant purpose test applied to subsection 66-5(1) of the GST Act was binding, the facts of that case were significantly different from those ruled on: [2012] AATA 407 at [49] and [54]. 3. Based on the facts ruled on, the aircraft were not sold in the ordinary course of business. In the ordinary course of business, the aircraft were leased. Consequently, paragraph 18(1)(a) of the GST Transition Act was not satisfied as the aircraft were not held on 1 July 2000 for the purposes of sale or exchange in the ordinary course of business: [2012] AATA 407 at [73]-[74]. | The Tribunal also expressed the following opinions regarding Division 48 of the GST Act which did not form part of its reasons for upholding the objection decisions: • The deeming of supplies between GST group members not to be taxable supplies by subsection 48-40(2) of the GST Act, only applied to modify the liability to pay GST and not more broadly as the Commissioner submitted in the application of paragraph 66-5(2)(e) of the GST Act: [2012] AATA 408 at [36]. • The decision in The Taxpayer and Commissioner of Taxation [2010] AATA 497 was distinguishable as it did not concern Division 66 of the GST Act; [2012] AATA 408 at [29]. The second taxpayer's single entity argument according to which it should be regarded as having made B company's taxable supply of the aircraft to the entity outside its GST group was preferable, because treating GST group members as if they were discrete entities was problematic:[2012] AATA 408 at [24] and [33]. • Subsection 48-45(3) of the GST Act only enabled an acquisition between GST group members to be a creditable acquisition where Division 84 of the GST Act applied, but Division 84 did not apply to B company's acquisition of aircraft from J company: 2012 AATA 408 at [31] and [35]. | • The deeming of supplies between GST group members not to be taxable supplies by subsection 48-40(2) of the GST Act, only applied to modify the liability to pay GST and not more broadly as the Commissioner submitted in the application of paragraph 66-5(2)(e) of the GST Act: [2012] AATA 408 at [36]. • The decision in The Taxpayer and Commissioner of Taxation [2010] AATA 497 was distinguishable as it did not concern Division 66 of the GST Act; [2012] AATA 408 at [29]. The second taxpayer's single entity argument according to which it should be regarded as having made B company's taxable supply of the aircraft to the entity outside its GST group was preferable, because treating GST group members as if they were discrete entities was problematic:[2012] AATA 408 at [24] and [33]. • Subsection 48-45(3) of the GST Act only enabled an acquisition between GST group members to be a creditable acquisition where Division 84 of the GST Act applied, but Division 84 did not apply to B company's acquisition of aircraft from J company: 2012 AATA 408 at [31] and [35].

Issues decided:
The Tribunal had to determine the following issues: 1. the precise description of the scheme referred to in the rulings; 2. whether in accordance with subsection 66-5(1) of the GST Act the first taxpayer and J company acquired the aircraft for the purposes of sale or exchange (but not manufacture) in the ordinary course of business; 3. whether in accordance with paragraph 18(1)(a) of the A New Tax System (Goods and Services Tax Transition) Act 1999 (GST Transition Act) the first taxpayer and J company held the aircraft on 1 July 2000 for the purposes of sale or exchange (but not manufacture) in the ordinary course of business; 4. whether under paragraph 18(1)(b) of the GST Transition Act, the first taxpayer and J company had held the aircraft prior to 1 July 2000 for any other purpose; and 5. whether, in the event J company satisfied section 18 of the GST Transition Act and subsection 66-5(1) of the GST Act, its sale of aircraft to B company was a supply of goods that was not a taxable supply for the purposes of paragraph 66-5(2)(e) of the GST Act. 1. the precise description of the scheme referred to in the rulings; 2. whether in accordance with subsection 66-5(1) of the GST Act the first taxpayer and J company acquired the aircraft for the purposes of sale or exchange (but not manufacture) in the ordinary course of business; 3. whether in accordance with paragraph 18(1)(a) of the A New Tax System (Goods and Services Tax Transition) Act 1999 (GST Transition Act) the first taxpayer and J company held the aircraft on 1 July 2000 for the purposes of sale or exchange (but not manufacture) in the ordinary course of business; 4. whether under paragraph 18(1)(b) of the GST Transition Act, the first taxpayer and J company had held the aircraft prior to 1 July 2000 for any other purpose; and 5. whether, in the event J company satisfied section 18 of the GST Transition Act and subsection 66-5(1) of the GST Act, its sale of aircraft to B company was a supply of goods that was not a taxable supply for the purposes of paragraph 66-5(2)(e) of the GST Act. The Tribunal found for the Commissioner as follows: 1. A conclusion about whether the aircraft were acquired and held for a purpose of sale in the ordinary course of business could not be fixed by an assertion made by the taxpayers in the private ruling application: [2012] AATA 407 at [29]. The conclusion must be based on the facts of the scheme that was the subject of the ruling: [2012] AATA 407 at [29] and [71]. 2. Whilst the decision in LeasePlan Australia Limited v Commissioner of Taxation [2009] FCA 1309 that neither a sole nor a dominant purpose test applied to subsection 66-5(1) of the GST Act was binding, the facts of that case were significantly different from those ruled on: [2012] AATA 407 at [49] and [54]. 3. Based on the facts ruled on, the aircraft were not sold in the ordinary course of business. In the ordinary course of business, the aircraft were leased. Consequently, paragraph 18(1)(a) of the GST Transition Act was not satisfied as the aircraft were not held on 1 July 2000 for the purposes of sale or exchange in the ordinary course of business: [2012] AATA 407 at [73]-[74]. 1. A conclusion about whether the aircraft were acquired and held for a purpose of sale in the ordinary course of business could not be fixed by an assertion made by the taxpayers in the private ruling application: [2012] AATA 407 at [29]. The conclusion must be based on the facts of the scheme that was the subject of the ruling: [2012] AATA 407 at [29] and [71]. 2. Whilst the decision in LeasePlan Australia Limited v Commissioner of Taxation [2009] FCA 1309 that neither a sole nor a dominant purpose test applied to subsection 66-5(1) of the GST Act was binding, the facts of that case were significantly different from those ruled on: [2012] AATA 407 at [49] and [54]. 3. Based on the facts ruled on, the aircraft were not sold in the ordinary course of business. In the ordinary course of business, the aircraft were leased. Consequently, paragraph 18(1)(a) of the GST Transition Act was not satisfied as the aircraft were not held on 1 July 2000 for the purposes of sale or exchange in the ordinary course of business: [2012] AATA 407 at [73]-[74]. The Tribunal also expressed the following opinions regarding Division 48 of the GST Act which did not form part of its reasons for upholding the objection decisions: • The deeming of supplies between GST group members not to be taxable supplies by subsection 48-40(2) of the GST Act, only applied to modify the liability to pay GST and not more broadly as the Commissioner submitted in the application of paragraph 66-5(2)(e) of the GST Act: [2012] AATA 408 at [36]. • The decision in The Taxpayer and Commissioner of Taxation [2010] AATA 497 was distinguishable as it did not concern Division 66 of the GST Act; [2012] AATA 408 at [29]. The second taxpayer's single entity argument according to which it should be regarded as having made B company's taxable supply of the aircraft to the entity outside its GST group was preferable, because treating GST group members as if they were discrete entities was problematic:[2012] AATA 408 at [24] and [33]. • Subsection 48-45(3) of the GST Act only enabled an acquisition between GST group members to be a creditable acquisition where Division 84 of the GST Act applied, but Division 84 did not apply to B company's acquisition of aircraft from J company: 2012 AATA 408 at [31] and [35]. • The deeming of supplies between GST group members not to be taxable supplies by subsection 48-40(2) of the GST Act, only applied to modify the liability to pay GST and not more broadly as the Commissioner submitted in the application of paragraph 66-5(2)(e) of the GST Act: [2012] AATA 408 at [36]. • The decision in The Taxpayer and Commissioner of Taxation [2010] AATA 497 was distinguishable as it did not concern Division 66 of the GST Act; [2012] AATA 408 at [29]. The second taxpayer's single entity argument according to which it should be regarded as having made B company's taxable supply of the aircraft to the entity outside its GST group was preferable, because treating GST group members as if they were discrete entities was problematic:[2012] AATA 408 at [24] and [33]. • Subsection 48-45(3) of the GST Act only enabled an acquisition between GST group members to be a creditable acquisition where Division 84 of the GST Act applied, but Division 84 did not apply to B company's acquisition of aircraft from J company: 2012 AATA 408 at [31] and [35].

ATO view of decision:
The decision on application of paragraph 18(1)(a) of the GST Transition Act was open to the Tribunal on the facts as found. As the Tribunal did not need to make a decision on the other second-hand goods provisions, the Commissioner's submissions on paragraph 18(1)(b) of the GST Transition Act and subsection 66-5(1) of the GST Act were not ruled on. | The decisions suggest that cases decided under former Part IV of the Taxation Administration Act 1953 (TAA 1953) have relevance to similarly worded provisions of Division 359 to Schedule 1 of the TAA 1953: [2012] AATA 407 at [12]. The decisions also emphasise that when making a private binding ruling, careful scrutiny of the facts comprising the scheme ruled upon is necessary. | Those facts can be distinguished from assertions made in the ruling application about satisfaction of the provisions in question. | Unlike in LeasePlan , the leasing activities before the Tribunal did not necessarily require sale of the relevant second-hand goods, in this case aircraft, at the end of a lease period based on a particular sum or residual value. Additionally, there was no evidence of regular aircraft sales and acquisitions: [2012] AATA 407 at [61]. This, coupled with the facts that the aircraft were leased for a substantial period of time before sale and sold after returns from leasing ceased being commercially viable, meant the requirements of section 18 of the GST Transition Act and subsection 66-5(1) of the GST Act could not be satisfied: [2012] AATA 407 at [62] and [70]. | We agree with the Tribunal's conclusion that these factors, where present, demonstrate that an entity has not acquired second-hand goods for a purpose of sale or exchange in the ordinary course of business. | Regarding the GST grouping rules, despite its preference for the second taxpayer's single entity argument , the Tribunal did not find the decision on the interaction between Divisions 48 and 75 of the GST Act in The Taxpayer and Commissioner of Taxation [2010] AATA 497 to be incorrect. We consider that decision, which has not been disturbed on appeal, properly reflects the fact that Division 48 of the GST Act does not confer an unqualified single entity treatment for GST groups under which actions of one group member can generally be ascribed to another. | Additionally, the Tribunal's conclusions on subsection 48-45(3) of the GST Act at [34] of [2012] AATA 408 were consistent with the Commissioner's submission that B company was not entitled to input tax credits for its acquisition of aircraft from J company.

Administrative treatment:
These decisions are broadly consistent with the way in which the Tax Office applies the law. GST group members seeking certainty about the Tax Office view on the application of Divisions 48 and 66 of the GST Act in their particular situation should consider applying for a private binding ruling. | Implications for ATO Precedential documents (Public Rulings & Determinations etc) | GSTD 2013/2 and an addendum to GSTR 2005/3 issued on 28 August 2013 in order to clarify when we consider second hand goods are acquired for the purpose of sale in the ordinary course of business under Division 66 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

Legislative references: Acts Interpretation Act 1901 (Cth) 13 A New Tax System (Goods and Services Tax ) Act 1999 (Cth) 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) 16 18 19A Income Tax Assessment Act 1936 (Cth) 6 Income Tax Assessment Act 1997 (Cth) 70-10 995-1 Taxation Administration Act 1953 (Cth) 14ZZ Division 359 359-1 359-10 359-5 359-60
Case references: 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 21 ATR 1532 Commissioner of Taxation v Hyteco Hiring Pty Ltd (1992) 39 FCR 502 24 ATR 218 92 ATC 4694 Commissioner of Taxation v McMahon (1997) 79 FCR 127 37 ATR 167 97 ATC 4986 Downs Distributing Company Pty Ltd v Associated Blue Star Stores Pty Ltd (In Liquidation) (1948) 76 CLR 463 [1948] HCA 14 Hope v The Council of the City of Bathurst (1980) 144 CLR 1 12 ATR 231 80 ATC 4386 [1980] HCA 16 Imperial Bottleshops Pty Ltd & Egerton v Federal Commissioner of Taxation (1991) 22 ATR 148 91 ATC 4546 John v Commissioner of Taxation of the Commonwealth of Australia (1989) 166 CLR 417 20 ATR 1 89 ATC 4101 LeasePlan Australia Limited v Commissioner of Taxation [2009] FCA 1309 2009 ATC 20-144 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 [1998] HCA 28 Saeed v Minister for Immigration and Citizenship (2010) 84 ALJR 507 [2010] HCA 23 Taylor and Anor v White and Anor (1964) 110 CLR 129 The Commissioner of Taxation of the Commonwealth of Australia v Suttons Motors (Chullora) Wholesale Pty Ltd (1985) 157 CLR 277 16 ATR 567 85 ATC 4398 The Taxpayer and the Commissioner of Taxation [2010] AATA 497 76 ATR 917
Subject references: GST input tax credits Acquisition of second-hand goods Purpose of acquisition Lease / hire-purchase agreement Goods acquired or held before the introduction of GST Goods acquired or held for the purposes of sale or exchange (but not manufacture) in the ordinary course of business Application of the GST grouping provisions Taxable supply
Other references: Taxpayer Alert TA 2004/9 - Exploitation of the second-hand goods provisions to obtain input tax credits