The AAT has confirmed that a taxpayer was not entitled to claim input tax credits of over $90,000 in relation to “acquisitions” from an associated entity.

An associated entity of the taxpayer owned assets, most of which were subject to charges held by third party financiers. The taxpayer argued that under an agreement entered into with the associated entity, it acquired the assets as part of its business operations – albeit as the aggregate liabilities of the associated entity exceeded the value of the assets that were the subject of the agreement, no monies were actually paid by the taxpayer to acquire the assets.

The Commissioner argued there was no such purchase nor any consideration in the form of assumption of liabilities in these circumstances.

In confirming that the taxpayer was not entitled input tax credits, the AAT first found there was no intention for the taxpayer to actually pay any monies for the assets and that as a result, in terms of s 9-5 of the GST Act, there was no payment made under the agreement in connection with the supply of anything.

In addition, the AAT dismissed the taxpayer’s claim that the liabilities the taxpayer assumed in respect of the assets subject to the agreement was “consideration” in respect of which an input tax credit could be claimed.

(Re McKinnon Holdings (NSW) Pty Ltd as Trustee for the McKinnon Equipment Trust and FCT [2016] AATA 917, AAT, Ref No 2014/5544, Deutsch DP, 17 November 2016).

Editor’s Note

At face value, this sounds a bit harsh, but some of these further facts help explain the result.

The purported vendor of the excavation equipment did go into liquidation nearly 4 months after the purported sale (24.9.2010) with the finance on the equipment exceeding its the market value. It seems that the intent of the agreement was to get the equipment refinanced at its lower market value. But this did not happen.

There was a written agreement that called for the equipment to be independently valued, and it was independently valued at $922,000 (ITC of 1/11th = $83,818.18). The agreement then provide that the purchase price was to be that valuation amount less any liabilities to which the equipment was subject or, if those liabilities exceeded the market value, the purchase price was to be $1. The intent of the agreement was to leave the excess debt behind.

The agreement assumed that the purchaser was undertaking the vendor’s debt, up to the market value of the equipment, however, it was not entirely clear that the agreement achieved this result. It provided a ‘best endeavours’ clause to try to get the finance novated (which never happened). Novation, however, is not necessary to get an input tax credit. It would be sufficient that the purchaser undertook to pay the financiers the agreed amount. There was an ‘indemnity’ clause but it was not clear that it achieved this. Further, the purchaser/taxpayer operated on a ‘cash basis’, meaning that it could not claim the ITC until it had paid the amounts to the vendor (which it had not done).

The end result was that the purchaser did not pay any cash amount to the vendor to buy the equipment, did not clearly assume any liabilities and, if it did assume the liabilities, by way of indemnity, it did not actually pay these amounts in the period claimed (making it too late to claim the ITC in the period the subject of the appeal). To add to this ‘tale of woe’ the vendor did not charge GST on the purported sale or remit any such amount to the Commissioner.

The result was that the purchaser/taxpayer failed in claiming an input tax credit in either of the ways it put its case.

(a)     An ITC$83,818 (1/11th of the market value of the $922,000 value equipment it said it bought); or, in the alternative

(b)     $109,661 (1/11th of the $1,206,272 of liabilities, which it said it assumed).