Case Analysis – Commissioner of Taxation v Luxottica Retail Australia Pty Ltd [2011] FCAFC 20

Commissioner of Taxation v Luxottica Retail Australia Pty Ltd [2011] FCAFC 20



The essential issue between the parties here was the apportionment of the discount offered under promotions for the sales of spectacles (comprising the taxable component of the frames and the GST-free component of the lenses).  The Commissioner submitted that the discount should be applied to both components whereas the taxpayer submitted that the discount should be applied to the frames only (in accordance with the terms of the promotion).  The Tribunal agreed with the taxpayer and the Full Court rejected the Commissioner’s appeal on the basis that the finding was open to the Tribunal and did not involve an error of law.  The Full Court also found that the formula in s 9-80 of the GST Act simply did not work.

As the formula did not work, it was open to the Tribunal to find, as a matter of fact, that it was appropriate to calculate the task of apportionment in s 9-80 by reference to the price of the frame and lenses agreed between the parties (i.e., the price of the lens and the price of the frames less the discount).

It is also relevant to note the decision of the Tribunal ([2010] AATA 22) as it dealt with the Commissioner’s discretion to pay refunds of GST pursuant to s 105-65 of Schedule 1 to the Taxation Administration Act.  The Tribunal found that it was appropriate to pay the GST refunds in this case.  The Commissioner did not appeal this aspect of the decision.


The taxpayer was the representative member of a GST group, of which the members were a number of well known retailers of spectacles.  The case related to the sale of spectacles, which in each case comprised prescription lenses fitted into frames for glasses or sunglasses.

During the tax periods at issue, the taxpayer ran a number of promotions under which spectacle frames were offered to the public at various discounts from the normal selling price, but on condition that the customers also bought lenses for the frames (i.e., an entire pair of spectacles).

The Tribunal made the following findings of fact:

  • there were sound commercial reasons for the discounting of frames;
  • there was no commercial imperative for the discounting of lenses;
  • there was nothing contrived or artificial about the pricing methodology adopted in the promotional arrangements.
The taxpayer contended that the discount should be totally applied to the frames, whereas the Commissioner contended that the discount should be applied to the frames (taxable) and the lenses (GST free).
The difference in approaches stemmed from the different applications of s 9-80 of the GST Act.
There was also an initial question of whether the sale of spectacles involved two supplies or a single supply with two components.


Single or multiple supply

The Tribunal found that the taxpayer had made a single supply of spectacles, comprising two components, the frame and the lenses.  This sat more comfortably with the “practical business tax” approach to GST favoured by the Federal Court.

The Full Court agreed with the Tribunal.  At [14]-[15], the Full Court outlined their reasoning for this view and also the role to be played by s 9-80:

We agree with the Tribunal that the sale of spectacles was a single supply.  While “supply” is defined broadly, it nevertheless invites a common sense, practical approach to characterisation.  An automobile has many parts which are fitted together to make a single vehicle.  Although, for instance, the motor, or indeed the tyres, might be purchased separately there can be little doubt that the sale of the completed vehicle is a single supply.  Like a motor vehicle, spectacles are customarily bought as a completed article and in such circumstances are treated as such by the purchaser.  The fact that either the frame or the lenses might be purchased separately is not to the point.  Similarly the fact that one component, the lenses, is GST-free or that one component is subject to the discount, does not alter the characterisation.

In providing for the valuation of an actual supply that is “partly a taxable supply” and “partly a supply that is GST-free…”, s 9-80 recognises that a single supply may be comprised of components that re classified differently for GST purposes: the sale of spectacles is just such a case.  For that distinction to be meaningful the amount of GST payable in respect of that supply (actual supply) must reflect the proportion that the taxable component bears to the whole of the supply.

S 9-80 of the GST Act

The Full Court then looked at the formula in s 9-80 and found that it simply did not work, adopting the Tribunal’s reference to is as “impenetrably circular”.  This meant that the “value” of the taxable part of the actual supply could not be determined.  In response to this, the Commissioner and the taxpayer both sought to argue that the concept of “price” could be relied on to to work out the value.  Where the parties departed was as to how the “price” should be ascertained.  The Commissioner argued for the price for which the frames and lenses could be sold separately, but the taxpayer argued for the price which was agreed between the parties.

The Tribunal agreed with the taxpayer.  In rejecting the Commissioner’s appeal, the Full Court noted the following matters:

  • the Tribunal made a considered decision as to the value of the taxable supply based on findings of fact that it was entitled to make;
  • how a promotion is structured is a matter for the commercial judgment of the seller.  In the present case it had clearly been decided that the discount offered should be applied to the price of the frames rather than the lenses
  • any error made by the Tribunal in determining the value would be an error of fact, not of law, and as such does not give rise to a question of law enlivening the jurisdiction of the Full Court
  • the Commissioner’s position amounts to a disagreement with the factual basis of the Tribunal’s decision – as a matter of fact, the Commissioner would prefer that the price of they frames sold as a separate item be the basis for determining the value.

The Tribunal – s 105-65

The Commissioner contended that he was entitled to refuse to pay any refunds of GST by relying on the discretion in s 105-65 of Schedule 1 to the TAA.

The Tribunal agreed that the discretion was engaged because the customers had not been reimbursed to the extent of the overpayment of GST.  The Tribunal found that the refund should nevertheless be paid, noting the following matters:

  • a reimbursement to the customer would have the effect of reducing the selling price of the spectacles and the customer would walk away from the transaction having paid less than what he or she contracted to pay;
  • the amounts would need to be allocated to the separate components, which would create a circular process of adjustments of the GST payable – being something which has no place in a taxpayer’s compliance with GST as a “practical business tax”
  • on the Commissioner’s approach, a windfall gain would flow to the underserving customer.
The Commissioner chose not appeal this aspect of the decision to the Full Court.  This was an unfortunate decision, given that it would have provided the Full Court with an opportunity to consider the scope and operation of the discretion in s 105-65 in the context of business to consumer transactions.

30 November 2011

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