Re Icehot Pty Ltd and FCT – taxpayer fails to get windfall refund of GST paid by a mortgagee bank and credited to mortgagor taxpayer – the ATO raised a debit to correct mistake then allowed the taxpayer’s objection, which the AAT held it could not review

The AAT has ruled that the Commissioner’s reasons for allowing an objection decision in relation to a GST liability on the sale of the taxpayer’s properties by a mortgagee in possession was not reviewable by the AAT.

In May 2013, a bank took possession of the taxpayer’s 2 properties over which the bank held a mortgage. The bank’s agent sold the properties and paid the ATO $53,386 which was said to be for the GST liability arising from the sale. The ATO then credited $53,386 to the taxpayer’s running balance account (RBA). The Commissioner subsequently issued an amended assessment of a GST net amount of $53,386 and debited $53,386 from the taxpayer’s RBA. The taxpayer objected against the amended assessment arguing that it was not liable to pay GST in respect of the sale of the properties. The Commissioner allowed the objection and issued another amended assessment for “nil”. However, the taxpayer was still dissatisfied with the Commissioner’s reasons for allowing the objection decision on the basis that the GST liability was that of the bank as mortgagee in possession.

The AAT ruled that the taxpayer could not seek a review of the objection decision under s 14ZZ of the TAA as the taxpayer could not be said to be dissatisfied with the decision which had been allowed in full. It was precisely the decision the taxpayer had sought when it lodged its taxation objection, the AAT said. As such, the AAT ruled that the objection decision was not reviewable under s 42A of the AAT Act. The AAT observed that, presumably, it was still open to the bank to argue that it was not liable to pay GST on the sale. However, the AAT noted that the bank had originally paid the $53,386 to the ATO on the basis that it was the GST liability arising from the sale of the properties.

(Re Icehot Pty Ltd and FCT [2017] AATA 1505, AAT, File No: 2017/3075, Popple SM, 15 September 2017.)

[LTN 182, 22/9/17]

Author’s Note

I’ve included a summary of relevant provisions from the GST Act below and likewise an extract from the reasons from the AAT’s decision.

It is difficult to be sure, what was going on here and why the taxpayer was not satisfied with an objection decision in his favour (the reasons concentrate on how it could not be relevantly ‘dissatisfied’ with a favourable decision).

But reading between the lines, it appears to me that the mortgagee bank sent the GST, on the sale, to the ATO (in May 2013) and the ATO incorrectly credited the GST to the taxpayer’s Running Balance Account (also in May 2013). Later, in 2016, the taxpayer tried to get this mistaken credit as a windfall refund. I reach this conclusion from the following:

1. The relevant law (Div 105 of the GST Act) makes the secured creditor (not the debtor/taxpayer) liable for the GST.
2. The ATO made a mistake, therefore, when it credited the bank’s payment, of the GST, to the taxpayer’s account.
3. The ATO reversed the mistaken credit later (on 4 May 2017) on the basis that it was a mistake (see paras 8 & 21 of the reasons, below).
4. All the rest was ‘noise’ – the belated ‘nil’ return for the June 2013 quarter (lodged on10 Aug 2016, para 5 or the reasons); the ATO raising an amended assessment as a means of not having to refund the mistaken credit (on 5 Sept 2016, para 6 of the reasons); the objection to the amended assessment (lodged on 24 Feb 2017, para 7 of the reasons); the decision allowing the objection, in full, by raising a new ‘nil’ assessment (raised on 2 May 2017, para 8 of the reasons); the application to the AAT for review of the favourable objection decision (on 24 May 2017, para 9 of the reasons) and the AAT’s decision that it can’t review the Commissioner’s failure to refund the money it mistakenly credited to the taxpayer.

Relevant law

Liquidators, administrators etc. – The GST Act has provided provisions dealing with ‘representatives of incapacitated entities’ (e.g. liquidators) – first in Div 147, which was replaced by Div 58 in 2009 (with retrospective effect back to the commencement of GST on 1 July 2000). ‘Incapacitated entities’ include individuals who are bankrupt and companies that are in liquidation or receivership. Representatives of those entities include: a trustee in bankruptcy, liquidator, receiver, controller or administrator under the Corporations Act 2001.  Section 58-1 of the GST Act provides the following outline of how these provisions work.

Secured creditors – An often overlapping issue applies when there is a secured creditor involved and it exercises its rights to sell the asset over which it has security. Division 105 of the GST Act governs this. The approach is similar in that the creditor is liable for GST (when selling to satisfy a debt owed by the debtor) but this is only if the debtor would have would have made a ‘taxable supply’, had it made the sale (s105-5(1)).

The overlapping issue

Before this was resolved by legislative amendment, the ATO ruled that the ‘secured creditor’ provisions (Div 110) had precedence over the ‘incapacitated entity’ provisions (Div 58) because they were the more specific – in other words, it resolved it on an established statutory construction basis.

The now withdrawn ATO ID 2010/224, expressed the conflict, when the provisions overlapped as follows:

As the GST obligations of a mortgagee in possession fall within the ambit of both Divisions 58 and 105 of the GST Act, there is a need to determine which Division takes precedence because the obligations imposed under each Division are different. For instance, Division 58 requires the mortgagee to register separately on each occasion that it takes possession of property owned by a corporation, whereas Division 105 does not require separate registration.

This ATOID was withdrawn after statutory amendments made in 2012, to insert a new s58-95 (to resolve this issue in favour of Div 105) and a note was added to s105-1 as a signpost to the priority given to this Division.

Extract from Reasons

Background

3. Icehot owned two properties. Those properties were subject to a mortgage held by the Bendigo and Adelaide Bank (the Bank). The Bank took possession of the properties, and sold them on 3 April 2013.
4. On 3 May 2013, the Bank’s agent in the sale of the properties paid the Australian Taxation Office (the ATO) $53,386.32, which was said to be the goods and services tax (GST) liability arising from the sale of the properties. On 7 May 2013, the ATO credited $53,386 to Icehot’s running balance account (RBA).
5. On 10 August 2016, Icehot lodged a “nil” business activity statement (BAS) for the quarter ending 30 June 2013.
6. On 5 September 2016, the Commissioner of Taxation issued an amended assessment of a GST net amount of $53,386. The ATO debited $53,386 from Icehot’s RBA.
7. On 24 February 2017, Icehot lodged an objection against the amended assessment. Icehot said that it was not liable to pay GST in respect of the sale of the two properties.
8. On 2 May 2017, the Commissioner allowed Icehot’s objection. The Commissioner issued another amended assessment, this time with an assessed amount of nil, and the ATO credited $53,386 to Icehot’s RBA. On 4 May 2017, the ATO debited $53,386 from Icehot’s RBA [see para 21 below].
9. On 24 May 2017, Icehot applied to the Tribunal, under s 14ZZ of the TA Act, for review of the Commissioner’s decision.

The substance of the matter

20. Icehot disagrees with the Commissioner about whether the Bank was liable to pay GST on the sale of the properties. But the objection decision was not a decision that the Bank was liable to pay GST on the sale. The objection decision was that the net amount was nil, because Icehot was not liable to pay GST on the sale. Presumably, it was—and may still be—open to the Bank to argue that it was not liable to pay GST on the sale. But, I note that, when the Bank paid the ATO $53,386.32 in May 2013, it did so on the basis that that was the GST liability arising from the sale of the properties.
21. Icehot also says that the ATO should not have reversed the credit that had been applied to Icehot’s RBA. But that was not the objection decision, either. Icehot points to a letter that the ATO sent Icehot on 4 May 2017 (two days after the objection decision). That letter said that, after processing Icehot’s BAS for the quarter ending 30 June 2013, there was a credit of $53,386 owing to Icehot. The letter then explained that that entire amount had been “used to reduce outstanding tax debts or other Commonwealth Government liabilities”, leaving a nil RBA balance. As counsel for the Commissioner conceded at the hearing, the letter was wrong. The credit of $53,386 (in May 2013) to Icehot’s RBA was reversed (in May 2017) because the Commissioner had come to the view that it had been credited in error. It was not used to reduce outstanding tax debts or other liabilities.

Conclusion

22. Icehot is dissatisfied with the Bank being liable to pay GST on the sale of the properties. But that was not the objection decision. And Icehot is dissatisfied with the ATO’s reversal of the credit that had been applied to Icehot’s RBA. But that was also not the objection decision. The objection decision was that the net amount was nil, because Icehot was not liable to pay GST on the sale of the properties. Icehot cannot be dissatisfied with that decision. It is precisely the decision that it sought when it lodged its taxation objection.
23. It follows that Icehot cannot apply to the Tribunal for review of the objection decision under s 14ZZ of the TA Act. I dismiss Icehot’s application for review, under s 42A(4) of the AAT Act, because the objection decision is not reviewable by the Tribunal.
24. This outcome is not the result of a technicality. Even if s 14ZZ did not require that Icehot be dissatisfied with the objection decision, the Tribunal could not make the decision that Icehot would want made on review. Even if the Tribunal agreed with Icehot that neither Icehot nor the Bank was liable to pay GST on the sale of the properties, it could do no more on review than the Commissioner did in the objection decision: make an assessment that Icehot’s GST net amount was nil.