Indirect Tax Developments In Australia – September 2017.

17 October, 2017

 

This Indirect Tax Bulletin outlines recent Australian indirect tax developments which may affect your business.

 

What you need to know

 

RELEVANT AREA	AT A GLANCE
Payroll tax, stamp duty, royalties – WA	The 2017/18 Western Australian Budget proposes a number of tax reforms, including the introduction of: a temporary progressive payroll tax scale for large employers, a 4% Foreign Owner Duty Surcharge on purchases of residential property, a 15% point of consumption wagering tax, and a tiered gold royalty rate.
Payroll Tax – charitable purposes exemption	In South Australian Employers' Chamber of Commerce & Industry Incorporated v Commissioner of State Taxation [2017] SASC 127, the Supreme Court of South Australia has denied a taxpayer's claim for exemption from payroll tax on the basis that its sole or dominant purpose was not charitable.
GST – going concern, margin scheme	In MSAUS Pty Ltd as the Trustee for the Melissa Trust and Commissioner of Taxation (Taxation)[2017] AATA 1408, the Administrative Appeals Tribunal has held that a contract for the sale of real property subject to a lease effectively created a conditional agreement that the supply was a GST-free supply of a going concern, unless the underlying lease was a supply of residential premises, in which event the sale was a taxable supply to which the margin scheme applied.  The lease was input taxed.
Stamp duty – value of land, value of business as going concern, relevance of goodwill	In Placer Dome Inc v Commissioner of State Revenue [2017] WASCA 165, the Court of Appeal of the Supreme Court of Western Australia found that the WA State Administrative Tribunal had erred by: applying the "top-down" valuation approach to value the land assets held by the taxpayer; and accepting a valuation methodology which relied upon the use of the price of gold futures for the purposes of valuing the taxpayer's land assets.

 

Western Australian Budget

 

The 2017/18 Western Australian Budget, announced on 7 September 2017, includes four main proposals for tax reform.

 

1. A temporary progressive payroll tax scale for large employers, to apply from 1 July 2018 to 30 June 2023.  The measure will increase the marginal rate of payroll tax from its current rate of 5.5% to 6.0% for annual taxable payrolls between $100m and $1.5bn and to 6.5% for annual taxable payrolls over $1.5bn.
2. A 4% Foreign Owner Duty Surcharge on purchases of residential property by foreigners, to apply from 1 January 2019.  Residential developments of ten or more properties, commercial residential property, and mixed use properties used primarily for commercial purposes will be excluded.
3. A 15% point of consumption wagering tax, to apply from 1 January 2019.  The tax of 15% of net wagering revenue will apply to all types of wagering products and will replace all current wagering tax arrangements.
4. A tiered gold royalty rate, to apply from 1 January 2018.  The current 2.5% ad valorem rate will apply for each month where the average gold price is $1,200/ounce or less while an increased rate of 3.75% will apply (on the full royalty value) where the price exceeds $1,200/ounce.  The existing exemption on the first 2,500 ounces of production in a given year will also be removed for any mine producing more than 2,500 ounces per year.

 

Legislation has yet to be introduced for these measures. 

 

South Australian Employers' Chamber of Commerce & Industry Incorporated v Commissioner of State Taxation[2017] SASC 127

 

Summary 

 

The Supreme Court of South Australia has held that the South Australian Employers' Chamber of Commerce and Industry Incorporated (the Chamber) was not entitled to an exemption from payroll tax under the exemption for non-profit organisations in section 48 of the Pay-roll Tax Act 2009 (SA) (the Act).  The Court held that the Chamber's sole or dominant purpose was not to advance trade or commerce, which would have been charitable, but rather to benefit members and/or businesses and employers in South Australia.

 

Background

 

The Chamber is a non-profit incorporated association.  Its main activities fell into five categories:

 

1. developing and advocating policies to government and opposition (policy advocacy);
2. providing services and products exclusively to members (member services);
3. selling commercial services to businesses and employers generally (commercial services);
4. conducting programs funded or subsidised mainly by government grants (subsidised programs); and
5. providing apprenticeship and trainee services funded by government grants (apprenticeship support).

 

The Chamber's constitution initially described its primary objects as:

 

"to promote the interests of members generally and in particular to promote the development of the commercial manufacturing or industrial resources of South Australia and the nation."

 

In 2012 the constitution was amended to describe the Chamber's primary objects as:

 

1. to promote economic development in Australia through the promotion of industry, trade and commerce in Australia and in particular in South Australia; and
2. for that purpose to promote the development of the manufacturing, industrial, intellectual, natural and agricultural resources of Australia generally and of South Australia in particular.

 

Membership was open to all businesses and not-for-profit incorporated societies that were employers (other than trade unions).  During the relevant period, between seven and ten per cent of South Australian employers were members of the Chamber.

 

In 2014, the Chamber applied to the Commissioner for exemption from payroll tax under section 48 of the Act and a refund of approximately $2.5m in payroll tax paid since 2009.  The Commissioner denied the application, and the subsequent objection, and the taxpayer appealed.

 

Relevantly, section 48 provides that wages are exempt wages if they are paid or payable:

 

1. by a non-profit organisation having as its sole or dominant purpose a charitable purpose (s 48(1); and
2. for work of a kind ordinarily performed in connection with the charitable purpose of the institution or body, and to a person engaged exclusively in that kind of work (s 48(2)).

 

The Chamber contended that its dominant purpose or purposes were charitable in three ways.

 

1. The dominant purpose of undertaking all five of its major activities was charitable.  Its dominant purpose was to advance trade and commerce at a macro level through policy advocacy, and at a micro level through the other activities, which generated economic activity that benefitted the community.
2. The dominant purpose of the policy advocacy, apprenticeship support and subsidised programs was to advance trade and commerce, and the member services and commercial services were for the incidental purposes of funding policy advocacy and increasing its membership so as to give it greater credibility in policy submissions.
3. The dominant purpose of the policy advocacy to advance trade and commerce, and the other activities were for the incidental purposes of funding policy advocacy and increasing its membership so as to give it greater credibility in policy submissions.

 

The Commissioner contended that the Chamber's activities were conducted not for the dominant purpose of advancing trade and commerce in South Australia, but rather for the purpose of benefiting members or alternatively benefiting businesses and employers in South Australia.

 

Decision

 

Blue J considered each of the main activities of the Chamber individually and held that only the subsidised programs and apprenticeship support were undertaken for the dominant purpose of advancing trade or commerce.  As a result, when considering the objects and activities of the Chamber as a whole, it failed to prove that its dominant purpose was the advancement of trade and commerce under any of the three alternatives put forward.

 

Some of the key findings from the decision are as follows.

 

1. When assessing an entity's sole or dominant purpose, a holistic approach must be taken, considering both the objects and the activities of the entity.  While the updated constitution removed the reference to promoting the interests of the members, the main purpose of updating the constitution was to increase the likelihood of charitable tax exemption, and the activities of the Chamber did not change following the change to the constitution.
2. Even if the policy advocacy had a charitable purpose, the member services and commercial services were not incidental to this purpose.  The primary purpose of the member services was to provide benefits to the members, and the Chamber failed to show that any increased membership facilitated its policy advocacy.  The commercial services were not incidental to the Chamber's primary purpose because there was no evidence that they were being run in order to fund its other activities.  Commercial activities used to fund charitable purposes could be incidental to those charitable purposes but the Chamber failed to establish this was the case.
3. Had the Chamber established that its dominant purpose was charitable, the Court would likely have accepted that all of the Chamber's wages were exempt.  Section 48(2) of the Act "directs attention to work ordinarily performed by institutions having the same charitable purpose as the institution in question".  Given the breadth of the charitable purpose identified, the Court would likely have accepted that the Chamber's activities were "of a kind ordinarily performed" by institutions seeking to advance trade or commerce.

 

MSAUS Pty Ltd as the Trustee for the Melissa Trust and Commissioner of Taxation (Taxation) [2017] AATA 1408

Summary

 

The Administrative Appeals Tribunal has ruled in favour of the taxpayer in the latest iteration of a long-running series of disputes over the GST treatment of the sale of apartments in the Sebel Manly Beach Hotel.  Contrary to the view of the Federal Court in South Steyne Hotel Pty Ltd v Federal Commissioner of Taxation [2009] FCAFC 155 (South Steyne Hotel), Deputy President McCabe held that certain provisions in contracts for the sale of apartments subject to leases were effective in providing that the supply was a GST-free going concern unless the supply under the lease was a supply of residential premises to be used predominately for residential accommodation, in which event the margin scheme in Division 75 of the A New Tax System (Goods and Services Tax) Act 1999 (Cth) (the GST Act) applied. 

 

Background

 

The dispute involved the sale of apartments at the Sebel Manly Beach Hotel.  The land that became the Sebel Manly Beach Hotel was initially acquired by South Steyne Hotel Pty Ltd, who developed a hotel complex and split 83 hotel/apartment rooms into separate lots in the strata plan for the premises.  Each room was leased to Mirvac Management Pty Ltd (Mirvac Management), who operated a serviced apartment business, and then sold to investors subject to the leases to Mirvac Management.

 

The first taxpayer purchased an apartment under a contract of sale on the following terms:

 

1. the "no" box was checked next to the statement "GST: Taxable supply" on the cover page;
2. the "yes" box was checked next to the statement "GST-free because the sale is the supply of a going concern under section 38-325" on the cover page;
3. clause 47.6.3 in the special conditions stated: "…that the sale of the Property comprises a supply of a going concern for the purposes of section 38-325 of the GST Act"; and
4. clause 47.6.6 in the special conditions stated: “if page 1 of the Contract says that the supply is GST-free because the sale is the supply of the going concern but the supply of the Property under the Apartment Lease is a supply of residential premises (but not commercial residential premises), and the premises are also to be used predominantly for residential accommodation (regardless of the term of the occupation), then the sale of the Property is a taxable supply and the parties agree that the margin scheme applies or, if completion has already occurred, the margin scheme is taken to have applied. For the avoidance of doubt, the Vendor acknowledges that if the margin scheme applies to the sale of the Property, the price is inclusive of any GST".

 

The wording of clauses 47.6.3 and 47.6.6 was slightly different in the second taxpayer's contract of sale, however the Tribunal did not consider the two contracts materially different for the purpose of the issues at hand.

 

Relevantly, in order to be a supply of a going concern under section 38-325 of the GST Act, a supplier and recipient must have agreed in writing that the supply is of a going concern (among other things), and in order to apply the margin scheme under section 75-5 of the GST Act, the supplier and recipient must have agreed in writing that the margin scheme is to apply.

 

Two superior court decisions relevant to the issue had been handed down since the parties entered into the contract.

 

1. In South Steyne Hotel, the Federal Court held that a contract substantially similar to this one created a GST-free supply of a going concern.  Clause 47.6.6 was disregarded for being inconsistent with the clauses which stated that the supply was of a going concern.
2. In Federal Commissioner of Taxation v MBI Properties Pty Ltd [2014] HCA 49 (MBI Properties), the High Court held that this arrangement gave rise to an increasing adjustment on the part of the purchasers under section 135-5 of the GST Act.  Section 135 5 provides that a recipient of a supply of a going concern who intends that some or all of the supplies made through the enterprise to which the supply relates will be neither taxable supplies nor GST-free supplies, will have an increasing adjustment equal to 10% of the supply price multiplied by the proportion of the non-creditable use.  In MBI Properties it was held that the purchasers of premises under the arrangement continued to make input taxed supplies of residential premises by way of the lease to Mirvac Management.  Therefore, at the time of the acquiring the premises, the purchasers intended to make supplies through the premises which are neither taxable nor GST-free.

 

The Commissioner argued that the sale of the property was GST-free as a supply of a going concern, and therefore that the taxpayers were liable to pay an increasing adjustment equal to 10% of the purchase price.

 

The taxpayers argued that the effect of clause 47.6.6 was that in the event that the contingency provided for arose (ie the supply of the premises by lease to Mirvac Management is a supply of residential premises), the boxes checked on the front page and clause 47.6.3 were negated, and the parties instead agreed to use the margin scheme.  The taxpayers argued that the decision in South Steyne Hotel did not apply either because the decision in MBI Properties "changes the game", or because the taxpayers had addressed gaps in the arguments in the earlier cases.

 

Decision

 

Deputy President McCabe held that under the terms of the contracts of sale, the taxpayers had agreed with the vendor to apply the margin scheme, and therefore the taxpayers did not have an increasing adjustment.

 

Clause 47.6.6 was inserted to deal with uncertainty in the law at the time of the agreement.  Prior to the decision in MBI Properties, it was not clear whether the purchasers would be making input taxed supplies to Mirvac Management.  The clause, while awkwardly drafted, was intended to create a contingency plan that is activated if something happens that would trigger a liability on the part of the purchaser to pay GST.  The intention was to avoid an increasing adjustment.  

 

Therefore, in viewing the contract as a whole, the parties' intention was that the margin scheme would apply if the condition in clause 47.6.6 was satisfied.

 

The Tribunal distinguished the decision in South Steyne Hotel on the basis that the Court in that case was labouring under a misunderstanding of the law.  Whereas in South Steyne Hotel the clause was a "confusing anomaly", the decision in MBI Properties made apparent the contingency for which the contractual drafters were providing.

 

Placer Dome Inc v Commissioner of State Revenue [2017] WASCA 165

Summary

 

This case concerned the operation of the (now repealed) land rich provisions under the Stamp Act 1921(WA) (Act).  In allowing the appeal by the taxpayer (PDI), the Court of Appeal of the Supreme Court of Western Australia found that the WA State Administrative Tribunal had erred by:

 

1. applying the "top-down" valuation approach to value the land assets held by PDI; and
2. accepting a valuation methodology which relied upon the use of the price of gold futures for the purposes of valuing PDI's land assets.

 

Although the Court did not conclusively decide the correct valuation methodology to apply in the circumstances (the matter was remitted back to the Tribunal), the judgement provides useful guidance for valuing land under the current landholder provisions, particularly where land is held by mining companies.

 

Background

 

In 2006, all the shares in PDI were acquired by Barrick Gold Corporation.  The Commissioner assessed PDI for stamp duty of approximately $55m.  The assessment was based on the Commissioner's view that, under section 76ATI of the Act, PDI was a "listed landholder corporation" as PDI was entitled to land (including mining tenements) that had a total value which represented at least 60% of the value of all property to which PDI was entitled.  PDI appealed to the Tribunal after the Commissioner disallowed its objection to the assessment.

 

The Tribunal favoured the valuation evidence submitted by expert valuers for the Commissioner.

 

In valuing PDI's land, the Tribunal accepted the Commissioner's top-down approach, which involved subtracting the value of all non-land assets from the value of the acquisition of PDI.  The resulting residual value was accepted as the value for PDI's land assets.  By necessity, this approach required the Commissioner to attribute a value to PDI's goodwill (being a non-land asset) before a residual value could be ascertained.  Although the Tribunal acknowledged that there was no requirement under the Act to ascribe a value to goodwill, because the top-down approach had been adopted it was unavoidable that the value of goodwill became a central issue.  The Tribunal concluded that there was no evidence to support the contention that PDI's business included goodwill of substantial value.

 

In considering the discounted cash flow (DCF) methodology that was employed by all the expert valuers to value PDI's land assets, the Tribunal accepted evidence submitted by the Commissioner's valuer.  The evidence relied upon the price of gold futures contracts as at the date of acquisition, and assumed, where gold futures prices were not available, that gold prices would increase indefinitely at a real rate of 2% p.a.

 

Having accepted the Commissioner's valuation evidence, the Tribunal concluded that the 60% value threshold had been met, and the Commissioner's assessment was upheld.

 

Decision

 

The Court found that the Tribunal had fallen into error in three main respects.

 

1. Valuation of PDI's land assets

 

The Court held that, while there may be cases in which the price paid for all the assets of a corporation could be taken into account to allocate value to each asset held by the corporation, including its land assets, this was not such a case.  The top-down approach can only be applied if the individual assets comprising the total assets of the relevant corporation, and the value properly applied to each of those individual assets, can be ascertained with certainty.  The Court found that in the circumstances, some of the components that added value to PDI did not correspond to identifiable items of property, and as such, the top-down approach was not appropriate to value PDI's land assets.

 

Further, the Court held that the Tribunal had incorrectly confused the sources of PDI's goodwill with PDI's goodwill itself – which, contrary to the Tribunal's findings, the Court concluded (based on the evidence) would be substantial.  In such cases, it would be essential to value the goodwill of the business with accuracy if the top-down approach was used to value the land.  This would require that all of PDI's tangible assets (including its land assets) are accurately valued first, with the resulting residual value being goodwill.  Of course, as the Court recognised, such an analysis is flawed as the task of deriving a residual value for the land assets is incompatible with the task of deriving a residual value for goodwill.  Accordingly, the Court held that valuing PDI's goodwill under the top-down approach was an unnecessary distraction from the statutory task of valuing the land.

 

In this regard, the Court held that the Tribunal had misapprehended the task required by the relevant provisions of the Act (for valuing the land and the mining tenements) – that is, to ascertain the value of the land to which PDI was entitled, applying the conventional valuation principles set out in Spencer v the Commonwealth [1907] HCA 82.  Consequently, the Tribunal had erred in failing to distinguish between the value of land and the value of a business conducted on the land.

 

2. Existence of goodwill

 

The Court found that, contrary to the Tribunal's findings, there was ample evidence of intangible aspects of PDI's substantial business which contributed to its profitability.  The Court identified numerous sources of PDI's substantial goodwill, including the technical capabilities of PDI's personnel and its significant workforce, its management systems and structures, its development of innovative mining techniques, and the economic benefits (ie synergies) that an acquirer could realise by merging PDI's business with its own business.

 

3. Use of gold futures

 

The Court held that it was not appropriate for the Tribunal to have accepted evidence of the value of PDI's land assets by reference to a DCF methodology that relied on the price of gold futures.

 

The Court held that the price of gold futures was not appropriate for valuing a mining business for various reasons, including that gold futures contracts are not an estimate of the future spot price of gold, that it assumes that all production is hedged, and that the gold futures market is thin, illiquid, opaque and of limited duration.  The limited duration and available data necessitated an unrealistic and inherently implausible assumption by the Commissioner's valuer of an indefinite escalation in the price of gold.

For further information, please contact:

 

Geoffrey Mann, Partner, Ashurst 

geoffrey.mann@ashurst.com