From Reliance Carpet to Qantas and Beyond?

FROM RELIANCE CARPET TO QANTAS

AND BEYOND?

(Presented at the ATAX GST Conference, Brisbane, 22 April 2013)

 

INTRODUCTION

1)    In the context of the value added tax (VAT) in the United Kingdom and Europe, courts have characterised transactions by reference to the “substance and reality” of the transaction.  The courts have sought to identify matters such as the “essential features” and the “dominant purpose” of the transaction and have also referred to the need to avoid the “over-zealous dissecting” of transactions.  Reference can be made to cases such as Customs and Excise Commissioners v Pippa-Dee Parties Ltd [1981] STC 495; Card Protection Plan Ltd v Customs and Excise Commissioners (No 2) [2002] 1 AC 202; Commissioners of Customs and Excise v Plantifor Ltd [2002] 1 WLR 2287; Beynon and Partners v Commissioner of Customs and Excise [2005] 1 WLR 86. These principles have recently been applied by the Supreme Court of Canada[1] and the Privy Council.[2]

2)    Noting the inherent difficulties in applying overseas authorities to Australian taxation legislation, a number of judges of the Federal Court adopted a similar “substance and reality” approach to the characterisation of transactions and referred to the UK approach with approval: see Saga Holidays Limited v Commissioner of Taxation [2006] FCAFC 191; (2006) 156 FCR 256[3]; Westley Nominees Pty Ltd v Coles Supermarkets Australia Pty Ltd [2006] FCAFC 115; (2006) 152 FCR 461 and Justice Downes sitting as the President of the Tribunal in AGR Joint Venture and Commissioner of Taxation [2007] AATA 1870; (2006) 70 ATR 466. The focus on the “substance and reality” of the transaction culminated in Reliance Carpet Co Pty Ltd v Commissioner of Taxation [2007] FCAFC 99; (2007) 160 FCR 433, where the Full Federal Court found that when the taxpayer entered into a contract for the sale of real estate, it entered into a contract for the supply of real property “nothing more and nothing less”.

3)    The High Court allowed the Commissioner’s appeal in Commissioner of Taxation v Reliance Carpet Co Pty Ltd [2008] HCA 22; (2008) 236 CLR 342 and the focus appeared to shift from identifying the “essence” or “purpose” of the transaction to the statutory test provided by the words of sections 9-5, 9-10 and 9-15 – i.e. was there “a supply for consideration”. In Qantas Airways Limited v Commissioner of Taxation [2011] FCAFC 113 the Full Federal Court appeared to re-instate the focus on the “essence” or “purpose” of the transaction, finding that the substance and reality of the transaction was the provision of air travel and that the Tribunal erred in “artificially splitting” the transaction into a supply of the booking or reservation. On appeal, the High Court in Commissioner of Taxation v Qantas Airways Limited [2012] HCA 41; (2012) 291 ALR 653 restated its view that the focus is squarely on the words of sections 9-5, 9-10 and 9-15 and observed that the decision in Reliance Carpet:

…provides 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.

4)    The question is “where to from here”? As noted recently,[4] tax specialists are divided as to the likely consequences of the decision of the High Court in Qantas (and also the decision in Reliance Carpet), with some arguing that it fundamentally shifts GST landscape in Australia. In my view, the full impact of the decision is yet to be felt but the views of the High Court (and the way the Commissioner argued his appeal in Qantas) do potentially have a significant impact. This is particularly where the question is whether there is any supply “at all” for which a payment is consideration. An example considered in the paper is the view of the Commissioner in GSTR 2001/4 that the making of a “discontinuance supply” by the party receiving an out-of-court settlement payment, of itself, does not give rise to a taxable supply.

5)    Further guidance on this difficult issue may be provided by the Full Federal Court in the forthcoming appeal in A.P. Group Limited and Commissioner of Taxation [2012] AATA 617[5] dealing with the question of whether incentive payments made by motor vehicle manufacturers to dealers were consideration for a supply made by the dealers.

A LOOK AT THE CASES

Saga Holidays Limited v Commissioner of Taxation [2005] FCA 1892; (2005) 149 FCR 41 (Conti J)[6]

6)    This was the first case to really consider the issue of identifying and characterising a supply (or supplies) made pursuant to a transaction for the purposes of GST. The issue was whether Saga (being a non-resident company registered for GST) made a taxable supply when it sold to customers, being non-residents, the Australian accommodation component of its holiday or touring packages. Saga contended that all it provided to customers was a mere contractual right entitling the customer to, inter alia, the supply of hotel accommodation upon arrival in each destination. The Commissioner contended that the broad definition of “real property” (which extended to “any other contractual right exercisable over or in relation to land”) encompassed the right of a hotel guest to occupy a hotel room in the course of a Saga packaged tour. Further, the only relevant transaction or supply was the supply by Saga of a packaged holiday, being a mixed supply containing separately identifiable components, including the hotel accommodation component.

7)    At first instance, Conti J appeared to accept the Commissioner’s submission that a ‘substance and reality’ approach should be adopted, consistent with the approach adopted in the United Kingdom. This is reflected in the following observations of his Honour (at [28]-[30]):

28 The Commissioner emphasised that GST is a value added tax, as is of course the corresponding tax the subject of the earlier United Kingdom Value Added Tax Act 1994 (UK) and its legislative predecessors, being designed to levy a net amount of tax on the proceeds secured by the enterprise in respect of value-added by the enterprise to what is supplied by it. Understandably therefore the parties addressed in the course of submissions a number United Kingdom judicial authorities on that legislation…

29 A contextual consideration involved in construing the GST Act is that GST is traditionally a tax on ‘businessmen’, to be assessed and paid by businessmen, and to be administered and interpreted in accordance with the understanding of businessmen. This is in contrast to other forms of taxation, such as income tax, which is ordinarily assessed by the Commissioner. Moreover, as the Commissioner emphasised, the GST Act contemplates that GST will be payable on the wide variety of business transactions which constitute a taxable supply (s 9-5), and as a necessary consequence, the legislation is expressed in general terms to facilitate its application to that wide variety of transactions. Hence the Commissioner’s observations that the legislation should not be construed in a narrow and technical way, but rather should be construed in a broad and practical way. I have later drawn attention to English authority reflecting of a similar approach to the application of its analogous value-added taxation.

30 The Commissioner submitted for operation in the present circumstances the observation of Ralph Gibson J of the Queens Bench Division made in the value added context of Customs and Excise Commissioners v Pippa-Dee Parties Ltd [1981] 495, where at 501 the following appears:

‘It is clear therefore that a technical analysis of one part of a transaction, or of one set of obligations within a contract, even though accurate in legal principle, which is capable of explaining the service supplied, or the consideration given, in a restricted way, is not necessarily the right answer in law to the application of the provisions to this statute. I accept counsel for the Crown’s submission that this approach does indicate that taxable transactions should not be artificially dissected so as to demonstrate as being the service provided, or the consideration given, something other or less than that which appears to have been the service provided or consideration given upon an examination of the entire transaction.’

That approach to construction of value-added statutes provides support for the Commissioner’s asserted ‘substance and reality’ approach. It is an approach which I think aptly accommodates those provisions of the GST Act falling in particular within Subdivision 9-A of which ss 9-5, 9-10 and 9-25 form an integral part.

8)    His Honour found that a principal supply of the tour was the provision of hotel accommodation. In doing so, his Honour adopted the UK approach (at [108]-[109]):

108 Central to the resolution of the issues posed by SAGA’s approach to the construction and operation of the GST Act, in relation to model circumstances as are here in dispute, has been a wide-ranging consideration of the nature and scope of taxable supply rendered taxable by way of GST, or else excluded from such taxation. The interpretation of the GST Act in relation to the critical subject and notion of taxable supply requires a reasonably broad and comprehensive perspective to be taken, being a perspective which is almost ambulatory in nature, having regard to the parameters of a supplier’s business activities and the transactions in issue. That requirement for a substantive and comprehensive approach, by paying regard to the entirety of a transaction addressed by the legislation, is evident from the judicial dicta appearing in the United Kingdom VAT authorities of Pippa-Dee, Diners Club, Plantifor and Sinclair Collis (in particular in the latter instance from the passage from the European Court of Justice’s reasons for judgment in Stockholm Lindopark that was cited with approval in the speech of Lord Slynn of Hadley) which I have cited. That approach is also apparent from judicial observations of principle appearing in the Australian authorities of HP Mercantile and Sterling Guardian which I have also earlier cited.

109 To those authorities I would add for completeness reference to the further speech of Lord Slynn of Hadley (with whom the other members of the House of Lords agreed) in Card Protection Plan Ltd v Customs and Excise Commissioners (No 2) [2001] UKHL 4; 2002 1 AC 202, where the following appears at 212-3 in relation to the approach to examination of a transaction, in terms as to what its essential and ancillary features:

‘It is clear from the [European] Court of Justice’s judgment that the national court’s task is to have regard to the “essential features of the transaction” to see whether it is “several distinct principal services” or a single service and that what from an economic point of view is in reality a single service should not be “artificially split”. It seems that an overall view should be taken and over-zealous dissecting and analysis of particular clauses should be avoided.

If one asks what is the essential feature of the scheme or its dominant purpose – perhaps why objectively people are likely to want to join it – I have no doubt it is to obtain a provision of insurance cover against loss arising from the misuse of credit cards or other documents.

In so far as there are services which are not independently to be categorised as insurance they are in my view ancillary and in some cases minor features of the plan…I doubt whether they can in any event be regarded as sufficiently coherent as to be treated as one separate supply but even if they can it is ancillary to the provision of insurance.

I would also draw attention to that aspect of the later speech of Lord Hoffman (with whom the other members of the House of Lords agreed) in the VAT case of Beynon, where his Lordship emphasised at [21] ‘the need to examine the circumstances in which the transaction takes place’, and referred to authorities which clarified the further need for consideration of what may satisfy the notion of supply from an economic perspective, and for eschewing any artificial dissection of transactions.

Reliance Carpet Company Pty Ltd and Commissioner of Taxation [2006] AATA 486 (DP Olney)[7]

9)    The issue was whether the taxpayer was liable to pay GST in respect of a deposit that was forfeited to it upon the rescission of a contract for the sale of real property – i.e. did the taxpayer make a supply for which the forfeited deposit was consideration?

10) Before the Tribunal, the taxpayer and the Commissioner relied extensively on overseas authorities, as observed by the Tribunal (at [6]):

Considerable reliance was placed upon judicial determination from other jurisdictions, notably the United Kingdom and New Zealand, was well as rulings by the respondent, extracts from the relevant explanatory memorandum and a variety of learned writings. This type of material was obviously resorted to in the absence of any binding Australian judicial determination relating to the specific statutory provisions under consideration.

11) The Tribunal chose not to have regard to these materials and determined to have regard to the legislative provisions themselves, noting (at [7]) that if the legislation proved to be uncertain or uncontradictory, resort may then be had to extraneous material.

12) The Tribunal then looked to the words of ss 9-5, 9-10 and 9-15 and concluded as follows (at [17]):

In the circumstances it may fairly be said that upon execution of the contract the applicant made a supply in that, in terms of s 9-10(2)(g) of the GST Act, it “entered into an obligation” to do the things it was bound to do under the contract and further that the payment of the deposit was consideration for a supply in that it was a “payment in connection with a supply” (s 9-15(1)(a)).

This deceptively simple approach ultimately found favour with the High Court on appeal and also with the High Court in Qantas. In both judgments the High Court adopted the same simple approach to the “building block” provisions of the GST Act, being ss 9-5(a), 9-10 and 9-15. The entry into the obligations upon making the contract[8] constituted a “supply” within the meaning of s 9-10 and the payment[9] was made “in connection with” that supply within the meaning of “consideration” in s 9-15.  Therefore, there was a “taxable supply” within the meaning of s 9-15(a), being a “supply made for consideration”.

Westley Nominees Pty Ltd v Coles Supermarkets Australia Pty Ltd [2006] FCAFC 115 (Ryan, Heerey and Edmonds JJ)[10]

13) The central issue in this case was whether a lease between the parties was GST-free pursuant to the transitional provisions in s 13 of the GST Transition Act.[11] One of the issues on appeal was whether the contribution to outgoings by the tenant was consideration for the supply of the premises in the Shopping Centre or was consideration for a separate supply of the benefits of being part of the Centre as a whole. The Full Federal Court found that the contribution to outgoings was part of the consideration for the single supply of the premises.

14) The Full Federal Court referred (at [59]) to the following passage of Sir Owen Dixon in dissent in Hallstroms Pty Ltd v Federal Commissioner of Taxation (1946) 72 CLR 634 at 648:

What is an outgoing of capital and what is an outgoing on account of revenue depends on what the expenditure is calculated to effect from a practical and business point of view, rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process.’

The Full Court considered that this observation was equally applicable in determining whether expenditure secures an ancillary and incidental supply separate and discrete from the main supply or whether it forms part of the consideration for a single supply. The Full Court also observed that this approach was consistent with the reasoning of the courts in the UK referred to earlier at [35] of the judgment. That paragraph relevantly stated as follows:

Senior Counsel for Coles submitted that, in a GST context, courts have been reluctant to apportion a supply into various components when, in truth, they are part of one commercial transaction. Here the relevant transaction was the lease of the premises being part of a shopping centre complex. Where one can identify a supply as incidental to a principal supply, courts have generally treated the transaction as giving rise to one supply. Reference was made to Customs and Excise Commissioners v British Telecommunications plc [1999] STC 758; British Airports Authority v Customs and Excise Commissioners [1977] STC 36; British Airways plc v Customs and Excise Commissioners [1990] STC 643; and Kimberley-Clark Ltd v Customs and Excise Commissioners [2004] STC 473 where English courts have asked whether there is a single supply or multiple supplies and have answered that question by reference to economic or commercial reality – i.e. by considering whether the transaction by reference to those criteria involves a single transaction or separate transactions.

Saga Holidays Limited v Commissioner of Taxation [2006] FCAFC 191; (2006) 156 FCR 256 (Gyles, Stone and Young JJ)[12]

15) The Full Federal Court[13] unanimously dismissed the taxpayer’s appeal against the decision of Conti J at first instance. Stone J described Saga’s submission on appeal as follows (at [32]):

Saga’s preliminary submission was that it was inappropriate and ‘entirely artificial’ for his Honour to characterise the supply by reference to the individual components promised to the tourist. Rather, it submitted, Saga supplied a single right which was to the performance of the contract as a whole. This submission reflects Saga’s underlying position that in an executory contract there are two supplies: the first of which occurs at the time of making the contract and the second at the time of performance.

16) Her Honour approached the question as simply whether there was a supply of “real property”, as broadly defined in the GST Act, under the contract between Saga and its customers.

17) The Commissioner argued that the supply of the accommodation component of the tour (including components such as the use of furniture and facilities in each room, cleaning and linen service, access to common areas and facilities such as pools and gymnasiums and various other services such as porterage and concierge) was “in substance and reality” a single supply of real property. Her Honour agreed.

18) Stone J (at [43]) referred to the High Court’s comment in Avon Products Pty Limited v Commissioner of Taxation (2006) 227 ALR 398 at [28] about the considerable caution that must be exercised before relying on international authorities that deal with different statutory regimes. Nevertheless, her Honour considered that in so far as Lord Hoffman in Beynon focused on the “social and economic reality” of the transaction, that approach was regarded as relevant.

Reliance Carpet Co Pty Ltd v Commissioner of Taxation [2007] FCAFC 99 (Heerey, Stone and Edmonds JJ)[14]

19) The Full Federal Court unanimously allowed the taxpayer’s appeal against the decision of the Tribunal. The Full Court referred to the Tribunal’s conclusion (at [17] – reproduced above) and observed that this conclusion had an artificial resonance to it.  The Full Court then referred to the decision of the Full Court in Westley Nominees (handed down after the Tribunal’s decision) and that Court’s reference to what was said by Dixon J in Hallstroms (reproduced above). The Full Court concluded as follows (at [18]):

When the applicant entered into the contract for sale with the purchaser it entered into a contract for the supply of real property: nothing more and nothing less. We accept the applicant’s primary contention ([13](1) – (7) below). That supply did not take place because the contract was rescinded. However, the fact that that supply did not take place is not a warrant to undertake some juristic dissection of the contract to find some other supply, in terms of the GST Act, at the time of entry into the contract. In our view, there was no supply of interim obligations either then or subsequently.

20) Of the taxpayer’s primary contention (reproduced at [13](1)-(7)), which was accepted by the Full Court, sub-paragraphs (2) – (4) relevantly stated as follows:

(2) Upon execution of the contract, certain rights were created in, and obligations were imposed on, both parties, including obligations entered into by the applicant referred to by the learned Deputy President at [13] (see [10(3)] above) defined in para 4(1)(a) of the applicant’s Amended Notice of Appeal as the “interim obligations”). Each of these matters was capable of falling within the broad definition of supply in s 9-10 of the GST Act. However, the interim obligations should properly be regarded as being ancillary, integral or incidental to the supply of the real property, and therefore as part of a single supply. Where one can identify a supply as being incidental to a principal supply, courts have generally treated the transaction as giving rise to one supply: Westley Nominees Pty Ltd v Coles Supermarkets Australia Pty Ltd (2006) 152 FCR 461 (at 472 [35] and 476-477 [58]-[59]) per Ryan, Heerey and Edmonds JJ.

(3) What is supplied under the contract is to be determined by commercial reality and the essential features of the transaction, rather than by artificially splitting the contract into components: Saga Holidays v Commissioner of Taxation (2005) 149 FCR 41 (at 56 [30] and 88-90 [108]-[111]). In affirming the decision on appeal, Stone J at [43] (Gyles J agreed) found that the approach of looking at the “social and economic reality” of the transaction adopted by Lord Hoffman in Beynon and Partners v Commissioner of Customs and Excise [2004] 4 All ER 1091 was relevant to this issue. This approach is consistent with the following statement of Lord Slynn in Card Protection Plan v Customs Comr (No.2) [2002] 1 AC 202 at 212G:

“…the national court’s task is to have regard to the ‘essential features of the transaction’ to see whether it is ‘several distinct principal services’ or a single service and that what from an economic point of view is in reality a single service should not be ‘artificially split’. It seems that an overall view should be taken and over-zealous dissecting and analysis of particular clauses should be avoided.

This approach is also consistent with the view of the Full Court in Westley Nominees at 477.5 [59] that in determining whether expenditure secures an ancillary or incidental supply separate and discrete from the main supply or whether it forms part of the consideration for a single supply one should consider “what the expenditure is calculated to effect from a practical and business point of view, rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process”.

(4) From a practical and business point of view, the entry by the applicant into the interim obligations should properly be regarded as being ancillary, integral or incidental to the principal supply of real property, and therefore as part of that principal supply.

AGR Joint Venture and Commissioner of Taxation [2007] AATA 466; (2007) 70 ATR 466 (Justice Downes P, Senior Member Sweidan)[15]

21) The issue in this case was whether the transaction whereby coin blanks (manufactured from refined gold or silver) were manufactured by the taxpayer manufactured and sold to the Royal Mint was a taxable supply (as contended by the Commissioner) or gave rise to two supplies (as contended by the taxpayer), with the first supply being a GST-free or input taxed supply of credit to the customer’s metal account and the second being the taxable supply of fabricating the coin blanks. The Tribunal found that while the transactions may have involved a number of steps, in substance, there was in each case a single taxable supply.

22) Under the heading “General Principles” the Tribunal observed as follows:

32. GST is a practical business tax (Sterling Guardian Pty Ltd v Commissioner of Taxation (2005) 220 ALR 550 at 562-563). We must interpret the GST Act in a practical and commonsense way and, accordingly, avoid interpretations which are unduly technical or overly meticulous and literal (Saga Holidays Ltd v Commissioner of Taxation (2006) 64 ATR 602 at 619).

33. There are a number of useful UK authorities in relation to the Value Added Tax. The European Court of Justice, on reference of a question of law from the House of Lords, stated: “Where the transaction in question comprises a bundle of features and acts, regard must first be had to all the circumstances in which that transaction takes place. In this respect…the essential features of the transaction must be ascertained in order to determine whether the taxable person is supplying the customer, being a typical customer, with several distinct principal services or with a single serve” (Card Protection Plan v Customs & Excise Commissioners [1999] 2 AC 601 at 626-627).

34. In ascertaining whether a transaction should be regarded as several distinct supplies as opposed to one composite supply, it is necessary to consider the true and substantial nature of the consideration given in return for the payments (Customs & Excise Commissioners v Wellington Private Hospital Ltd [1997] STC 445 at 462)…“The courts should have regard to the commercial reality of the transaction. If two or more distinct elements in the supply can be discerned, it needs to be asked whether or not one or more can be seen as ancillary to a principal element or elements” (Sea Containers Ltd v Customs & Excise Commissioners [2000] STC 82 at 88).

23) Adopting these principles, the Tribunal found that (at [39]) the “essence” of the transaction between the parties was undoubtedly the delivery of coin blanks. In coming to this finding, the Tribunal observed that (at [40]) it was critical that “the real purpose” for the dealing and all its steps was the supply of blanks. At [41] the Tribunal observed as follows:

We accept that the dealings are capable of being characterised as the supply of a bundle of rights, including the crediting of a metal account, followed by the fabrication of metal into blanks. However, that does not mean that there are two supplies. To say that there are two supplies is, in our opinion, to create an artificial splitting of the transaction. The effect of the GST legislation on the dealings is not simply determined by identifying their precise legal character. The question is how they should be characterised for GST purposes. This involves an analysis of the nature of the dealings as much as a technical analysis.

Commissioner of Taxation v Reliance Carpet Co Pty Limited [2008] HCA 22; (2008) 236 CLR 342 (Gleeson CJ, Gummow, Heydon, Crennan and Kiefel JJ)[16]

24) The High Court unanimously allowed the Commissioner’s appeal. The Court (at [13]) made the following observations on the view of the Full Court that “when the taxpayer entered into the contract for the supply of the contract for the sale with the purchaser it entered into a contract for the supply of real property; nothing more and nothing less…”:

a)     The circumstance that the contract did not proceed to completion does not necessarily prevent there having been a “supply” when the contract was entered into; the ultimate issue being whether there was a “taxable supply” to which the GST was attributed for the relevant tax period.

b)    The contract was executory in nature and was never “rescinded” in the sense of being set aside for some vitiating factor attending its formation.

c)     The use of the phrase “nothing more and nothing less” appeared to give insufficient weight both to the definition of “real property” in the Act, and to the identity of the subject matter of the contract, in accordance with the ordinary principles of conveyancing, as the title or estate of the vendor in a parcel of land rather than merely the parcel itself in a geographical sense.

25) The High Court first dealt with the question of consideration. The Court found (at [33]) that the deposit was a payment made “in connection with” a supply by the taxpayer, within the meaning of the definition of “consideration” in s 9-15(1)(a). The Court also found that the taxpayer made a “supply” within the meaning of s 9-10 before the forfeiture and approved of the findings of the Tribunal, referred to above, that:

“In the circumstances it may fairly be said that upon execution of the contract the applicant made a supply in that, in terms of s 9-10(2)(g) of [the Act], it ‘entered into an obligation’ to do the things it was bound to do under the contract…”

Finally, having regard to the operation of Division 99, the Court found (at [40]) that, upon forfeiture to the taxpayer of the deposit, by reason of the failure by the purchaser to complete the contract, the “supply” represented by the making of the Contract became a “taxable supply”.

Travelex Limited v Commissioner of Taxation [2009] FCAFC 133; (2009) 178 FCR 434 (Mansfield, Stone and Edmonds JJ)[17]

26) The issue was whether the taxpayer’s sale of foreign currency on the departure side of the customs barrier at an international airport in Australia to a person travelling overseas, where the foreign currency is for use overseas, was GST-free as a supply made in relation to rights which were for use outside Australia. At first instance, Emmett J found that the supply was not GST-free.[18] His Honour found (at [49]) that there could be a supply “in relation to rights only “if the essential character or substance of the supply, or a separately identifiable part of the supply, is one of rights” and there is not a supply “in relation to rights” “where the supply of rights is merely integral, ancillary or incidental to another dominant part of the supply, the supply being characterised by the dominant part”.

27) On appeal, a majority of the Full Federal Court dismissed the taxpayer’s appeal.[19] The majority agreed with the primary judge that the relevant inquiry required identification of the “predominant” aspect of the supply as distinct from any rights “incidental to the supply of the bank notes”.

28) Stone J observed (at [47]) that both the appellant and the Commissioner appealed to the concept of GST as a “practical business tax”. Edmonds J agreed with the judgment of Stone J and merely wished to add (at [58]) that “the same conclusion can be reached at a more fundamental level through a different but equally legitimate process of reasoning which is not attended with the potential difficulties of statutory construction considered in the reasoning of the primary judge and her Honour on the appeal”. His Honour’s observations are reproduced below (at [59]-[60]):

59 Accepting, as both parties do, that it is appropriate to characterise the transaction – Mr Urquart’s purchase of 400 Fijian dollars for $AUD 339.67 (including commission of $AUD 8) – from a ‘practical business point of view’ to determine the nature of character of the supply, the submission of the appellant at [41] of its written outline that ‘from a practical and business point of view the transaction is to be characterised as a supply in relation to the right to use the currency as legal tender’, cannot be accepted. It involves a juristic disaggregation and classification of rights inherent in the currency which does not reflect the practical reality of what is in fact supplied…

60 In a similar context, but in a different jurisdiction, the Court of Justice in the European Communities said in Card Protection Plan Ltd v Customs and Excise Commissioners [1999] 2 AC 601 at 623, [29]:

‘[A] supply which comprises a single service from an economic point of view should not be artificially split, so as not to distort the functioning of the VAT system…’

Travelex Ltd v Commissioner of Taxation [2010] HCA 33; (2010) 241 CLR 510 (French CJ, Hayne, Heydon, Crennan and Bell JJ)[20]

29) By a majority (3:2) the High Court allowed the taxpayer’s appeal. French CJ and Hayne J (who formed the majority with Heydon J) (at [24]) repeated the observation of Stone J that “both parties had appealed in argument to the need to approach the act from a “practical and business point of view””.

30) While French CJ and Hayne J did not refer to the earlier decisions of the Full Federal Court or to the UK authorities, their Honours arguably adopted a similar approach in making the following observation (at [32]):

Observing that rights attached to currency, and pass upon negotiation of the currency by delivery, does not constitute any “juristic disaggregation and classification of rights” that fails to reflect “the practical reality of what is in fact supplied”. On the contrary, recognising that a sale of foreign currency transfers to the purchaser the rights that attach to the notes does no more than recognise the evident purpose of the transaction.

Qantas Airways Limited and Commissioner of Taxation [2010] AATA 977 (Justice Downes President, Senior Member Frost)[21]

31) The issue was whether the taxpayer made a taxable supply in circumstances where a passenger booked and paid for airline travel, but subsequently did not show for the flight and did not receive a refund of the fare.[22] The Tribunal found that the taxpayer made a taxable supply upon the making of the booking and the receipt of the fare, and in doing so adopted an approach that was similar to that of the Tribunal in Reliance Carpet. The Tribunal observed as follows (at [9]):

The correct view of the Conditions of Carriage seems to us to be that they give rise to a contract enforceable at law between Qantas and each passenger. The contract, in turn, creates rights (s 9-10(2)(e)) and involves entering into obligations “to do anything” (s 9-10(2)(g)). There is, accordingly, an argument that at the time of the creation of the rights and the entering into of the obligations, which will generally be at the time, or shortly after, a reservation is made, there is a supply. Certainly it will be no later than the time of payment. The mutual promises or the payment will provide consideration.

32) The Tribunal went further and acknowledged that the “circumstance which dominates this case” is that none of the passengers ever undertook their journey, and that the Tribunal must therefore ask itself whether the absence of the actual carriage affected the operation of s 9-10(2)(e) and (g). The Tribunal found that this was not the case. Once it was accepted that a contract was made with passengers, the Tribunal could see no reason why the arrangements with passengers did not fall within both s 9-10(2)(e) and (g). Further, in taking this view, the Tribunal considered that it was acting consistently with the approach taken by the High Court in Reliance Carpet.

33) The Tribunal also considered the question of whether, on the ordinary meaning of “supply” in s 9-10(1), there was a supply when a passenger made a reservation even though the object of the reservation was not fulfilled. The Tribunal observed that the UK cases were concerned more with the ordinary meaning of supply (noting that in Australia it seemed appropriate to address the precise statutory provision). In finding that there was a supply in its ordinary meaning, a way of describing what Qantas had done for a passenger, and in return for the “fare” that had been paid, was holding itself ready to carry the passenger in accordance with its Conditions of Carriage. This was the provision of a sufficient service to give rise to the imposition of GST.

Qantas Airways Limited v Commissioner of Taxation [2011] FCAFC 113 (Stone, Edmonds and Perram JJ)[23]

34) The Full Federal Court unanimously allowed the taxpayer’s appeal.[24] Edmonds and Perram JJ observed (at [10]) that at the heart of Qantas’ case was “the simple proposition that the air journey was the supply in contemplation, it did not occur, and therefore no supply occurred; as such no GST liability was, in the event, triggered.”

35) The Full Court distinguished Reliance Carpet on the basis that Division 99 provided a “statutory mandate” to search for and identify some “anterior supply” as the taxable supply. In the absence of that statutory mandate, because an outcome, which was the supply paid for, failed, did not provide a warrant to search for and identify an anterior supply as the taxable supply, which was what the Full Court thought the Tribunal did.

36) The Full Court referred to the findings of the Tribunal that “the actual carriage of the passenger” was “obviously the purpose of each reservation” and then noted that French CJ and Hayne J in Travelex clearly supported recourse to the purpose of the transaction as identifying the relevant supply. The Full Court then concluded that “the relevant supply” was the contemplated flight, not the reservation or booking, and the contemplated flight failed to occur.

37) The Full Court observed that the taxpayer referred to the decisions in Saga Holidays and AGR Joint Venture where the focus was on the “substance and reality” of the transaction. Using the criteria in those cases, the Full Court found that “the essence and sole purpose” of the transaction was carriage by air – and if the actual travel did not occur there was no taxable supply. The Tribunal erred in artificially splitting the transaction, and in the absence of the principal supply, looked for things otherwise incidental to that supply.

AP Group Limited and Commissioner of Taxation [2012] AATA (DP Frost and DP Deutch)[25]

38) This case involved the question whether “incentive” payments by car manufacturers to car dealers were consideration for a supply made by the car dealers – if so, the payments were taxable. The Commissioner contended that the dealers made supplies to manufacturers by performing or agreeing to perform the obligations imposed on them by the Dealer Agreements. The Tribunal rejected this contention.

39) The submissions of the taxpayer were consistent with those accepted by the Full Court in Qantas. The essence of the submissions was that the Tribunal must decide what the payments were “for” – and that there was no substantial relation, in a practical business sense, to any other supply. The Commissioner’s submissions were similar to his written submissions filed with the High Court in in Qantas[26] and sought to disavow any role for characterising the transaction in identifying whether there was a supply “at all”. In rejecting this contention, the Tribunal observed as follows (at [82]-[85]):

82. The Applicant notes in its written submissions that both this Tribunal and the Federal Court have, for GST purposes, “characterised supplies based on the true and substantial nature of the supply, a substance and reality approach, recognition that GST is a practical business tax and that what needs to be identified is the essence or sole purpose of the transaction”. Those submissions refer to AGR Joint Venture and Commissioner of Taxation [2007] AATA 1870; (2007) 70 ATR 466, which was referred to with approval in Qantas Airways Limited v Commissioner of Taxation [2011] FCAFC 113 (although we note that the Full Court’s decision in Qantas has been appealed to the High Court).

83. In this regard, the Commissioner responds in his written submissions as follows (original emphasis; footnotes omitted):

[W]hether AP Group made supplies to the manufacturers is not an enquiry assisted by an attempt to divine the ‘essence or sole purpose of the transaction’. While that kind of analysis in the past has been considered useful in deciding whether there is one supply or two; or the identity of a particular supply in respect of which consideration was provided; it has no logical role to play in identifying whether there was a supply at all. It simply deflects from the real question: whether AP Group made supplies in respect of which the incentive payments it received was consideration.

84. That seems a curious position for the Commissioner to take. It is hard to discover the merit in a proposition that the “essence” or “purpose” of a transaction should be disregarded at the stage of identification of a supply (is there are a supply?), but brought into focus only at the characterisation stage (what is the supply?). It seems to us that any criteria that are relevant to one stage are quite likely to be relevant to the other. And having regard to the essence and purpose throughout the enquiry is likely to lead to a GST outcome that reflects the realities of the commercial arrangement, rather than the “chaotic vista” that Mr Cordara predicted, where everything is a supply, everything is consideration, and everything is connected with everything.

85. In the context of the overall business relationships and contractual arrangements between the Applicant on the one hand, and the various manufacturers on the other, we do not think that the Applicant’s acceptance of the obligations or the making of the promises is properly viewed as the making of supplies to manufacturers. Instead they are part of the foundation underpinning the relationship, the background to the bargain the parties have made – in a sense, the rulebook by which the game is to be played. (emphasis added)

40) The decision of the Tribunal was handed down after the High Court had heard the Commissioner’s appeal in Qantas, but before the High Court made its decision.[27]

Commissioner of Taxation v Qantas Airways Limited [2012] HCA 41; (2012) 291 ALR 653 (Gummow, Hayne, Heydon, Kiefel and Bell JJ)[28]

41) The majority of the High Court allowed the Commissioner’s appeal.[29] The majority observed (at [11]-[12]) that the reasoning of the Full Court fixed upon the consideration “for” which a taxable supply was provided and identified this by distilling from the arrangements between airline and customer the “essence and sole purpose” of the transaction.

42) The majority considered that the appeal turned upon the construction and application of the provisions of the GST Act, particularly the phrase “the supply for consideration” in the definition of “taxable supply” in s 9-5(a), noting that the word “for” does not adopt contractual principles but requires a connection or relationship between the supply and the consideration.

43) The majority also observed that (at [21]-[22]) in addition to the general provisions, various specific provisions with respect to various species of supply are made elsewhere in the GST Act and use phrases of relationship of connection and that these specific provisions were insufficiently appreciated in the submissions by Qantas. In this context, the majority observed that Travelex turned on subdivision 38-E and the phrase “in relation to rights”; Saga Holidays turned on the phrase “connected with Australia”; and TAB Ltd[30] hinged upon the phrase in Division 126 “relating to the outcome of a *gambling event”.

44) The majority then observed that the decision in Reliance Carpet was treated as if it supported the contention by Qantas that the sole candidate for a taxable supply was the flight, for which the fare was pre-paid, to the exclusion of the supply by reason of the making of the contract of carriage upon payment of the fare. In response to this purported reliance, the majority’s view was clear:

The case provides 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.

45) The majority concluded as follows (at [33]) (footnotes excluded):

The Qantas conditions and the Jetstar conditions did not provide an unconditional promise to carry the passenger and baggage on a particular flight. They supplied something less than that. This was at least a promise to use best endeavours to carry the passenger and baggage, having regard to the circumstances of the business operations of the airline. This was a “taxable supply” for which the consideration, being the fare, was received.

What does it ALL mean?

46) As outlined above, the majority of the High Court in Qantas made it very clear that the decision in Reliance Carpet:

…provides 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.

In light of this statement, the question arises as to what, if any, role the characterisation of a transaction is to play in the context of the GST Act.

47) The Full Federal Court in the AP Group appeal may provide further guidance on this question, but in my view the principles of characterisation retain relevance in the following circumstances:

a)     Where the question is whether the supply is taxable or input taxed or GST free. The Commissioner appears to accept this, as reflected in the following submissions to the High Court in reply (footnotes omitted, emphasis added):

3. Issues of characterisation (expressed as questions of “essential character” or of identifying a “relevant supply”) arise where the issue is whether the supply in connection with which an amount is received as consideration is a taxable supply, an input taxed supply or a GST-free supply. They do not arise in this case, where all potential supplies were taxable supplies, and the only issue for resolution is whether there was any supply at all in connection with the receipts taken into the calculation of the assessed net amounts.

b)    Where the question is whether there is a single supply or more than one supply. This is reflected in the Commissioner’s submissions to the Tribunal in AP Group reproduced above.  This is also consistent with the following observation of the High Court in Reliance Carpet at [5]:

The composite expression “a taxable supply” is of critical importance for the creation of liability to GST. In the facts and circumstances of a given case there may be disclosed consecutive acts each of which answers the statutory description of “supply”, but upon examination it may appear that there is no more than one “taxable supply”.

In this context, the approach taken in cases such as Westley Nominees and AGR Joint Venture remains relevant – being to focus on the substance and reality of the transaction.

48) However, in light of the clear words of the High Court, it may well be that the characterisation of the transaction or the identification of its “essence” or “purpose” has no role to play where the issue is one of identifying the existence of a supply – i.e. whether there was a supply “at all”. That certainly appears to be the view of the Commissioner, as reflected in his written submissions filed with the High Court in Qantas and in AP Group.

49) The implications of such an outcome may be significant. For example, there are transactions where the Commissioner considers that, looking at the “substance and reality” of the transaction, no supply or no taxable supply arises, notwithstanding that a contract exists between the parties. The basis for this view now appears to be questionable.

50) An area which illustrates these potential difficulties is the Commissioner’s treatment of “discontinuance supplies” in GSTR 2001/4 “Court orders and out-of-court settlements”.

GSTR 2012/4 and “Discontinuance supplies”

51) GSTR 2001/4 outlines the view of the Commissioner of the GST treatment of court judgments and out-of-court settlements.  The ruling relies on concepts such as “earlier supply” and “current supply” and “discontinuance supply”.  Further, the ruling confirms the Commissioner’s view that damages are not consideration for a supply.

52) In the context of out-of-court settlements, the ruling states that terms of settlement will generally provide for the plaintiff to release the defendant from some or all of the existing claims provided the terms of settlement are complied with. The ruling considers (at [54]) that the types of “supplies” (within s 9-10) which may be created under the conditions of settlement may be characterised as:

a)     Surrendering a right to pursue further legal action [paragraph 9-10(2)(e)].

b)    Entering into an obligation to refrain from further legal action [paragraph 9-10(2)(g)].

c)     Releasing another party from further obligations in relation to the dispute [paragraph 9-10(2)(g)].

These supplies are referred to in the Ruling as “discontinuance supplies”.

53) The ruling observes that in most cases, the “discontinuance supply” will have no separately ascribed value and will merely be an inherent part of the legal machinery to add finality to the dispute. The view is that a “discontinuance supply” is in the nature of a term or condition of the settlement, rather than the subject of the settlement.  In this context, every settlement agreement will usually contain at least one “discontinuance supply”.

54) The ruling considers that most cases where the only supply is a “discontinuance supply” will involve the settlement of a claim for damages. In that context, the Commissioner’s view is that the payment will be treated as a payment of damages and will not be consideration for a supply at all, regardless of whether there is an identifiable discontinuance supply under the settlement. The ruling does leave some room to apply GST to a ‘discontinuance supply’, but only if “there is overwhelming evidence that the claim which is the subject of the dispute is so lacking in substance that the payment could only have been made for the discontinuance supply”.

The impact of the decisions in Qantas and Reliance Carpet

55) The approach of the Commissioner in the ruling is to look at the “substance and reality” of the transaction and to effectively ignore “discontinuance supplies” where the parties enter into a settlement to resolve a claim for damages. However, the decision of the High Court in Qantas and the way the Commissioner argued the appeal (and also the appeal in AP Group) raise real doubt as to whether that approach can be maintained.

56) The decisions of the High Court in Reliance Carpet and Qantas make it clear that in determining whether there is a taxable supply, the statutory test prescribed by ss 9-5(a), 9-10 and 9-15 of the GST Act is to be followed. Looking to the words of the sections, the statutory test is to:

a)     identify a supply;

b)    identify a payment; and

c)     identify a “connection” between the two, so that the payment represents consideration “in connection with” the supply.

57) Where a settlement agreement is entered into, each of these elements is arguably satisfied, regardless of whether an “earlier supply” or a “current supply” can be identified. The discontinuance supply made by the defendant falls within the broad definition of “supply” in s 9-10 (as acknowledged in the Ruling at [68]-[70]). The payment under the settlement agreement acts to bind the parties to the contract (being contract law consideration) and is directly connected to the supply made by the defendant upon entry into the settlement agreement – in Qantas, the High Court referred to “the supply by reason of the making of the contract of carriage upon payment of the fare” (emphasis added). That the consideration may also be connected with something that is not a supply (eg, a claim for damages) or that the “subject matter” of the settlement agreement is a claim for damages is arguably not relevant.[31]

58) This effectively means that all payments made under settlement agreements will be consideration for a taxable supply (being the discontinuance supply) made by the recipient, regardless of whether an “earlier supply” or a “current supply” can be identified and regardless of whether the payment is solely to resolve a claim for damages. This is because in all cases the settlement payment will be connected with “the supply by reason of the making of the contract” – being the discontinuance supply.

59) Given that this outcome directly conflicts with the views of the Commissioner in a public ruling, it is important to investigate this issue further.

60) The following matters arise for discussion.

a)     Is the payment under the settlement agreement “in connection with” the discontinuance supply?

b)    Should the discontinuance supply be ignored because the payment is “for” the damages claim?

c)     Is the payment in the nature of damages, and therefore excluded from the definition of “consideration”?

Is the payment under the settlement agreement “in connection with” the discontinuance supply?

61) Whilst the High Court observed that the word “for” in the phrase “supply for consideration” does not adopt contractual principles, where parties look to enter into contractual arrangements the consideration will operate to bind the parties. In such circumstances, it is difficult to see how that consideration is not “in connection with” with those supplies made by the recipient upon entry into the contract.

62) Support for this view is found in the following observation of the High Court in Reliance Carpet when characterising the deposit (at [33]):

First, as to consideration. The payment of the deposit by the purchaser to the taxpayer was “in connection with” a supply by the taxpayer, within the meaning of the definition of “consideration” in s 9-15(1)(a) of the Act. That connection is readily seen from the circumstance that, with the receipt of the written notice of the exercise of the option by the purchaser, and by force of cl 5 of the Option Agreement, the payment of the deposit obliged the parties to enter into the mutual legal relations with the executory obligations and rights laid out in the Contract.

63) As discussed above, in Qantas the High Court referred to “the supply by reason of the making of the contract of carriage upon payment of the fare” (emphasis added). In Reliance Carpet, the rights and obligations supplied to the purchaser by reason of the making of the contract included the obligation to transfer title to the purchaser upon payment of the balance of the purchase price and certain other obligations, such as to maintain the property in its present condition. In Qantas the rights and obligations supplied to the customer by reason of the making of the contract did not include the promise of a flight, but those rights and obligations (being at least a promise to use best endeavours to carry the passenger) nevertheless constituted a taxable supply for which the fare was consideration.

64) The approach of the High Court in Reliance Carpet and Qantas was to focus on the specific provisions in ss 9-5, 9-10 and 9-15[32] to establish the existence of a taxable supply. Adopting that approach, the scope of the statutory test is limited to identifying an act which falls within the broad definition of “supply”, identifying a payment and identifying a connection between the two.

65) The Commissioner’s written submissions in Qantas appear to be consistent with that approach (footnotes omitted) (emphasis added):

20. …[The fare] was received on or pursuant to the making of a contract between Qantas and a customer, by which Qantas supplied rights, obligations and services additional to the flight which was to have been provided. Each comprised “payment…in connection with a supply” of those rights, obligations and services, which was thereby a taxable supply attributable to that period.

36. The creation of those rights on the making of the contract, and the making of the reservation, are each included in the definition of a “supply” in subsection (1) of s 9-10 (“any form of supply whatsoever”) and in paragraphs (b), (e), (g) and (h) of subsection (2). As the unused fares were received in connection with the making of the contract and reservation, they comprise “consideration” (s 9-15(1)) for the supply of the rights and reservation, which is thus a taxable supply (s 9-5).

41. The statutory question posed by ss 9-75 and 9-15 is whether there was a supply of anything for which the unused fares were consideration (ie, in connection with which they were paid).

66) In the context of a settlement agreement, the statutory question would be whether there was a supply of anything for which the payment was consideration (ie, in connection with which they were paid). Taking such a prescriptive approach to the statutory test posed in ss 9-5, 9-10 and 9-15, it is difficult to see how the payment is not “connected” to a discontinuance supply made on entry into the contract.

Should the discontinuance supply be ignored because the payment was “for” damages?

67) The basis for the Commissioner’s view in the ruling that a “discontinuance supply” will generally not give rise to a taxable supply appears to be that the payment is “for” the damages claim and no part of the consideration is “for” the discontinuance supply. On this basis, the discontinuance supply is effectively ignored. As stated in paragraph [107] of the ruling:

In most instances, a ‘discontinuance’ supply will not have a separately ascribed value and will merely be an inherent part of the legal machinery to add finality to a dispute which does not give rise to additional payment in its own right. They are in the nature of a term or condition of the settlement, rather than being the subject of the settlement.

68) Paragraphs [106-7] of the ruling appear to justify disregarding the existence of the discontinuance supply by relying on the following factors:

a)     The discontinuance supply is not the “subject of the settlement”.

b)    The discontinuance supply has no separately ascribed value.

The “subject matter” of the transaction

69) As outlined above, the genesis of the search for the “subject matter” of a transaction in the context of GST is found in the principles established in the VAT regime in the UK and Europe.[33]

70) The High Court in Qantas appears to have rejected that approach (at least where the question is one of identifying whether there is a supply for consideration). The Commissioner’s written submissions to the High Court were to the same effect (footnotes omitted):

43. The Full Court justified its answer on the ground that “the actual travel was the relevant supply, and if it did not occur there was no taxable supply”. It embellished the premise by adding that the flight was “the essence, and sole purpose, of the transaction. The prospective supply is of air travel, dare we say, in the face of Reliance Carpet (at [13]), ‘nothing more or less’.”

44. None of these terms appears in the GST Act, and there is no warrant for importing them. What the Act does say is that “a supply is any form of supply whatsoever”, that “consideration includes any payment … in connection with a supply of anything”, and that a taxable supply is (relevantly) one made for consideration. There is no basis for limiting words of such explicit breadth by notions of essence, purpose or “relevance”.

71) In light of the above, the ruling’s focus on “the subject of the settlement” would now appear to be misplaced. The focus of the statutory test in ss 9-5, 9-10 and 9-15 is solely on identifying a supply and also consideration, being any payment in connection with a supply of anything.

No separately ascribed value to the discontinuance supplies

72) The ruling’s reliance on the discontinuance supply not having a separately ascribed value would also now appear to be misplaced.

73) Applying the statutory test in ss 9-5, 9-10 and 9-15, there is no requirement that the consideration reflect, or bear any correlation to, the value of the supply to which it is connected. It is sufficient that there is a “connection” between the supply and the payment and any disparity between the value of the supply and the payment is irrelevant. This is illustrated by Qantas where the fare would be unlikely to equate to the value of the supply made.[34] This is also reflected in the Commissioner’s written submissions to the High Court (footnotes omitted):

29. It is not necessary for taxpayers to value what is supplied, nor to identify whether there is more than one component of the supply (or more than one supply) in connection with which the consideration is paid, nor to allocate the consideration among any such components…it is the payment of consideration which determines when, and how much, GST must be paid.

74) In the context of settlement agreements (where there are no earlier or current supplies and the settlement is of a damages claim), the fact that no value was ascribed to the discontinuance supplies or that the value of those supplies was negligible and bore no relation to the payment made arguably has no relevance to “the statutory question” posed by ss 9-5, 9-10 and 9-15. It is sufficient that there is a supply “of anything” and that the supply is connected to a payment.

Is the payment under the settlement agreement in the nature of “damages” and therefore not consideration?

75) Where a settlement agreement is entered into to resolve damages claims, the payment may properly be labeled as “in the nature of damages”. However, this does not prevent the payment also falling within the definition of “consideration” in s 9-15. So much was acknowledged by the Commissioner in GSTR 2011/3 at paragraph 64.

76) In Reliance Carpet the taxpayer contended that the forfeited deposit was received by it “in the nature of damages”, with the consequence that there was no “supply” in connection with the forfeited deposit. The High Court rejected this contention, noting that no action had been taken by the taxpayer to recover any alleged damages for failure to complete the contract.

77) The High Court therefore did not expressly address the question of whether a payment that was “in the nature of damages” could also be “consideration”. However, the judgment appears to support that conclusion. The High Court made the following observation after reviewing the various characteristics of a deposit (at [28]):[35]

The circumstance that the deposit forfeited to the taxpayer had various characteristics does not mean that the taxpayer may fix upon such one or more of these characteristics as it selects to demonstrate that there was no taxable supply. It is sufficient for the Commissioner’s case that the presence of one or more of these characteristics satisfies the criterion of “consideration” for the application of the GST provisions respecting a “taxable supply”.

78) Applying this approach, it is sufficient if one of the characteristics of a payment made under a settlement agreement entered into to resolve a damages claim satisfies the criterion of “consideration” – ie, it is a payment “in connection with” a supply made under the settlement agreement. It does not matter if another characteristic (or even the primary purpose) of the payment is that it is in the nature of damages.

Conclusion

79) In Reliance Carpet the Tribunal declined to pay regard to overseas authorities, particularly those in the UK which have sought to characterise transactions by reference to the “substance and reality” of the transaction, and rather focused on the words of sections 9-5, 9-10 and 9-15 to determine whether the taxpayer had made a “supply for consideration”. That approach was ultimately approved of by the High Court on appeal and again, some 6 years later, in Qantas.

80) At least where the question is whether there is a supply “at all” for which a payment is consideration, it is arguable that there is no scope to identify the “essence” or “purpose” of a transaction and regard must be had to the statutory test established by sections 9-5, 9-10 and 9-15. That certainly appears to be the view of the Commissioner.

81) The unresolved question is the impact of this approach. Where a payment is made to bind the parties to a contract, it is difficult to see how that payment is not connected with a supply made by the recipient upon entry into the contract (for example, the entry into obligations to perform the contract or to do other things). Such an outcome may have a real impact on the way GST is applied to contracts. A ready example is the view of the Commissioner in GSTR 2001/4 that the existence of a “discontinuance supply” as part of an out-of-court settlement to resolve a damages claim will not give rise to a taxable supply.

82) It is likely that the forthcoming appeal to the Full Federal Court in AP Group will provide some guidance on this difficult issue.

 

Dated: 12 April 2013

Christopher Sievers

Lonsdale Chambers


[1] City of Calgary v Canada [2012] SCR 689.

[2] Director General, Mauritius Revenue Authority v Central Water Authority (Mauritius) [2013] UKPC 4.

[3] The Full Federal Court approved of the findings of Conti J at first instance: [2005] FCA 1892; (2005) 149 FCR 41.

[4] Case note, Australian GST Journal, December 2012 Volume 12/4 at p.163.

[5] Both parties have appealed this decision to the Federal Court. The appeal is scheduled to be heard before a Full Court in the sittings commencing 29 April 2013.

[6] Date of hearing: 22 August 2005; Date of judgment: 22 December 2005.

[7] Date of hearing: 28 April 2006; Date of judgment: 5 June 2006.

[8] Being the real estate contract at issue in Reliance Carpet and the airline booking at issue in Qantas.

[9] Being the deposit paid in Reliance Carpet and the fare paid in Qantas.

[10] Date of hearing: 10 November 2005; Date of judgment: 10 July 2006.

[11] The A New Tax System (Goods and Services Tax Transition) Act 1999 (Cth). The Commissioner was not a party to the proceeding at first instance, but successfully applied to be added as a respondent to the appeal.

[12] Date of hearing: 15 August 2006; Date of judgment: 20 December 2006.

[13] Gyles J agreed with the judgment of Stone J. Young J also agreed with Stone J and made some additional observations.

[14] Date of hearing: 13 February 2007; Date of judgment 5 July 2007.

[15] Date of hearing: 23 July 2007; Date of judgment: 18 October 2007.

[16] Date of judgment: 22 May 2008.

[17] Date of hearing: 22 May 2009; Date of judgment: 29 September 2009.

[18] Travelex Limited v Commissioner of Taxation [2008] FCA 1961

[19] Stone and Edmonds JJ, Mansfield J dissenting.

[20] Date of judgment: 29 September 2010.

[21] Date of hearing: 10 November 2010; Date of decision: 6 December 2010.

[22] Either because the passenger was not entitled to a refund of the fare, or where the fare was fully refundable the passenger did not claim a refund.

[23] Date of hearing: 24 May 2011; Date of decision: 1 September 2011.

[24] Stone J agreed with the judgment of Edmonds and Perram JJ.

[25] Date of hearing: 30 April 2012; Date of judgment: 2 July 2012.

[26] The Commissioner’s written submissions were filed with the High Court on 9 March 2012. The hearing in AP Group took place on 30 April 2012.

[27] The application was heard by the Tribunal on 30 April – 3 May 2012 and the decision was handed down on 2 July 2012. The appeal in Qantas was heard on 4-5 June 2012 and the decision was handed down on 2 October 2012.

[28] Date of judgment: 2 October 2012.

[29] Gummow, Hayne, Kiefel and Bell JJ. Heydon J dissented.

[30] TAB Ltd v Commissioner of Taxation [2005] 223 ALR 309.

[31] In GSTR 2003/11 the Commissioner acknowledges (at [64]) that an amount can have both the character of damages, a penalty or compensation and also be consideration in connection with a supply.

[32] The majority of the High Court (at [12]) found that Qantas (and by implication the Full Court) insufficiently appreciated these specific provisions.

[33] Card Protection Plan at 202 per Lord Slynn; Beynon at 1100-1101 [31] per Lord Hoffman; College of Estate Management v Customs & Excise Commissioners [2005] 4 All ER 933 at 944-5 [28]-[29] per Lord Walker.

[34] Being “at least a promise to use best endeavours to carry the passenger and baggage, having regard to the circumstances of the business operations of the airline”: at [33].

[35] In Qantas the majority of the High Court (at [26]) referred to these observations.

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