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 Court 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. The arrangement was helpfully summarised by the Court above.
The facts 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) recived 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 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.
- 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.
Observations
The decision shows that the notwithstanding the recent statement of the High Court in Commissioner of Taxation v Qantas Airways Ltd [2012] HCA HCA 41 (at [27]) that the decision in Reliance Carpet “provided no support for the proposition adopted by the Full Court in the present case that it was necessary to extract from the transaction between the airline and the prospective passenger the “essence” and “sole purpose” of the transaction“, the principles of characterising a transaction and looking to its “substance and reality” appear to remain. Of course, the issue in Qantas was whether there was a supply “at all”, whereas the issue in this case was whether the supply was taxable or GST-free and whether there was one or two supplies.
The case was a partial win for both parties. However, the taxpayer still has to get over the difficult hurdle of convincing the Commissioner that he should exercise his discretion in s 105-65 of Schedule 1 to the TAA to refund the GST paid on the margin.
All about GST in Australia 
UK Supreme Court has considered the same issue; see:
http://www.bailii.org/uk/cases/UKSC/2014/16.html
Interesting to compare the contractual analysis of the two Courts.
Thanks Gary. I read the UK decision with interest and I published a short summary on my blog as part of my regular international cases update. The Full Federal Court is presently considering the appeal in ATS, and it will be interesting if the bench has regard to the UK decision.
No regard to UK decision!!!!!