12 Jan 2010

At long last - a legislative fix for the GST payable by representatives of incapacitated entities

by Andrew Sommer

It has taken 12 months, but new legislative provisions are now in place to deal with the problems for representatives of incapacitated entities arising from Justice Logan's decision in Deputy Commissioner of Taxation v PM Developments Pty Limited [2008] FCA 1886.

The new provisions go beyond merely addressing the outcome of PM Developments. They also introduce new obligations for representatives of incapacitated entities as well as some concessions and protections.

In PM Developments, Justice Logan refused to "read in" to the operative provisions of Division 147 of the GST Act a mechanism to make the representative of the incapacitated entity (the receiver, manager, administrator etc.) personally liable for the GST consequences of transactions effected by the incapacitated entity after the date of the representative's appointment – even though such a result was clearly intended by the other provisions of the GST Act.

In response the Government announced that it would amend the GST law to ensure it achieved the original intention with respect to transactions undertaken by representatives during their appointment.

Rather than attempt to patch up the defective mechanisms in Division 147, the legislative response has been to scrap Division 147 and insert a new Division 58. The amendments were contained in Tax Laws Amendment (2009 Measures No. 5) Bill 2009, which received Royal Assent on 4 December 2009.

Many of the key provisions of Division 58 have effect from 1 July 2000 – which means they have effect for all representatives of incapacitated entities, even those appointed well before PM Developments and the recent legislative response.

Division 58 – the new approach

Two different approaches could have been taken in rectifying the problems with the previous provisions:

  • the representative of the incapacitated entity could have been deemed to be making the supplies and acquisitions made by the incapacitated entity from the date of the representative's appointment; or
  • the representative could simply be made liable for the GST consequences of supplies and acquisitions made by the incapacitated entity from the date of the representative's appointment.

It is the second, and simpler, approach that has been taken in Division 58. This is important as it simplifies the interaction between Division 58 and other provisions of the GST Act – especially the "supply of a going concern" provisions (that require the supplier to carry on the enterprise being sold up until the day of supply) and the margin scheme (which reduce the GST payable on a sale of land by reference to the consideration provided by the supplier for its acquisition of the land).

Even though it is the representative that will be taking actions, those actions will be imputed to the incapacitated entity for the purposes of working out whether a supply is a taxable supply or whether an acquisition is a creditable acquisition. Once the character of the supply or the acquisition has been determined, it is the representative that will be liable for the GST consequences – ie. required to pay the GST on the taxable supply or entitled to input tax credits for the creditable acquisitions.

Similarities with the old provisions

Many of the provisions of Division 58 are similar to those previously found in Division 147, namely:

  • the representative will be required to be registered in that capacity if the incapacitated entity was registered or required to be registered;
  • the tax periods applicable to the representative in that capacity will be the same as those applying to the incapacitated entity; and
  • the representative must notify the Commissioner when the representative ceases to be the representative of an incapacitated entity.

New benefits for representatives

However, some additional provisions should improve certainty for representatives in seeking to meet their GST obligations. Under Division 58, a representative of two or more incapacitated entities may lodge one GST return on behalf of all such incapacitated entities for each tax period, where those incapacitated entities are members of the same GST group.

Of more significance is the statutory protection afforded to representatives by section 58-65 and section 58-70, providing:

  • specific authorisation to apply any money received by the representative in that capacity to pay any amount for which the representative is liable as a result of Division 58; and
  • that the representative will not be liable to any or civil or criminal proceedings "in relation to an act done, or omitted to be done, in good faith, in the performance or purported performance or exercise or purported exercise of the representative's duties or power under, or in relation to, the GST law.

New responsibilities for representatives

Representatives of incapacitated entities were previously required to provide GST returns for the tax periods occurring during the term of their appointment. In addition, Division 58 now requires representatives to "clean up" the GST compliance of the incapacitated entities. Upon receipt of a notice from the Commissioner, the representative can be required to lodge GST returns for any tax period prior to the representative's appointment for which the incapacitated entity has failed to previously lodge a GST return. Incapacitated entities often have poor compliance histories and the obligation to reconstruct GST obligations arising from transactions prior to the representative's appointment could become a burdensome obligation for representatives.

As the issuance of such a notice is a reviewable decision, it will be important to closely the monitor the circumstances in which these notices are issued and the additional burdens on representatives and the cost to creditors.

What next?

The retrospective operation of the new provisions means that all representatives are now subject to them – irrespective of when they were appointed.

The motivation for the amendments was to restore the intended operation of the GST law. However, the new provisions go further than merely addressing the outcome of PM Developments and achieve their objective in a different way to the former provisions. There are subtle differences that may yet prove to have significance in practice. Representatives should carefully consider their practices and the operation of the new provisions.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.