International All Sports v Commissioner of Taxation [2011] FCA 824 (26 July 2011)

CASE ANALYSIS

Summary

This case is another example of the Court having to undertake the task of statutory construction of a provision of the GST Act.  In finding in favour of the applicant, the Court appeared to adopt the more literal construction and the decision is a further example of the apparent disconnect between judges of the Federal Court as to the statutory construction of the GST Act.  On one side there are the judges who favour the “practical business tax” approach and on the other side are those who appear to favour a more literal construction.  Whatever is the correct approach, what does appear clear is that the GST Act continues to be complex and to suffer from some unfortunate drafting.

Facts

The essence of this matter was a claim by the applicant that it had paid too much by way of “net amount” due to a mistaken interpretation of s 126-10 of the GST Act.  The applicant requested assessments for the relevant tax periods and objected to those assessments.  The appeal was brought to the Court pursuant to Part IVC of the Taxation Administration Act.

The applicant was the representative member of a GST group, one of the members of which carried on a bookmaking business whereby customers (situated both in Australia and overseas) laid wagers in various gambling and betting activities and money prizes were paid to those customers who were successful.

The case centred on the proper construction of the provisions in Division 126 of the GST Act, relating to gambling supplies.  The issue was whether wages received from gamblers outside Australia were to be included when working out the applicant’s net amount.  On the construction proposed by the applicant, all of the monetary prizes paid during a tax period (including those paid to customers outside Australia) were to be included, effectively allowing an input tax credit in relation to those prizes paid – including in relation to prizes paid to gamblers upon whose wager no GST was paid.  The Commissioner contended for a construction which excluded prizes paid to overseas gamblers.

Consideration

Construction of s 126

The Court found that the function of Division 126 was to provide an alternative way of working out the net amount where “gambling supplies” were concerned.  Section 126-5 provides as follows:

(1) If you are liable for the GST on a gambling supply, your net amount for the tax period to which the GST on the supply is attributable is as follows:

Global GST amount + Other GST – Input tax credits

The effect of s 126-5 was that if an entity made a single gambling supply in a tax period, its “net amount” for that tax period must be calculated by reference to Division 126.  For example, if a casino served a meal to one of its customers, the GST attracted by the consideration for the meal would be within its “other GST” for the purposes of s 126-5; and if it paid a contract caterer to prepare and serve the meal, the GST component of that payment would be within its “input tax credits” for the purposes of the section.

The case concerned the calculation of the applicant’s “Global GST amount”.  The Court identified two components, namely “total amount wagered” and “total monetary prizes”.  Calculation of the former requires the summation of the consideration for all of the entity’s “gambling supplies” attributable to the tax period and the latter requires the summation of monetary prizes paid during the tax period.  One eleventh of the difference between the two is the entity’s “Global GST amount”.  As noted by the Court (at [17]):

At least at the superficial level, this has the appearance of mimicking the way in which the entity’s net amount is calculated under the general provisions of the GST Act, using an artifice in which monetary prizes are treated as a king of analogue for the consideration which an entity pays for creditable acquisitions.

The dispute related to the purported application by the Commissioner of this analogy to the statutory construction of the definition of “total monetary prizes” in s 126-10(1).  At [18] the Court summarised the dispute as follows:

However, in terms at least, the definition of “total monetary prizes” in s 126-10(1) calls in (under para (a)) all of the monetary prizes which the entity is liable to pay in the tax period.  In a case in which some of the entity’s gambling supplies were GST-free – such as when a lottery ticket was supplied to a non-resident of Australia, and he or she made or had no effective use or enjoyment of the ticket in Australia – a literal reading of this definition would produce the result that the entity would effectively be allowed an input tax credit in relation to a prize paid to a gambler upon whose wager no GST was paid.  According to the Commissioner, such a result could not have been intended by the legislature.

While the Court found positives and negatives with the arguments of both parties, the ultimate conclusion (at [22]) was that the applicant’s construction “is the one most naturally conveyed by the words which are central to the present controversy: “the monetary prizes you are liable to pay…on the outcome of gambling events…””

The Commissioner submitted that this was a case where “a purely textual approach to construction is unsatisfactory” and there were clear indications of the object and purpose of s 126-10, and in the Explanatory Memorandum, which pointed to the conclusion that the legislature intended that the definition of “total monetary prizes” should be confined.  The Commissioner also pointed to the description of the GST as “a practical business tax”.  The crux of the Commissioner’s submissions appear to be summarised by the Court (at [46]) as follows:

Neither do I regard the provision in question as “ambiguous or obscure”, and I do not believe that the Commissioner seriously contended that it was.  The thrust of the submission made on his behalf was that the ordinary meaning conveyed by the text of the definition, taking into account its context in the GST Act and the purpose or object underlying that Act, led to a result that was manifestly absurd or unreasonable.

In rejecting the Commissioner’s contentions, the Court made the following statement (at [49]) which seeks to outline the limits upon which a Court can interfere in cases such as this:

This is not, in my view, a case in which a court can look at a provision of an Act of Parliament and be confident not only that the words of the provision could not have been what the legislature intended but also that the meaning actually intended was an obviously alternative, identifiable, one.  At most, it might be a case in which the statutory draftsman had not thought through the implications of the words which he or she employed.  It is quite possible that he or she did not have in the forefront of his or her mind the arithmetical outcome ordained by those words in situations in which successful gamblers were based overseas.  It would not be the first time that some practical, possibly only occasional, impact of new legislation of brad application had escaped the conscious anticipation of the draftsman.  However these things may be, they provide no warrant for the court, either under s 15AB or generally, not only to hold that the legislature probably did not mean what it said, but also to supply what it considers would most probably have been the draftsman’s chosen wording, had the matter been given the attention which it required.  I accept the submission of the applicants that I should follow the advice of Lords Simonds and Reid in IRC v Wolfson [1949] 1 All ER 865, 868 and 870:

It is not the function of the court of law to give to words a strained and unnatural meaning because only thus will a taxing section apply to a transaction which, had the legislature thought of it, would have been covered by appropriate words.

Refunds and s 105-65

Having found in favour of the applicant, the Court dealt with the contention by the Commissioner that he was entitled to refuse to pay the refund by relying on the discretion in s 105-65 of Schedule 1 to the TAA.

The Court found that the provisions of s 105-65 were not engaged. In making that finding, the Court noted that the section was not concerned simply with an overpayment, but with an overpayment of a particular kind (namely due to treating a supply as taxable when it was not), made in the circumstances referred to in the section.  At [55] the Court stated as follows:

Despite the persistent endeavours of counsel for the Commissioner, I confess to a complete inability to appreciate how it might be said, on the assumed facts of the present case, that the overpayments made by the applicants arose because supplies were treated as taxable supplies, or arrangements were treated as giving rise to taxable supplies, to any extent…It was common ground that those supplies were not taxable ones, and it is not suggested that the applicants ever treated them as taxable.  In my view, therefore, s 105-65(1)(a) is quite irrelevant to the circumstances of the present case. 

The Court made orders that the refunds be paid.

ATO Response

On 30 September 2011 the ATO issued a Decision Impact Statement for the decision of Jessup J.  The ATO decided not to file an appeal.

While the decision relates to gambling supplies and Division 126 of the GST Act, the real impact of the Decision Impact Statement is the apparent concession that the application of the Commissioner’s “discretion” to refund refunds in s 105-65 of Schedule 1 of the Taxation Administration Act 1999is limited to cases where a supply or arrangement was wrongly treated as a taxable supply.  In the All Sports case, and in a number of cases involving the margin scheme, the Commissioner was arguing that the discretion extended to where a taxpayer treated a supply as taxable, but nevertheless paid too much tax (eg, because of using an incorrect valuation methodology under the margin scheme).

The basis for the Commissioner’s view was set out in MT 2010/1.  In essence, the Commissioner argued that the words “treated as a taxable supply…to any extent” in s 105-65(1)(a) were broad enough to capture circumstances where a taxpayer correctly treated a supply as taxable, but paid too much GST on that taxable supply.  The Commissioner now accepts that MT 2010/1 must be amended.  I would contend that the majority of that ruling should be amended.

I have always regarded the view of the Commissioner as “ambitious”, to say the least.  Further, the view appears to be founded upon the belief that the Commissioner’s discretion to refuse to pay refunds under s 105-65 is to be given a broad scope of operation.  The decision of Jessup J in AllSports is arguably another nail in the coffin of that view.  As noted by Emmett J in KAP Motors Pty Ltd v Commissioner of Taxation [2008] FCA 159 (at [33]): “Section 105-65 should not be given an expansive construction.  While its object may be commendable, in seeking to avoid windfall gains for taxpayers, it is, in a sense, a paternalistic interference with the rights of taxpayers.  It proceeds on the basis that GST that should not have been paid has been paid by a taxpayer.  It operates to ensure that the Commissioner receives a windfall rather than a taxpayer.”

These sentiments were approved of by the Tribunal in Luxottica Retail Australia Pty Limited and Commissioner of Taxation [2010] AATA 22 (at [59), a case where the Tribunal found it appropriate that the refund be paid.  While the Commissioner did appeal that case ([2011] FCAFC 20), it is unfortunate that he did not feel the need to appeal the issue relating to s 105-65, notwithstanding his statement in the Decision Impact Statement for the Tribunal decision that it “respectfully disagreed” with the reasoning of the Tribunal.

In fairness to the Commissioner, it should be noted that in MTAA Superannuation Fund (RG Casey Building) Property Pty Ltd and Commissioner of Taxation [2011] AATA 769 and National Jet Systems Pty Limited and Commissioner of Taxation [2011] AATA 766 the Tribunal recently upheld the decision of the Commissioner to rely on s 105-65 to refuse to pay a refund of GST as payment of such a refund would give rise to a windfall gain to the taxpayer or the recipient.

Application for Indemnity Costs – [2011] FCA 1027

The Federal Court ordered the Commissioner to pay indemnity costs from the date that an Offer of Compromise was made by the taxpayer.  This is an important decision, as it shows that the Commissioner is not immune from the operation of the Federal Court Rules, including those relating to Offers of Compromise and their heavy costs consequences.

In making the order, Jessup J rejected the Commissioner’s submission that the provisions of Order 52B (those relating to appeals of objection decisions) amounted to a code, and did not include the provisions of Order 23 dealing with offers of compromise.  In doing so, his Honour noted (at [5]) that the Commissioner had made the very same submission in Clark v Commissioner of Taxation [2010] FCA 415 and was rejected.  It should be noted that the Commissioner has filed an appeal to the Full Federal Court from that decision.

8 November 2011