Tribunal finds GST payable on the supply of an irrevocable proxy

On Friday the Tribunal handed down its decision in Australian Style Investments Pty Ltd as Trustee for the Australian Style Investments Unit Trust and Commissioner of Taxation [2013] AATA 847. This case involved the question whether the supply of an irrevocable proxy was taxable or was input taxed as a financial supply. Prior to this decision there appears to have been only two decisions dealing with financial supplies – American Express ([2010] FCAFC 122) and  The Recoveries Trust ([2004] AATA 1075).

The applicant was a unit holder in trusts constituting a managed investment scheme, which had been granted the concession by the State of Queensland in respect of a major infrastructure project, the Brisbane Airport Link Project. The applicant executed a deed providing for, amongst other things, the delivery of irrevocable proxies by which the applicant would appoint entities involved in the Project to vote against resolutions to be considered at a meeting of unit holders in the trusts.

The primary issue in the case was whether the supply made by the applicant upon execution of the deed was a “financial supply” for the purpose of the GST Act, and therefore input taxed. Particularly, the question before the Tribunal was whether the subject of the supply constituted an “interest in or under…[s]ecurities” for the purposes of regulation 40-5.09 of the GST Regulations. The Tribunal found that it was not such an interest, and was therefore a taxable supply.

Given that I appeared in the case I will not be providing an analysis of the decision. Rather, set out below are the questions the Tribunal considered it was necessary to address and the conclusions of the Tribunal on each question.

At [47] the Tribunal considered that it was necessary to address the following questions with respect to whether there was a “financial supply”:

  • what was the subject of the supply made upon execution of the deed? At [58] the Tribunal concluded that:

In my view, the subject of the supply was the promises made by the applicant enumerated in clause 4 of the Deed (see Qantas Airways Ltd at [33]). The execution of the Deed by the applicant constituted “an entry” into obligations to do things and to refrain from acts within the terms of s 910(2)(g) (see subparas (i) and (ii)). Alternatively, if the word “obligation” in s 910(2)(g) should not be read as including the plural according to the customary rule, the execution of the Deed constituted the entry into each of the obligations in clause 4, which in combination formed a single supply by operation of s 910(2)(h).

  • what “interest” did the subject of the supply constitute for the purposes of regulation 40-5.09(3)? At [71] the Tribunal concluded that:

I have expressed the view that the subject of the supply was wholly executory in nature, in the sense that the supply was complete upon the making of each of the promises in clause 4 of the Deed. On that basis, it seems to me that the “interest” reflected in the subject of the supply, being the thing “recognised at law or in equity as property in any form” (see reg 40-5.02) that was provided by the applicant, was a chose in action which comprised the rights of action arising under the Deed in respect of those promises, including the promise to deliver the irrevocable proxies (clause 4(a)) (see Loxton v Moir [1914] HCA 89(1914) 18 CLR 360 at 379). (I note that such rights were the subject of clause 6.

And at [92]-[93]:

In summary, the “interest” provided by the applicant for the purposes of reg 40-5.09 upon execution of the Deed is to be characterised according to the legal effect of the Deed.

As I have said, my view is that the “interest” provided was a chose in action which comprised the rights of action arising under the Deed in respect of each of the promises in clause 4 of the Deed, including the promise to deliver the irrevocable proxies (clause 4(a)).

  • what is the proper construction of the words “in or under” in regulation 40-5.09(3)? At [99] the Tribunal concluded as follows:

In my view, the phrase “interest in or under” ought to be read confluently, that is to say as a whole (see Sea Shepherd Australia Limited v Commissioner of Taxation (2013) 212 FCR 252at [34] and the cases referred to therein) and by importing the definition of the term “interest” in reg 40-5.02 (“anything that is recognised at law or in equity as property in any form”) into the substantive provision so as to aid in its construction (see Allianz Australia Insurance Limited v GSF Australia Pty Limited [2005] HCA 26(2005) 221 CLR 568 at [12] per McHugh J, citing Kelly v The Queen [2004] HCA 12(2004) 218 CLR 216 at [103]).

And at [104]:

In any event, in my view the prepositions “in” and “under”, read in the context in which they appear, naturally import an immediate nexus with the matters enumerated in reg 405.09(3), including securities, in the sense that the interest must reside in those matters (see Chan v Cresdon Pty Ltd [1989] HCA 63(1989) 168 CLR 242 at 249-50). The examples of interests provided in reg 40-5.02 tend to confirm that that is so.

  • was the interest “an interest in or under [s]ecurities” for the purposes of item 10 in the table in 40-5.09(3), the “securities” being either “the capital of a…trust” (for the purposes of para (d) of Item 10) or “interests in a managed investment scheme” (for the purposes of s 92(1)© of the Corporations Act)? At [110] the Tribunal concluded as follows:

The rights provided to TJ under the Deed, being the rights of action arising in respect of the promises made by the applicant in clause 4 and perhaps extending to the irrevocable right to act as the applicant’s proxy as appointed, were contractual rights, enforceable only against the applicant. The interest provided by the applicant was therefore not a “property interest broadly conceived” in or under the capital of the Trusts or rights to benefits produced by the Trusts in the sense described by the majority in American Express. It was not enforceable at law or equity in or under such “[s]ecurities”. Furthermore, as I have said, the proxy’s rights under s252W of the Corporations Act were held solely in its capacity as the applicant’s agent. Those statutory rights were therefore not capable of constituting an “interest in or under … [s]ecurities” supplied by the applicant for the purposes of reg 40-5.09(3).

The Commissioner had imposed administrative penalties of 50% on the basis that the applicant had been reckless as to the operation of the GST Act. The Tribunal was not satisfied on the balance of probabilities that the applicant was not reckless in the sense described in BRK (Bris) Pty Ltd v Commissioner of Taxation [2001] FCA 164(2001) 46 ATR 347. The Tribunal was also not satisfied that it was appropriate to remit all or part of the penalty.

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