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GST apportionment revisited - implications of Full Federal Court decision
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  • 4 minute read
  • April 10, 2024

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The Commissioner has failed in his appeal against the Federal Court’s decision to allow the taxpayer to claim input tax credits for overhead acquisitions in accordance with the taxpayer's revenue based apportionment methodology.  The Full Federal Court decision is particularly interesting in its endorsement of the apportionment methodology used by the taxpayer and will be of particular interest to other financial services providers considering what may be a fair and reasonable method. 

10 April 2024

In Brief

The Full Federal Court has rejected an appeal by the Commissioner of Taxation (Commissioner) against the primary judge’s decision to allow the taxpayer to claim input tax credits for overhead acquisitions (Commissioner of Taxation v Hannover Life Re of Australasia Pty Ltd [2024] FCAFC 23). 

The Commissioner had contended the company’s acquisitions related solely to input taxed supplies and specifically that they did not relate to the GST-free acquisition-supplies of reinsurance from its overseas parent. The Commissioner argued that the only relationship of the acquisitions to the supplies of reinsurance was “by and through” the input taxed life insurance supplies to Australian customers. 

The Full Court dismissed this argument and held instead that the primary judge did not err in concluding that the overhead acquisitions related to all of the types of supplies made by Hannover, observing that:

  • the GST law required a judgement about the relationship between an acquisition and the making of supplies. The directness or “immediacy” of the connection between an acquisition and a supply is plainly relevant and the Primary Judge had correctly concluded that the overhead acquisitions had no direct or immediate relationship to any particular supply and did not relate only to the company’s input taxed supplies. 
  • the phrase “by and through” as relied upon by the Commissioner was not a part of the GST law and reliance on it as a tool of analysis was liable to distract from applying the words of the statute.
  • given the overhead acquisitions did not relate solely to any particular supplies, an apportionment was required and the revenue-based apportionment methodology applied by the taxpayer to determine the extent of that relationship between the overhead acquisitions and its GST-free and input taxed supplies was reasonable in the circumstances.

Key takeaways

  1. The Full Federal Court rejected the Commissioner’s reliance on the phrase “by and through” to analyse the relationship between the acquisitions and supplies made by Hannover. The Commissioner had argued that an acquisition will relate solely to the making of input taxed supplies if its relationship with a supply that is not input taxed is made “by and through” an input taxed supply, and relied on the structure of the contractual arrangements for reinsurance to show the GST-free reinsurance supplies was made by and through the input taxed insurance supplies.

    The Court found that this approach was wrong. The correct approach was to analyse the relationship between the overhead acquisitions and the reinsurance and insurance supplies. The Full Federal Court affirmed the Primary Judge’s conclusion that the overhead acquisitions had no direct or immediate relationship to any particular supply. This conclusion was based on evidence, for example, that administrative, legal and financial resources were applied to the various reinsurance arrangements and management costs could not be directly attributed to particular activities or product lines. The Full Federal Court found this conclusion unsurprising given the general nature of overheads and the nature of the overheads in this case.

    Observations

    The decision serves as a good reminder that section 11-15(2)(a) of the GST Act requires a factual identification of the acquisitions in question and a factual inquiry into the extent to which those acquisitions relate to the making of supplies that would be input taxed. Following the decision in Rio Tinto ([2015] FCAFC 117), there has been some uncertainty as to whether input taxed supplies have some special status or that a tracing analysis is relevant in determining the relationship between acquisitions and supplies, particularly where taxpayers undertake activities which give rise to both input taxed supplies and taxable supplies. The decision in this latest case affirms that there is no requirement to trace acquisitions to supplies. An acquisition should only be treated as solely relating to input taxed supplies where it directly and immediately relates only to input taxed supplies or indirectly relates only to input taxed supplies because no other supplies are made.

    Taxpayers should revisit any positions where an alternative analysis has been adopted and ensure that the analysis of the relationship is supported by objective evidence. 
  2. The Full Federal Court also rejected the Commissioner’s argument that the revenue based apportionment methodology used by the taxpayer was not fair and reasonable. The Commissioner had argued that the error in the methodology was that it assumed that the overhead acquisitions ceased to relate to the input taxed supply of insurance to the extent risk was ceded under the reinsurance arrangements.  

    The Full Court agreed with the Primary Judge that the revenue based apportionment methodology was reasonable on the basis that the overhead acquisitions related indifferently to all of the types of supplies made by the taxpayer and the ‘alignment of interest’ reflected in the reinsurance arrangements. The Court rejected the relevance of the Commissioner’s analysis, including the alternative example of a notional arrangement offered by the Commissioner.

    Observations

    The decision on the apportionment methodology is interesting, particularly in the context of the use of revenue based apportionment methodologies. Whilst the Commissioner’s public ruling on apportionment for providers of financial supplies (GSTR 2006/3) accepts the use of revenue based methods, he has issued guidance more recently in relation to specific financial supplies business in which he eschews their use (for example, in relation to credit card issuers and buy now-pay later providers). The Full Court’s endorsement of the taxpayer’s revenue based apportionment methodology provides a rejection of the Commissioner’s arguments and may well have similar application to other circumstances where the Commissioner views revenue based methodologies as being higher risk.

    Taxpayers should revisit circumstances in which revenue based apportionment methodologies have been rejected on the basis that they are not fair and reasonable to assess whether that view remains correct in light of this latest decision. 
Contact us

If you would like to further discuss this alert, reach out to our team or your PwC adviser.

Matt Strauch

National Indirect Tax Leader, Melbourne, PwC Australia

+61 408 180 305

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Andrew Howe

Partner, Global Tax, Sydney, PwC Australia

+61 414 641 438

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Wai Choong Chan

Director, Tax, PwC Australia

+61 410 898 667

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Mark Simpson

Partner, Tax, Sydney, PwC Australia

+61 (2) 8266 2654

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