AAT decides GST treatment of motor industry incentive payments
Taxpayer partly successful
On 2 July 2012 the Administrative Appeals Tribunal handed down its provisional decision, partly in favour of the taxpayer, in the matter of AP Group Limited and Commissioner of Taxation (commonly referred to as the ‘Son of Holdback’ action).
Roderick Cordara QC and Heydon Miller, barrister were instructed by Deloitte advising the applicant taxpayer, AP Group.
- The taxpayer succeeded in arguing that GST was not payable on target incentive payments and transit allowances/interest protection payments
- The ATO succeeded in arguing that GST was payable on fleet rebates and run-out model support payments
- Dealers who protected their rights may be entitled to GST refunds
- Dealers who did not protect their rights are now out of time to request a refund
- Distributors should not have any adverse financial impact as a result of dealers making refund claims
- The decision remains provisional as the parties are requested to return to the Tribunal to consider the impact of the ‘passing on’ provisions.
Background to the Case
This test case considered the GST treatment of various incentive payments in the motor industry that flow from the distributors to the dealers. These include payments such as target incentive payments, run-out bonuses and fleet rebates. These payments had been treated as subject to GST by the dealers following the ATO's position. However, this was only an interim position adopted by the ATO with the treatment remaining under reviewi by them for many years. It was not until December 2008, as a result of this test case action commencing, that the ATO finalised its position with the publication of ATO ID 2008/166. However, that position was inconsistent with the views of both the distributors and the dealers as to what these payments are in substance and reality.
This has therefore been a grey area since GST was introduced on 1 July 2000, with the distributors, dealers and the ATO all uncertain as to the correct treatment. After discussions between Deloitte and senior ATO personnel back in 2008, it was agreed that the only way to obtain certainty on the matter was to litigate using a test case. Deloitte, working closely with the motor industry and with cooperation from the ATO, assisted AP Group in putting forward a test case. Whilst the case was not a formal test case, both parties treated it as an important test case needed to achieve certainty for the industry. The parties worked openly to ensure the appropriate facts and issues were presented to the Tribunal to enable a clear decision to be made.
With the Tribunal's decision there is now certainty going forward, subject to an appeal (by either party). The Tribunal found that the dealers did not make any supplies to the distributors in return for any of the incentive payments. However, the Tribunal characterised fleet rebates and run-out bonuses as part consideration for the ultimate retail sale of the motor vehicle by the dealer. This means that GST was properly accounted for on these payments by the dealers, albeit for different reasons to those stated in ATO ID 2008/166. With regard to transit allowances (interest protection payments), retail target incentives and wholesale target incentives, the Tribunal’s decision means that the dealers overpaid GST on the receipt of those payments.
What does it mean to the dealers?
The decision means that dealers overpaid GST to the ATO on payments that have the characteristics of target incentive payments and transit allowance payments, however described. This is likely to necessitate a further review of all payments in order to quantify refund entitlements. A refund may now be due for the period 1 July 2000 to 30 June 2008. However, refunds will only be available for dealers who protected their rights with a ‘stop the clock’ notification. Any new request made now will be ineffective under the four-year capping provision. There is unlikely to be any refund opportunity for tax periods after June 2008 as the law changed following the KAP Motors decision. This change means the ATO can refuse to pay those refunds under the 'passing on' provisions.
For those dealers who have protected their position with Deloitte, we will be liaising with the ATO to understand the ATO’s intentions following the decision.
On the go forward position, whilst the decision as it stands means that GST was properly accounted for on fleet rebates and run-out model bonuses, the documentation surrounding these payments may have to change from a GST perspective. We will be liaising with the ATO on this point also.
What does it mean for the manufacturers/distributors?
The arguments AP Group put forward in the case were consistent with the views of the distributors. The Federal Chamber Automotive Industries group (FCAI), on behalf of the distributors, requested the Board of Taxation to recommend a law changeii so that the GST treatment of certain payments would reflect the commercial reality of the payments. The FCAI's submission specifically quoted holdback, model run-out discounts and fleet discounts as examples where the commercial reality is that these are discounts to the wholesale sales price of the vehicles. Whilst the Tribunal did not favour this analysis and instead concluded that the payments were part consideration for the ultimate retail sale of the vehicle, this evidences that the area did need to be reviewed for certainty.
Any refunds sought by dealers should not have any adverse financial impact on the distributors. The distributors claimed input tax credits on the various payments in good faith following the ATO's interpretation of the law. The Tribunal's decision means that there was no entitlement to input tax credits on target incentive payments and transit allowances. Early in the process Deloitte took advice from senior tax counsel who was of the view that the ATO would not succeed in taking action because the distributors appear to have relied on a private ruling issued by the ATO to the FCAI. We understand the ATO has not taken any action with the distributors.
Even if the ATO were to now consider protective action, under the four-year capping provisions the ATO cannot adjust the distributor's GST position for the periods up to June 2008, being the potential claim period for the dealers.
To discuss the issues outlined above please contact Jon Graham (+61 2 9322 7421) or Doug Tredinnick (+61 2 9322 7701) from Deloitte’s Indirect Tax team, or your usual Deloitte Motor Industry Services adviser.
i Identical letters of 29 April 2005 from ATO to MTAA and Federal Chamber Automotive Industries
ii Submission to the Board of Taxation by the FCAI (page 8 re other incentive payments)