In Rio Tinto Services Ltd v Commissioner of Taxation [2015] FCA 94, the Federal Court has held that acquisitions made for the purpose of providing residential accommodation at remote mine sites to mining employees were not made “for a creditable purpose”. Accordingly, input tax credits for those acquisitions were denied. The decision is an example of a narrow construction of section 11-15(2)(a) of the A New Tax System (Goods and Services Tax) Act 1999 (Cth) (“GST Act”).

The Federal Court’s decision focused on whether the acquisitions in question had a “material” or “sufficient” connection with the input taxed supply of residential accommodation.

Facts

The facts of the case were not in dispute. Hamersley Iron Pty Ltd (“Hamersley”), a member of the Rio Tinto Ltd GST group (of which the applicant (“Rio”) was the representative member), was in the business of mining and selling iron ore. As part of its operations, Hamersley and another entity in the GST group, Pilbara Iron Company (Services) Pty Limited, provided housing in remote areas to Hamersley’s workforce. The Commissioner and the Court accepted that the provision of such accommodation was a necessary and essential part of Hamersley’s mining business.

The expenditure incurred by Hamersley greatly exceeded the rental income it received on the provision of the residential accommodation to its workforce. This was largely because Hamersley significantly subsidised the rent otherwise payable for the accommodation. This was necessary because, without the subsidy, it would not be economically viable for Hamersley’s workforce to pay the full cost of the accommodation. That, in turn, would make it difficult for Hamersley to attract and retain people to work at its mines.

The case was run as a test case in which Rio sought a declaration that it was entitled to input tax credits of $573,515.74 (or a portion thereof) for expenditure incurred in October 2010 on:

  1. the construction and purchase of new housing;
  2. the refurbishment, minor works, maintenance and repairs of residential housing;
  3. mould removal, remediation and general hygiene cleansing; and
  4. cleaning housing, landscaping grounds and pool maintenance

(together, the “Acquisitions”).

The legislation

Under section 48-45 of the GST Act, Rio (as the representative member of the GST group) is entitled to input tax credits for its group members’ “creditable acquisitions”. Section 11-5 of the GST Act provides that “creditable acquisitions” include anything acquired for, among other things, a “creditable purpose”.

Under section 11-15(a) of the GST Act, an entity will acquire a thing for a “creditable purpose” if it acquires that thing in “carrying on its enterprise”. A further requirement, however, under section 11-15(2)(a) of the GST Act, denies input tax credits “to the extent that the acquisition relates to making supplies that would be input taxed”. This case concerned whether the Acquisitions “related to making supplies that would be input taxed”. In particular, the case concerned whether the Acquisitions “related to” the provision of residential accommodation by Hamersley to its workforce (an input taxed supply) or Hamersley’s mining operations (which are not input taxed).

The parties’ submissions

Rio’s primary submission was that the Acquisitions were made wholly for a creditable purpose because the supply of the residential accommodation was not an end commercial objective in itself but was wholly incidental to the mining operations as a necessary and essential part of those operations. Although Rio accepted that the provision of accommodation was an input taxed supply, it argued that the connection between the Acquisitions and that supply was not a “relevant connection” because it was not “sufficient and material”. On this point, Rio argued that the moving cause or purpose of the Acquisitions was not the provision of accommodation as such, but the carrying on of the mining business.

Rio supported its argument on the basis that Hamersley did not profit, and in fact made losses, from the provision of accommodation to its workforce. It also supported its argument on the basis that a denial of input tax credits would amount to cascading; i.e. a tax on a tax, or double taxation. This was because if input tax credits were denied, Hamersley would be unable to recoup the GST borne on the Acquisitions from Hamersley’s employees as the subsidised rent would prevent it from doing so. That cost could therefore only be recouped in the iron ore price with the consequence of GST forming part of the cost on which GST would be charged or part of the cost of GST-free supplies.

The Commissioner on the other hand argued that section 11-15(2)(a) applied to deny in whole input tax credits for the GST borne on the Acquisitions because the Acquisitions had a “direct and immediate connection” with the supply of residential accommodation.

The Court’s finding

In agreeing with the Commissioner, Justice Davies held that section 11-15 does not “use the language of, or require, or even direct, an inquiry into purpose”. Rather, the words “relate to” were held to simply denote the existence of a relationship or connection between an acquisition and the making of input taxed supplies. Whilst agreeing that the relationship must be “material” or “sufficient”, Her Honour held that the “moving cause” or “principal purpose” of the Acquisitions did not determine whether section 11-15(2)(a) was enlivened.

In construing section 11-15(2)(a), Her Honour rejected Rio’s reliance on the underlying policy of the GST Act to prevent a cascading of tax. In short, Her Honour concluded that Rio’s dilemma arose from the commercial decision to subsidise the rent payable by its workforce.

Observations

Apportionment

Her Honour held that an apportionment would be required “to the extent that an acquisition has a relevant relationship with both the making of taxable supplies and input taxed supplies”. This was not the case here as “the Acquisitions related wholly to the provision of the accommodation”. On this basis, circumstances similar to those considered in this case may exist where an apportionment is available for GST purposes where it can be demonstrated that the requisite relationship does exist between the relevant acquisition and an entity’s taxable supplies.

Her Honour also refused to express a view on the appropriate apportionment methodology in this case if, contrary to Her Honour’s view, apportionment did apply. Rio argued that if apportionment did apply, the appropriate methodology should be a revenue based method.

Scenarios where the ultimate supply is an input taxed supply

The decision does not give any guidance on the availability of input tax credits for a reverse scenario; i.e. where an entity incurs GST on acquisitions in making taxable supplies that are wholly incidental to the making of input taxed supplies. The decision can be taken to suggest that input tax credits should be available in those circumstances.