ART decision a reminder to horse breeders of 4-year limit to claim GST credits

NEW CASE A REMINDER TO HORSE BREEDERS OF 4 YEAR LIMIT TO CLAIM GST CREDITS

One of the most difficult and contentious tax matters in the horse breeding and racing industry is determining whether an activity is an “enterprise” for GST purposes.

A GST registered business can claim back GST on its creditable acquisitions, known as input tax credits, and is obliged to levy GST on its taxable supplies.

This dilemma can have unfortunate tax compliance implications as often industry players take too long to get this matter reviewed by their advisers, mainly due to ignorance as to what factors are required and, surprisingly, whether a breeding or racing activity can be GST registered!

Do I have enough mares? Am I spending enough money on service fees? Do I need to sell regularly? Is a breeding property necessary? These are amongst the key questions that are left in the “too hard basket” for too long. It can often take years after the initial investment for players to finally act and seek advice on the possibility of GST registration and income tax business status.

Due to this time delay, taxpayers leave themselves exposed to lodging GST claims too late for an activity that is registered retrospectively. A taxpayer is not entitled to input tax credits claimed more than 4 years after a GST return was required to be lodged.

This article will outline a very interesting tax case decided recently at the Administrative Review Tribunal (ART), Karagounis and Commissioner of Taxation (Taxation and Business) [2024] ARTA 80, referred to below as the Karagounis case.  This case confirmed, as noted above, the longstanding GST rule that a taxpayer was not entitled to input tax credits if the “4 year rule” for claiming is not met.  

Of course, there may be other reasons why GST claims are made later than the required 4 years, for instance despite best efforts tax invoices can go missing, but it’s my experience that registering for GST and lodging a claim for credits too late is the most common and avoidable reason.

Facts

• The taxpayer was an individual who operated a cleaning business.
• She was registered for GST and accounted for GST on a cash basis, i.e. the claim can only be made once the Tax Invoice has been paid.  The taxpayer lodged all her quarterly GST returns for the period from 1 October 2015 to 31 March 2017 on 10 July 2021, which was outside the 4-year time limit for lodging a GST input tax credit claim. The taxpayer’s reason for the delay in lodging the returns related to her tax agent losing material and her own health issues.
• The ATO disallowed the taxpayer’s objections to the GST assessments and the taxpayer sought review of the ATO’s objection decision. At issue was whether the taxpayer was entitled to claim input tax credits totalling $10,680 for the GST periods from 1 October 2015 to 31 March 2017.

ATO case

The ATO contended that the taxpayer had ceased to be entitled to the input tax credits because they had not been “taken into account in an assessment of a net amount” during the period of 4 years after the day that the taxpayer was required to file her GST returns”. The ATO also claimed that it had no discretion to otherwise allow the taxpayer’s claimed input tax credits.

Example 1

Aaron operates a horse breeding enterprise and incurred $22,000 (inc GST) on new fencing on 1 February 2020, however he did not claim the GST in his March 2020 BAS return, due on 28 April 2020, as he had misplaced the Tax Invoice (that must be held by the time of lodging the return). After many years he finally found that Tax Invoice and instructed his BAS agent to claim the $2,000 of GST in his March 2025 quarter BAS return.

His BAS agent had bad news for Aaron. Claiming the credit was going to be greater than 4 years from the time he could do so, i.e. 28 April 2020. His “entitlement period” had lapsed and that fencing GST could not be claimed.

Karagounis case

The taxpayer claimed that the input tax credits should have been allowed because another section applied which set out the circumstances in which a taxpayer’s entitlement to input tax credits did not cease, i.e. Section 93-10 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

The ART affirmed the ATO’s objection decision. The GST Act was very clear, and the taxpayer’s arguments had no merit. The taxpayer agreed that she did not file returns for the relevant periods within 4 years after the day on which she was required to file those returns (the “entitlement period”). The taxpayer also acknowledged that she did not have input tax credits taken into account in an assessment of a net amount during the entitlement period and did not have an extension of time to file her GST returns granted during that entitlement period. As a consequence, the relevant GST Act section provided that the taxpayer simply ceased to be entitled to those input tax credits. The ART had no discretion to allow otherwise.

ART reasons for decision

The ART decided that the GST Act could not be clearer. In evidence before the ART, Ms Karagounis agreed that she did not file returns for the relevant periods within 4 years after the day on which she was required to file those GST returns (the ‘entitlement period’). Ms Karagounis acknowledges she did not have input tax credits taken into account in an assessment of a net amount during the entitlement period. Ms Karagounis also did not have an extension of time to file her GST returns granted during that entitlement period. As a consequence, the GST Act provides that Ms Karagounis simply ceased to be entitled to those input tax credits. The ART has no discretion to allow otherwise.

In terms of Ms Karagounis’s arguments, the ART concluded that they were without any merit. The major reasons they cited were:

All of the Section 93-10 paragraphs (a) to (d) had to be satisfied. This is demonstrable from the use of the word “and” at the end of each of the paragraphs.

Paragraph 93-10(4)(b) is not satisfied as, during the period of four years after Ms Karagounis’s GST returns were required to be filed, a net amount was not assessed on the basis that any of the supplies made by Ms Karagounis were input taxed. As is noted above, Ms Karagounis admits she did not file the relevant returns during the entitlement period and there were no such assessments of a net amount during Ms Karagounis’s entitlement period. That alone means that paragraph 93-10(4)(b) is not satisfied.

There is also no evidence that Ms Karagounis made input taxed supplies. The GST Act sets out an array of supplies that are input taxed. These are financial supplies, the supply of certain premises by way of lease, hire or licence, the sale or long-term lease of residential premises, the supply of precious metals, supplies by school tuckshops or canteens, fund-raising events conducted by charities or gift-deductible entities, and particular inbound intangible consumer supplies covered by a Ministerial determination. Ms Karagounis did not, on the face of the evidence, make any such supplies. She supplied cleaning services. As is noted below, there is a difference between input tax credits and an input taxed supply. They are not the same thing.

Paragraph 93-10(4)(c) is not satisfied. It requires the ATO to amend Ms Karagounis’s assessments on the basis her supply is not input taxed. That is not what has happened here – there are no input taxed supplies by Ms Karagounis and that is not the basis of the ATO’s action. Ms Karagounis is confused about the difference between an input taxed supply and input tax credits. These are two completely different things as is demonstrated above. An input taxed supply is a specified type of supply under the GST Act. For subsection 93-10(4) to be relevant Ms Karagounis needed to make input taxed supplies. She did not. Input tax credits is a type of tax relief which allows Ms Karagounis to reclaim GST charged to Ms Karagounis for creditable acquisitions in her cleaning business. That is not the same thing as an input taxed supply.

The ART did not mince words. It was its view that Ms Karagounis misunderstood the GST law. As is noted above, she had confused input taxed supplies with input tax credits when they are different things. In various documents filed at the ART, Ms Karagounis asserted that “[t]he ATO did not request any evidence from me showing that I have collected the GST on my invoice from my clients and I owe it to them” and maintains that the ATO moved GST “from purchases to sales.”

For GST to be owing to the ATO, Ms Karagounis does not have to “pass on” GST in her invoices or collect GST from her clients. Suppliers may or may not add GST to their invoices to their clients and it is not a legal requirement that they do so. A liability for GST arises where there are taxable supplies (such as Ms Karagounis’s supply of cleaning services), and that liability arises no matter how the supplier chooses to invoice their clients.

The ART did acknowledge Ms Karagounis’s circumstances had been difficult for her. The tax law can be confusing, and Ms Karagounis’s health issues impacted her and management of her tax issues adversely. The ART tried to be constructive in its handling of this case. It encouraged Ms Karagounis to continue to take the steps forward she had already taken to recover from these challenges. From the material before the ART, it is clear that the ATO tried to assist Ms Karagounis (including by penalty remissions) but may not have always given clear guidance to Ms Karagounis from her perspective. This had resulted in her dissatisfaction with the outcome.

Please do not hesitate to contact the writer if you wish for me to clarify or expand on any of the matters raised in this article.

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DISCLAIMER

Any reader intending to apply the information in this article to practical circumstances should independently verify their interpretation and the information’s applicability to their circumstances with an accountant or adviser specialising in this area.