Paul Anderson | November 2011 | Business & Property
The recent Federal Court decision of Reglon Pty Limited v Commissioner of Taxation considers whether payment of a judgment in conversion can constitute a taxable supply for GST purposes.
Who does it impact? Advisers practising in the GST area and their clients.
What action should be taken? Advisers and their clients should be aware of the decision and at least consider claiming GST in proceedings for conversion.
GST on damages in conversion
The recent Federal Court decision of Reglon Pty Limited v Commissioner of Taxation considers the interesting question of whether a judgment for conversion constitutes a taxable supply for GST purposes.
Facts The facts were complicated but after a certain degree of simplification, can be summarised as follows. On 21 September 2004, the Taxpayer entered into a contract to acquire approximately 117,000 individual items of scaffolding for a total purchase price of $1,478,125. The full amount of the purchase price was borrowed. On 13 December 2004 the Taxpayer entered into a Hire Agreement with ACS Hire Pty Limited (“ACS Hire”) under which the scaffolding was hired to ACS Hire for ten years with the intention that ACS Hire would itself hire out the scaffolding to users in the building and construction industry. ACS Hire had a connection with Action Construction Services Pty Limited (“Action Construction”) in that both were controlled by a Mr Baker. Action Construction also owned items of scaffolding, the acquisition of which was financed by Citadel Financial Corporation Pty Limited (“Citadel”). The borrowing was secured by a Fixed and Floating Charge to Citadel over the assets of Action Construction including its scaffolding assets.
GST on damages in conversion Paul Anderson | November 11
However, in September 2005, ACS Hire defaulted in the payment of hire fees to the Taxpayer. All of the intermingled scaffolding was moved to a holding yard at St Peters. On 29 December 2005 Citadel appointed a Receiver and Manager to Action Construction pursuant to its Charge. On 18 January 2006 the Receiver and Manager granted a licence to use the intermingled scaffolding to Action Construction Services NSW Pty Limited (“Action NSW”) which had been incorporated two days earlier. A Mr Maiolo was the sole director of both Citadel and Action NSW. On 16 February 2006, the Taxpayer commenced proceedings against the Receiver and Manager and Citadel for an order for delivery up of the Taxpayer’s scaffolding, or, alternatively, for damages for conversion. On 11 December 2006 judgment was entered for the Taxpayer in the sum of $1,478,125 being damages for conversion of the scaffolding. After unsuccessful appeals, the sum of $1,478,125 plus interest was paid to the Taxpayer at some stage prior to 31 March 2008. The Taxpayer applied the full amount of the money received in payment of the original loan pursuant to which its scaffolding had been purchased. This left the Taxpayer with assets of $499. The Taxpayer no longer conducted any business or activity. Following an audit, the Commission of Taxation then issued a GST assessment in the sum of $134,375 alleging that the Taxpayer had made a taxable supply to Citadel of its scaffolding for a consideration of $1,478,125.
Issues Section 9-5 of the GST Act, provides, in effect, that a taxpayer makes a taxable supply if the taxpayer makes a supply for consideration and the supply is made in the course or furtherance of an enterprise. Justice Emmett identified the issues in the case as being as follows: >> Did the Taxpayer make a supply for consideration? and, if so; >> Was that supply made in the course or furtherance of an enterprise?
The Taxpayer’s scaffolding (which had been hired to ACS Hire) and the scaffolding owned by Action Construction were intermingled at premises at Wetherill Park. Thereafter, Action Construction used the intermingled scaffolding in its business of hiring out scaffolding to users in the building and construction industry. ACS Hire paid hire fees to the Taxpayer and Action Construction in turn reimbursed ACS Hire the amount of those fees.
The effect of the payment in full by Citadel of the judgment in conversion against it was to vest in Citadel ownership of the Taxpayer’s scaffolding. It was not the obtaining of judgment in conversion that was important, nor the formal entry of judgment. Rather it was satisfaction of the judgment by payment that had the effect of transferring title to the scaffolding to Citadel. Judgment in conversion needs to be contrasted with judgment in detinue. In the latter case, the plaintiff primarily asserts a right to recover the goods in specie. In the case of non-delivery, the plaintiff can recover their value. The defendant has the option of giving up the goods or paying their value. Title to the goods only passes to the defendant in an action in detinue if the judgment is satisfied by payment. At first sight, it might be thought that because, following payment of the judgment, title vested in Citadel, there was a supply for consideration. However, in the judge’s opinion “the transfer of ownership to Citadel, and the extinguishment of the Taxpayer’s ownership by operation of law, occurred without assent and was triggered by the payment of the judgment sum by Citadel. That payment did not depend upon any action of the Taxpayer.” In these circumstances there was no supply and therefore no taxable supply.
GST on damages in conversion
That finding was enough to dispose of the proceedings. However, without expressing final views, the judge went on to consider the other issues in the case assuming that there was a supply. These tentative findings were that: >> On payment of the judgment, there would be consideration for the supply; and >> The supply would be in the course of an enterprise.
The two decisions are consistent in that they require a positive or voluntary act by the Taxpayer before there can be a supply. However, what is the difference between a “letter of request” in the Hornsby Shire Council case and instituting legal proceedings in the present case? It remains to be seen whether the Commissioner will accept the decision. Until such time as it is clear that he will accept the decision, taxpayers in similar circumstances should claim the GST as part of their damages in the proceedings for conversion.
In relation to the latter point, the Taxpayer argued that it had ceased business operations and, therefore, was not carrying on an enterprise. However, it also conceded that if the scaffolding had been returned, it would have resumed its activity of hiring the scaffolding to third parties.
Comment The decision that there was no “supply” turned on the fact that “the payment did not depend upon any action of the Taxpayer”. However, it might be said that there was an action by the Taxpayer namely, the instituting of legal proceedings for conversion. That was a voluntary act of the Taxpayer which lead inevitably to the payment and transfer of title.
Paul Anderson | November 11
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The decision can be contrasted with a 2009 Administrative Appeals Tribunal decision of Hornsby Shire Council v Commissioner of Taxation, to which the judge was not referred and which was not binding upon him in any event. That case dealt with whether a compulsory acquisition of land by a Council was a taxable supply. The Tribunal formed the view that there must be some positive act by the landowner before there will be a taxable supply. Ultimately, the Tribunal found that there was a taxable supply because the process had been triggered by a letter of request from the landowner. The Tribunal left open the question of whether there could be a taxable supply if the resumption was the result of exclusive, unilateral action by the Council
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