On 10 March 2011, the AAT handed down a brief decision in which it held that the taxpayer's proposed use of "effective life" as the basis of apportionment was not acceptable as a fair and reasonable apportionment methodology: A Taxpayer v Commissioner of Taxation AATA 160. In doing so, the AAT simply adopted the views of the Commissioner set out in a public ruling – seeing "no need to elaborate further".
This significant win for the Commissioner has implications for those seeking to determine the extent to which they can claim input tax credits for property developments and their liability for increasing adjustments when properties that were intended to be sold are instead used for making input taxed supplies.
Background: GST liabilities and apportionment
The correct calculation of your GST liabilities is dependent on many different "apportionments" – you need to apportion acquisitions between creditable and non-creditable purposes, you need to apportion consideration between taxable and non-taxable supplies and you need to apportion use between creditable and non-creditable "applications".
The Commissioner's guidance in relation to these apportionments has often been of limited practical utility, generally espousing two basic principles:
- apportionment needs to be done on "fair and reasonable" basis; and
- the basis of apportionment needs to be properly documented.
In specific instances, these general principles have been supplemented by the Commissioner identifying a few approaches that he will not accept as fair and reasonable.
The property development in this case
The facts of the case arose out of a common problem – a developer constructed a property for the purposes of sale, but could not sell the whole property in the manner intended.
Parts of the development were sold – the retail spaces and the commercial carpark – but not the residential premises, which were eventually leased out.
The Tribunal accepted that notwithstanding that the residential apartments were the subject of a lease, they continued to be held for sale in accordance with the Commissioner's approach in a ruling, GSTR 2009/4.
Adjustments to input tax credits previously claimed
This means that there was a period of dual application – the residential apartments continued to be applied for the originally intended purposes (a taxable supply of residential premises) but were also partially applied for a different purpose, input taxed residential leasing. Because input tax credits had been claimed for the construction of the apartments, the developer needed to repay a portion of those input tax credits, as they were no longer being apply solely for a creditable purpose.
The extent to which input tax credits had to be repaid depended on the extent to which the apartments should be seen as having been "applied" for the purpose of making input taxed supplies of residential premises by way of lease.
Originally, the taxpayer calculated this "increasing adjustment" based on the revenue derived from the input taxed activity as a proportion of the total revenue that would be derived if the apartments had have been sold for their expected return. This calculation was done in accordance with the Commissioner's statements in GSTR 2009/4.
However, subsequently the taxpayer sought to use a different basis of apportionment. The taxpayer argued that the "effective life" of the apartments, consistent with Division 43 of the Income Tax Assessment Act 1997, was 40 years (or 480 months for the purposes of their calculations).
Therefore, because by the end of the relevant year, the apartments had been used for making input taxed supplies for only two months, the extent to which the apartments had been applied for this purpose should be expressed as 2/480 – giving rise to a much smaller increasing adjustment than would have been necessary in accordance with the Commissioner's views in GSTR 2009/4.
Why the Tribunal rejected the taxpayer's apportionment argument
The Tribunal rejected the taxpayer's revised approach, but offered little reasoning of its own – instead preferring what it described as the "cogent explanation" for the rejection of an effective life methodology set out by the Commissioner in GSTR 2009/4.
The two principal reasons the Commissioner provides for the rejection of an "effective life" apportionment approach, and cited with approval by the Tribunal, were:
- an apportionment based on effective life contemplates the entire life span of the premises rather than the actual use of the premises by the entity in the relevant period; and
- the effective life of a building is too remote and arbitrary to reasonably reflect the application of the residential premises (including the land and the building) during the relevant period.
In a further victory for the Commissioner, the Tribunal rejected the Taxpayer's arguments that GSTR 2009/4 did not properly reflect the intention of Division 129 of the GST Act – the provisions requiring an adjustment for change of use.
Apportionment disputes with the Commissioner are going to become more common. The legislative guidance for apportionment is very limited and there is substantial room for differences of opinion in what is "fair and reasonable".
It is important to have careful regard to the views of the Commissioner in public rulings. Where taxpayers choose to depart from those views, they must do so cautiously and on the basis of clear and cogent reasons of their own.
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