Introduction

The principal issue in this case was the nature and characterisation of the “supply” made by ATS to non-resident travel agents (NR Travel Agents) in the context of ATR’s enterprise which was summarised by the primary judge as follows:

In essence, the relevant enterprise carried out by ATS was contracting for and making supplies to NR Travel Agents in relation to Products [accommodation, transfers, car hire, tours, meals and similar products], which were then provided to NR Tourists [non-resident tourists who travelled to Australia] by Australian Providers [the Australian based providers of the Products]. The NR Travel Agents generally selected the products through a website and software operated by ATS called Tourplan, and then compiled an itinerary for their NR Tourist clients that included the selected Products. Once the selection was made by the NR Travel Agent using Tourplan, ATS would book the requested Product with the Australian Provider, and charge the NR Travel Agent a fee that included the cost of the Product and a margin (the margin). ATS then paid the Australian Provider for the Product. The Product would be supplied by the Australian Provider to, and consumed by, the NR Tourist.

ATS contended that the supply to the NR Travel Agent was only the provision of the service of booking/arranging services – a GST-free supply. The Commissioner contended that ATS supplied the Products, or the rights thereto, to the NR Travel Agent – a taxable supply. If the Commissioner was correct, ATS contended that, in addition to the supply of the Products or the rights thereto, ATS provided the service of “booking/arranging services” and charged a margin for that service which was GST-free.

ATS also contended that the Commissioner’s discretion in s 105-65 of Schedule 1 to the TAA did not apply for tax periods prior to 1 July 2008 as there was no “supply” for the purposes of the discretion.

Facts

The facts were agreed between the parties and can be summarised as follows:

• ATS was an Australian resident taxpayer and was registered for GST
• The business of ATS included (a) contracting with and making supplies to NR Travel Agents in relation to Products to be provided to NR Tourists; (b) contracting with Australian Providers, who were able to provide products to NR Tourists.
• The dealings between ATS and NR Travel Agents primarily occurred by electronic means, being via the ATS website which allowed the NR Travel Agents to access the Australian Providers and to build a tour package by selecting particular Australian Providers and their Products and requesting that ATS book selected Australian Providers and Products at agreed rates.
• After confirmation of a booking, passenger information documentation was prepared by ATS or the NR Travel Agent to be given to the NR Tourist before commencing the tour.
• Once agreement had been reached between the NR Travel Agent and ATS as to the details of which products would be booked by ATS, ATS entered into contracts with the relevant Australian Providers whereby the Products were provided to the NR Tourist. ATS contracted with the Australian Providers as principal, not as agent for the NR Travel Agents and the Australian Providers issued tax invoices to ATS. ATS claimed input tax credits for the GST component of amounts paid to to Australian Providers.
• ATS paid GST on the consideration (including the margin) received for all its supplies to its NR Travel Agent clients, other than supplies in respect of accommodation booked in serviced apartments, which ATS treated as input taxed supplies.

The primary decision

The characterisation issue

It was common ground that ATS made a supply to NR Travel Agents. The primary issue was the characterisation of that supply, which could be any of the following:

• the supply of the booking and arranging of Products;
• the supply of the Products;
• the supply of a promise or performance; or
• the assignment of rights.

ATS contended that it only supplied booking and arranging services, that were not consumed in Australia, to the NR Travel Agent clients. Further, it did not supply rights to the Products, or supply additional promises to the NR Travel Agents to ensure that the Products were provided to the NR Tourists. Accordingly, the supply was the GST-free supply under s 38-190(1) item 2.

The Commissioner contended that ATO promised the NR Travel Agents that the Products would be provided by Australian Providers. Alternatively, ATS itself acquired the rights to acquire the products form Australian Providers and assigned them to the NR Travel Agents, or alternatively, on-sold those rights.

In response to ATS’ emphasis on the contracts in determining the legal substance of the relationship between ATS and the NR Travel Agents, the Court observed (at [71]) that it was “it is not disputed that the proper characterisation of the supply…is not always answered by a mere contractual analysis and must be addressed having regard to the substance, purpose and commercial reality of the transactions” and referred to the decision in Saga Holidays.

ATS’ contention was when ATS booked an Australian Provider, ATS did not itself supply those products to the NR Travel Agent, but supplied the service of a booking. Further, it was the NR Travel Agents who promises the NR tourists that the Products would be provided. The Court observed that there were a number of difficulties with ATS’s contention:

• the NR Travel had no contractual or other rights as against the Australian Providers, such rights were held by ATS, which gave the instructions and made the payments to the Providers
• the reality of the situation was, so far as the Australian Provider was concerned, the Products were provided on ATS’s instruction, for the person nominated by ATS, and upon delivery of the Products, ATS paid for the Product. While the contractual arrangements did not expressly state that ATS would itself provide the Products, or would ensure that they were provided by the Australian Providers, the fact was that the only party able to ensure that provision was ATS.
• if the NR Travel Agent had received nothing more than an arranging service from ATS, it would have been in a highly vulnerable commercial position. If there was a complete or partial default by the Australian provider and the NR Tourist sued the NR Travel Agent, that travel agent would have no recourse against ATS and ATS would be entitled to keep its “booking fee”

The Court accepted the Commissioner’s contention that in order to full its oblgations, ATS supplied the NR Travel Agent with a contractual right or promise that the Australian Providers would provide the Products to the NR Tourist. The Court accepted the Commissioner’s contention that there was an implied term of the contract between ATS and the NR Travel Agent that ATS promised that the Australian Provider would perform its obligation to the benefit of the NR Tourist and that AST assumed an obligation that the relevant Product (eg, a hotel room) would be available.

Looking at the entirety of the transaction, the Court concluded (at [124]) that the commercial reality of the transactions, for example a hotel room, could be characterised as follows:

• ATS contracted with the Australian Provider and essentially obtained the right to occupy the hotel room for a period of X days.
• ATS incurred a contractual liability to pay for the room.
• When ATS confirmed the availability of the room with the NR Travel Agent at the quoted pice, it was essentially promising, having paid for and acquiring that right, that when the NR Tourist arrived at the hotel, that tourist would be able to stay in that room and that it had already been paid for.
• ATS was liable to pay the Australian Provider and the NR Travel Agent paid ATS a single figure which represented ATS’ cost of securing the accommodation plus a margin which was expressed to be the fees or costs associated in arranging the service

Was the supply GST-free pursuant to s 38-190

ATS contended that its supply fell within s 38-190 as it only supplied booking and arranging services to non-residents (the NR Travel Agents) and those services were not consumed in Australia, and the Products consumed in Australia were supplied by other parties.

The Court found that the supply of accommodation services did not fall within the exemption as they were the supply of “real property” within the extended definition (being “any contractual right exercisable over or in relation to land”). The Court applied the reasoning in Saga Holidays (at [38]).

The Court also found that the supply of non-accommodation services did not fall within the exemption because the supply was properly characterised as the supply of services under an agreement with a non-resident in circumstances where the supply is provided, or the agreement requires it to be provided to another entity (the NR Tourist) in Australia.

Finally, the Court found that the Products were consumed in Australia by NR Tourists, which provided sufficient connection with Australia for the purposes of s-38-190(2). The supply was effectively a right or option to acquire something (ie, the Products to be consumed in Australia) which would be connected with Australia.

The Margin

The Court accepted the taxpayer’s alternative argument that the margin received by ATS from the NR Travel Agents was GST-free under Item 2 of the table in s 38-190 as the supply of booking services to the NR Travel Agents.

The Court accepted ATS’ contention that there were two supplies encompassed by its contract with the NR Travel Agent. The Court rejected the Commissioner’s contentions, which were as follows:

the invoice contains a single undivided sum
the margin was similar to any other retail product that is sold, a margin charged by a retailer over the cost price
even if there was a separate service provided, that was subsidiary or ancillary to the primary component of the supply, and should not be regarded as a separate supply.
The Court concluded that the arranging services constituted an object for the NR Travel Agents and a service for its own sake, and the arranging service was not merely ancillary or incidental to the supply of the Products.

The refund issue

ATS contended that it mistook that it was making a supply of rights to accommodation and non-accommodation services, rather than a mistake as to the GST treatment of supplies made by ATS. The taxpayer contended that s 105-65 of Schedule 1 to the TAA (in the form prior to 1 July 2008) did not apply because the section only applied to an actual taxable supply. ATS relied on the statement of Emmet J in KAP Motors Pty Ltd v Commissioner of Taxation [2008] FCA 159 that the provision “was limited to circumstances where there is a single supply that is not a taxable supply. It does not in its terms extend to some transaction that does not involve a supply within the meaning of the GST Act.”

The Court agreed with the Commissioner’s contention that KAP Motors should be distinguished as it was the nature of the ATS supply, rather than its existence, which was in dispute – the discretion applied. The parties agreed that if the discretion applied, the appropriate course was to remit the matter to the Commissioner to consider whether to exercise the discretion.

The Appeal

The fundamental issue in the appeal was the finding of the primary judge that in respect of the accommodation component of the tours, the appellant’s supply of the promise that it would ensure that the Australian provider provided the products (including the rooms) was a supply of real property as defined in ss 9-10(2)(d) and 195-1 of the GST Act and that the non-accommodation components of the tours, such as car hire or meals, was was properly characterised as a supply of goods which were not GST-free (s 38-190(1)), while in respect of tour or land transport, the ATS supplies were properly characterised as supplies of services which were also not GST-free (s 38-190(3)).

The fundamental issue in the cross appeal was the finding that the margin paid to the appellant was consideration for a separate supply for arrangement services – rather than forming part of the consideration for a single supply of the product.

The characterisation of the supply

The appellant assailed the primary judge’s finding that a term was to be implied into the contract between ATS and the NR Travel Agents that ATS promised the provision of the Products by the Australian Providers to the NR Tourists. It did so on the basis that none of the legal requirements (under contract law principles) for the implication for such a term were fulfilled.

His Honour found that it was not necessary to decide this question, for two reasons:

• it was open to the primary judge to come to the characterisation conclusion her Honour did without recourse to an analysis of whether the contract between ATS and the NR Travel Agents contained a term, express or implied, that ATS promised the NR Travel Agents that the Australian Providers would provide the Products to the NR Tourists. As observed by his Honour:

At the end of the day, her Honour found, as a fact, and without confinement to the terms of the contract between ATS and the NR Travel Agents, that that was the proper characterisation of the supply.

• it is not desirable, in the interests of certainty of application of a revenue statute, for the characterisation of a supply made by performance of an executory contract, to depend upon whether or not a term can be implied into the contract, unless it is absolutely essential to give business efficacy to the contract. His Honour appeared to look to sever the link between the concept of “supply” and contractual principles by making the following statement:

In this day and age, revenue statutes are inherently complex, and the GST Act is certainly no exception. The concept of a “supply”, as defined in s 9-10 of the GST Act, is fundamental to the operation of that Act and has greatly contributed to that uncertainty, both in terms of identifying whether a “taxable supply” has occurred (Qantas Airways Ltd), but more importantly, on the premise that a supply has occurred, in determining how that supply is to be characterised (Travelex Ltd v Federal Commissioner of Taxation [2010] HCA 33; (2010) 241 CLR 510). Resort to jurisprudence in contract law to imply a term into a contract does not contribute to an aspirational hope, let alone a confident expectation, of certainty of application going forward

His Honour noted that the appellant sought to assail the conclusions of the primary judge “by reference to a perimeter confined to the Terms and Conditions, said to represent the four corners of the contractual relationship between ATS and the NR Travel Agents”. In rejecting these contentions, his Honour stated:

39. In determining the character of a supply – what was really supplied? – pursuant to performance of an executory contract, a court is not to be “handcuffed” by the terms embodied in the four corners of the contract, the more so if those terms and conditions do not represent all the terms and conditions of the contract; or where the contract is but one link in a chain of contracts, the performance of each being related to, if not dependent on, performance of the immediately preceding contract; or where, by reference to the factual matrix of the entirety of the arrangements, the commercial or practical reality points to the conferral or provision of a supply which goes beyond the conclusion that might otherwise be drawn from a confined analysis of the terms and conditions of one contract in that chain.
40. Undoubtedly, where the supply is made pursuant to the performance of a stand-alone executory contract between B and C which is totally unrelated to any other contract either B or C has entered into, an analysis of the terms and conditions of that contract will shed considerable light on the character of the supply made between B and C. Where, however, the supply is made pursuant to the performance of an executory contract between B and C which is related to a contract between A and B; to a contract between C and D; and to the consumption by D of what A provided B, it could not, at least in my view, be seriously denied that in determining the character of the supply from B to C one could not have regard to matters standing outside the contract between B and C, in particular, to the terms of the contract between A and B, between C and D and to the consumption by D of the contractual promise from A to B in determining the characterisation of the supply from B to C.

At the end of the day, his Honour considered that the determination of the characterisation of the supply in a case such as the present was a matter of practical or business reality.

In agreeing with his Honour’s judgment, Pagone J made some additional comments along similar lines, including the following:

• The GST Act is designed to operate in a practical business context and is to be interpreted accordingly. That requires attention to the purpose of the transaction rather than to particular content of the rights which may be created.
• It is, therefore, not relevant that ATS might not itself provide the products which it may have arranged on behalf of the tourist through the non-resident travel agent. What is relevant, and determinative, is how it has arranged for the services to be provided. ATS has not simply provided a service whereby a non-resident travel agent, or a non-resident tourist, can contract directly with those ultimately providing the service in Australia. Its website describes itself as providing the products which are ultimately to be enjoyed by the tourist.
• Its arranging facilities include meeting foreign inbound tourists with ATS representatives and where appropriate giving the tourists relevant travel documents and travel vouchers. It contracted directly with the provider of the service in Australia but did so on the basis that it would be the tourist who would enjoy the benefit of any contract between ATS and the provider of the service. ATS is essentially the wholesaler of a retail product whose fee to the non-resident travel agent was a composite sum un-dissected as between disbursement and profit margin.

Application of s 38-190

His Honour agreed with the result of the primary judge, but provided his own reasons for coming to that view. Those reasons can be summarised as follows:

• as to the accommodation component, the finding that ATS supplied the NR Travel Agents with a promise that the hotel proprietors would provide hotel accommodation to the NR Tourists when they came to Australia was enough to constitute a “supply of real property”;
• as to the non-accommodation component, the supply (being the the promise to ensure that the Australian Providers would provide the Products, relevantly goods or services, to the NR Tourists when they came to Australia) was excluded from s 38-190 by subsection (2) because that promise carries with it a right to acquire the goods or services, albeit a right exercisable by or for the benefit of the NR Tourists.

The cross-appeal

His Honour found that it was not open to it was not open to the primary judge to find or conclude that there were two supplies from ATS to NR Travel Agents, which her Honour characterised as the Products and the supply of ATS’ arranging services, when it was not in dispute, either before her Honour or on appeal, that the Australian Providers supplied the Products, not ATS. His Honour accepted that the the arranging service supplied by ATS was not merely ancillary or incidental to the supply of the Products, but that was because ATS did not supply the Products.

His Honour considered that the question the primary judge should have asked was whether there was another non-ancillary, non-incidental supply from ATS to the NR Travel Agents. His Honour considered that the answer to that question would have been clearly there was not, noting that the arranging or packaging of the tour was but a component of the supply.

Finally, his Honour considered that the the question of whether there is one or two supplies and if there are two, their characterisation, in particular whether one is ancillary or incidental to the other, also has to be approached from a practical and business point of view: referring to Westley Nominees Pty Ltd v Coles Supermarkets Australia Pty Ltd [2006] FCAFC 115; (2006) 152 FCR 461 at [59], rather than from any separate treatment or quantification in the text of the contract or related tax invoice.

Observations – a move away from contractual law principles?

Justice Edmonds observed that this case was not dealing with whether a supply occurred on entry into a contract (referring to Qantas) or even with the characterisation of that supply if it did occur. Rather, the Court was concerned with the character of a supply made as a result of performance of the terms and conditions of a contract. In this context, his Honour stated as follows (at [29]):

The terms and conditions are the instrumentality through which the supply is made, but the text of these terms and conditions is not conclusive of the character of the supply that is made; that will depend as much on the manner of performance of those terms and conditions as the text of the terms and conditions themselves; it will also depend on the commercial or business purposes, discerned objectively, of those who have entered into the relevant contract.

This statement can be compared with the observation of the UK Supreme Court (Lord Neuberger with whom Lords Sumpton, Reed, Hughes and Hodge agreed) earlier this month in Revenue & Customs v Secret Hotels2 Ltd [2014] UKSC 16 (my analysis of this decision can be accessed here) in a case which considered the liability for VAT in very similar circumstances, being described as follows:

This appeal concerns the liability for Value Added Tax (“VAT”) of a company which markets and arranges holiday accommodation through an on-line website. The outcome turns on the appropriate characterisation of the relationship between the company, the operators of the hotels, and the holiday-makers or their travel agents (which is an English law issue).

 Lord Neuberger approached the characterisation of the supply having regard to the following principles (at [31]-[35]):

• Where parties have entered into a written agreement which appears on its face to be intended to govern the relationship between them, then, in order to determine the legal and commercial nature of that relationship, it is necessary to interpret the agreement in order to identify the parties’ respective rights and obligations, unless it is established that it constitutes a sham.
• When interpreting an agreement, the court must have regard to the words used, to the provisions of the agreement as whole, to the surrounding circumstances in so far as they were known to both parties, and to commercial common sense. When deciding on the categorisation of a relationship governed by a written agreement, the label or labels which the parties have used to describe their relationship cannot be conclusive, and may often be of little weight.
• In English law it is not permissible to take into account the subsequent behaviour or statements of the parties as an aid to interpreting their written agreement

The above principles reflect contract law principles (which are similar in the UK and Australia). A reliance on contract law principles arguably provides a narrower construct in which to characterise a supply in the VAT regime than the approach of the Full Federal Court. In particular, the Full Federal Court appears to consider the manner of the performance of the terms and conditions of the contract to be relevant. Also, the Full Federal Court appears to be more willing to look beyond the terms of the contract in characterising the supply – including looking at the “purpose” of the transaction and to the practical or business reality of the circumstances.