This paper was presented at the 2016 GST Symposium at the Sheraton Mirage on Thursday 11 February 2016.

Introduction

In Secretary to the Department of Transport (Victoria) v Commissioner of Taxation [2009] FCA 1209; (2009) 73 ATR 690 Gordon J (as her Honour then was) observed (at [28]) that the two central concepts of the GST Act[1] are “supply” and “acquisition”.

The importance of these concepts can be illustrated as follows:

• Identifying a supply and the supplier facilitates the identification of the party liable to pay GST, depending on whether the supply is taxable,[2] GST-free or input taxed.
• Identifying an acquisition and the acquirer facilitates the identification of the party that may be entitled to input tax credits, depending on whether the acquisition is of taxable supply and whether that entity has paid, or is liable to pay, the consideration for the supply.[3]

In a two-party transaction, identifying the supply and the acquisition (and the supplier and the acquirer) is usually straightforward. Party A makes a supply to party B in return for consideration. If the supply is a taxable supply, A pays GST and B is entitled to input tax credits if the conditions in s 11-5 are satisfied. However, in an arrangement involving more than two parties (referred to hereinafter as a “tripartite agreement”), the process is often more difficult. For these arrangements, two major difficulties may arise:

• What is being supplied and by who?
• Who is making an acquisition and can the acquirer claim input tax credits? A tripartite agreement can lead to irrecoverable GST where the entity that pays for a taxable supply is does not acquire the supply.

This paper reviews a number of authorities in the United Kingdom and in Australia dealing with tripartite agreements and endeavours to derive a number of general propositions that may be applied when considering tripartite agreements in the context of the GST Act. While caution must be had when referring to overseas authorities on taxation issues, it does appear that the Federal Court has been guided by a number of decisions of the higher Courts in the United Kingdom and has adopted a number of propositions that are consistent with those decisions.

It is clear that there is no single test and each arrangement must be considered in light of its own particular facts. Nevertheless, I consider that these propositions provide a useful roadmap for approaching tripartite agreements. Further, identifying the contractual position will usually be a sensible starting point and in most cases will provide the answer. However, that may not always be the case, and one may be required to consider the “economic” or “practical” reality of the arrangement.

The United Kingdom Experience – from Redrow to Adecco

Adecco UK Ltd v Revenue & Customs [2015] UKFTT 600

A review of the authorities in the United Kingdom illustrates the difficulties with applying the VAT to tripartite agreements. Rather than simply providing a historical review of these authorities, I have found it instructive to consider the UK experience through the eyes of the First Tier Tribunal in the recent decision in Adecco UK Ltd v Revenue & Customs [2015] UKFTT 600.[4]

Adecco provided “temps” to clients, being persons who were on the books of Adecco but were not considered to be employees. The Tribunal had to decide whether the applicant was liable to pay VAT on the full charge paid by its clients for the services of the temps or only on the element of the charge retained by Adecco (i.e. the commission or gross profit element). As observed by the Tribunal (at [8]), the question for the Tribunal was simple in essence. What did Adecco supply to its clients? The answer was not so easy.

The Tribunal ultimately found that Adecco was liable to pay VAT on the whole charge, but doing so required a decision running to some 314 paragraphs, taking the reader on a detailed journey through various decisions in the United Kingdom that have considered how VAT applies to tripartite agreements.

The factual background was as follows:

• Adecco introduced the temps to clients looking for a temporary worker to undertake an assignment.  The temps were not obliged to accept any assignment offered and Adecco was not obliged to find them an assignment.  Nevertheless, Adecco undertook to pay the temps for the work they did for Adecco’s clients.  Adecco’s payment by its clients was periodic and normally calculated as an amount representing the payment Adecco must make to and on behalf of the temp plus a commission element.
• Adecco accounted for VAT on the full charge paid by its clients for the services of the temps – i.e., it accounted for VAT both on the element of the charge paid by the client which was equivalent to or represented the wages paid to the temp (including amounts paid in tax) and it accounted for VAT on the element of the charge effectively retained by itself (ie the commission or gross profit element).
• In March 2011 the First Tier Tribunal handed down its decision in Reed Employment Ltd [2011] UKFTT 200 where the Tribunal found that the employment bureau appellant in that case providing temps to its clients was making a supply of introductory services to its clients in return for its commission.  It was therefore not liable to account for VAT on the element of the charge representing the wages which it received from its clients and paid to the temps. The Revenue did not appeal that decision. Following this decision, Adecco requested a refund of GST. The Revenue rejected the claims, on the basis that Adecco supplied the services of the temps and was not merely supplying the service of introducing temps to its clients.

The contractual position

The Tribunal observed (at [89]) that while the contractual position may not determine the direction of the VAT supply, it is the starting point when determining whether and to whom and of what a supply is made. In this context, the conclusions of the Tribunal as to the contractual position under the arrangement were as follows:

• On assignment, the temp did the job that the client asked he or she to do and all the day to day contact by the temp was with personnel of the client. However, both parties accepted that there was no contract, actual or implied, between the temp and the client.
• Under its contract with the temp, Adecco was liable to pay the temp the agreed payment for its services in undertaking the assignment for the client.  The client had no contractual obligation with either the temp or Adecco to pay the temp for its work in undertaking the assignment.  The client’s only obligation to pay for the work was an obligation to pay Adecco the agreed fee. In other words, under the contracts, the client was obliged to pay Adecco for the work, and Adecco was obliged to pay the temp for the work.

The taxpayer’s characterisation of the contractual arrangements was essentially that Adecco merely introduced the temps to its clients and received only the commission in its own right (the wages element were paid to it as a disbursement). The Tribunal rejected this characterisation and observed as follows:

If Adecco merely introduced the temp to its client, it would be for the client to enter into a contract with the temp to take him on as a worker, and if the client did so, then the client would have a direct obligation to the temp to pay him for the work.  It is a very different position where the contracts between Adecco and its clients are such that the client gets the benefit of the work of the temp but without any contractual relationship with the temp and without any obligations to the temp and in particular without the obligation to pay the temp for the work. Instead, the temp’s contractual relationship is with Adecco.  So Adecco was not merely providing introductory services, indeed it was not really providing introductory services at all:  it was not introducing persons with the intention that those persons enter into a legal relationship.  What the client got was workers who would carry out the assignments but to whom it owed no responsibilities such as payment; Adecco supplied the work of the workers, not an introduction to them.

The concept of simply providing “introductory services” will likely be important for enterprises such as Uber and AirBnB which appear to characterise their contractual arrangements as merely introducing the service provider (be it a driver or a room owner) to a member of the public, who is then free to enter into a contractual relationship with the service provider (or not) – meaning that GST will only be payable on the fee retained by the facilitator and not on the entire payment received from the customer.

The lack of any contractual relationship between the temps and the clients appeared to be fatal to Adecco’s claim. However, the Tribunal accepted that its conclusions on the contractual position did not necessarily dictate the VAT position. The question to be addressed was whether the economic realities of the whole situation meant that the contractual position did not reflect the VAT supply position.

The economic reality

Adecco contended that the “economic reality” of what Adecco was doing under the contracts was providing a service of introducing candidates for temporary roles to its clients and that its consideration for doing this was the commission element of the payment paid by its client – the element which represented wages which the company passed on to the temp was not consideration for any supply made by Adecco.

The taxpayer’s case on economic reality was based on the following factors:

• There was no mutuality of obligation between Adecco and the temp worker; in particular Adecco was not obliged to find work for the temp to carry out and nor was the temp obliged to accept any offered;
• Where a temp did accept the work offered, the temp was under the control, direction and supervision of the client and not Adecco;
• Other factors such as (a) Adecco did not review appraise or discipline the temp workers; (b) Adecco had no exclusivity over the temp and (c) the client appraised Adecco on the basis of its introductory service and not on the basis of the temp’s performance.

The Tribunal ultimately rejected Adecco’s contentions, but in coming to this view the Tribunal conducted a detailed review of the leading authorities on VAT and tripartite agreements.

Commissioners of Customs and Excise v Redrow Group Plc [1999] UKHL 4; [1999] 2 All ER 13 (“Redrow”)

Redrow was a builder of new houses. It wanted to sell its houses to home owners who had existing property to sell. Redrow promised potential buyers that it would pay the estate agents fees for selling their previous home when they bought a new home built by Redrow. Redrow contracted with the estate agent to pay its fees for selling the buyer’s house if the buyer went ahead with the purchase of the new home.

The question was whether Redrow was entitled to recover VAT in respect of the amount paid to the estate agent. The House of Lords found that the answer was yes.

Lord Millet observed that the Commissioner described the services in question as the ordinary services of an estate agent instructed to market and sell his client’s house – these services were supplied to the householder. The Commissioner conceded that the taxpayer derived a benefit from the services supplied by the agent and was accordingly prepared to pay for them – but that was said to be irrelevant as the question was to whom did the agent supply his services, not who derived a benefit from them. His Lordship considered that the Commissioner’s approach begged the question to be decided as the way in which the Commissioner described the services dictated the answer. The proper approach was as follows:

… one should start with the taxpayer’s claim to deduct tax.  He must identify the payment of which the tax to be deducted formed part; if the goods or services are to be paid for by someone else he has no claim to deduction.  Once the taxpayer has identified the payment the question to be asked is: did he obtain anything – anything at all – used or to be used for the purposes of his business in return for that payment? This will normally consist of the supply of goods or services to the taxpayer. But it may equally well consist of the right to have goods delivered or services rendered to a third party. The grant of such a right is itself a supply of services.

Applying this approach, his Lordship found that the taxpayer did not merely derive a benefit from the services supplied by the agent to the householder, it obtained a contractual right to have the householder’s homes valued and marketed, to monitor the agent’s performance and maintain pressure for a quick sale, and to override any alteration in the agents’ instructions which the householders might be minded to give. The doing of those acts constituted a supply of services to the taxpayer.

In Adecco the Tribunal referred to this approach as to “follow the money”, meaning that the person who is liable to pay the consideration receives the supply. With respect to the Tribunal, this may over-simplify the statement of Lord Millet extracted at paragraph [18)] above. What his Lordship appears to have been saying was that liability to pay was a pre-requisite to the recovery of the VAT, but that this was not necessarily sufficient. Implicit in this statement is that the acceptance of a mere liability to pay without receiving any supply in return (ie, third party consideration) would not be sufficient. The decisions in Australia (discussed below) are consistent with that view.

Loyalty Management/Aimia v Revenue & Customs [2013] UKSC 15; [2013] 2 All ER 719 – Supreme Court

Retailers contracted with LMUK to be a part of the LMUK ‘nectar’ scheme which gave rewards to loyal customers.  Retailers could buy ‘points’ from LMUK to issue to their customers.  LMUK contracted with ‘redeemers’ to provide goods and services in exchange for the points cashed in by the retailer’s customers.

It was accepted that the payments to LMUK by the retailers were subject to VAT as being payments in consideration of a taxable supply of services of participation in the loyalty scheme. The issue was whether the payments by LMUK to the redeemers were for a taxable supply made to LMUK. LMUK contended that these payments were consideration for the redeemers supply to it of the services for which it had contracted with them. The Commissioner contended that the payments were third party consideration for the redeemer’s supply of goods and services to customers and no input tax credits were deductible by LMUK.

The Tribunal initially agreed with LMUK. The High Court allowed the appeal by the Revenue. The Court of Appeal allowed the appeal of LMUK.[5] In doing so, the Court regarded Redrow as being authority for two propositions:

• A supplier could be treated as making, in the same transaction, both a supply of services to one person and a supply of different services to another person; and
• In addressing a claim for input tax by one of those persons, the relevant questions were (1) whether that person had made a payment to the supplier, (2) whether the payment was consideration for the services supplied to him, and (3) whether the services were used or to be used in the course of a business carried on by that person.

The Court of Appeal observed that it could be said that when a customer received goods and services from a redeemer, the redeemer made two different supplies – one was the supply of goods and services to the customer, the other was the supply to LMUK of the services of providing the rewards to the customer.

The Revenue appealed to the House of Lords, which referred the matter to the CJEU for a preliminary ruling. The CJEU joined the reference with another case, Baxi Group Ltd v Commissioners for Her Majesty’s Revenue and Customs [2008] STC 491, which concerned a loyalty scheme of a different character. The CJEU made its ruling in Commissioners for Her Majesty’s Revenue and Customs v Loyalty Management UK and Baxi Group Ltd (Joined Cases c-55/09 and C-55/09) [2010] STC 2651. The Court answered the question as follows:

Payments made by the operator of the scheme to redeemers who supply loyalty rewards to customers must be regarded, in Case C-53/09, as being the consideration, paid by a third party, for a supply of goods to those customers or, as the case may be, a supply of services to them. It is, however, for the referring court to determine whether those payments also include the consideration for a supply of services corresponding to a separate service.

The decision of the Supreme Court

Upon its return to the Supreme Court (which replaced the House of Lords), the Revenue contended that the findings of the Court of Justice were incompatible with the Redrow line of authorities. The majority dismissed the Revenue’s appeal and upheld the decision of the Court of Appeal. Further, the majority did not accept that Redrowwas wrongly decided and instead it considered that the CJEU in LMUK had been asked, and answered, the wrong question.

What the majority did say was that, while Redrow was correctly decided, Lord Millet’s proposition outlined above at paragraph [17)] did not amount to an absolute rule – a consideration of economic realities was also a fundamental criterion for the application of VAT. Lord Reed stated as follows:

[67] …it is also necessary to bear in mind that consideration paid in respect of the provision of a supply of goods or services to a third party may sometimes constitute third party consideration for that supply, either in whole or in part.  The speeches in Redrow should not be understood as excluding that possibility.  Economic reality being what it is, commercial businesses do not usually pay suppliers unless they themselves are the recipient of the supply for which they are paying (even if it may involve the provision of goods or services to a third party), but that possibility cannot be excluded a priori.  A business may, for example, meet the cost of a supply of which it cannot realistically be regarded as the recipient in order to discharge an obligation owed to the recipient or to a third party.  In such a situation the correct analysis is likely to be that the payment constitutes third party consideration for the supply. 

After reviewing this decision, the Tribunal asked the question – where does the Supreme Court’s decision in LMUKleave the appeal in this case? The Tribunal noted that the economic reality in LMUK was found to be consistent with the contracts into which LMUK had entered.  So the VAT analysis followed the contracts. However, the implication of the Supreme Court decision was that in some tripartite instances the application of economic reality would mean that the direction of the supply would not always follow the contracts and the legal liability to pay.

WHA v Revenue and Customs [2013] UKSC 24; [2013] 2 All ER 907 – Supreme Court

An insurance company (NIG) offered breakdown insurance to purchasers of second hand cars. NIG reinsured 100 per cent of its risk to a group company called Crystal in Gibraltar, which in turn reinsured 85 per cent of that risk to another Gibraltan company called Viscount. Viscount entered into a claims handling arrangement with WHA, a group company in the UK, pursuant to which WHA agreed to handle all claims and entered into agreements with garages to provide for payment of repairs undertaken pursuant to the insurance.

The arrangement was part of a complicated scheme to avoid VAT, so that WHA could recover the input tax paid to the garages. The question addressed by the Supreme Court was whether the garages made a supply of repair services to WHA or to the owner of the car.

The Commissioner contended that the garages were making supplies to the owners and the payments by WHA were merely third party consideration. The Supreme Court agreed.

The Supreme Court noted that under the contract of insurance, NIG undertook to the insured that it would meet the cost of repair – NIG did not undertake to repair the vehicle. In this context, if NIG was to perform its contact by paying the repair bill, it would be an example of third party consideration for a supply – meaning consideration for a supply which the person providing the consideration does not himself receive, but which he pays for, in this example, to discharge an obligation owed to the recipient of the supply. The interposition of WHA did not change this position. The economic reality was that when WHA paid for the repairs it merely discharged NIG’s obligation to the insured to pay for the repaid. As noted by the Court:

The interposition of WHA does not, by some alchemy, transmute the discharge of the insurer’s obligations to the insured into the consideration for a service provided to the reinsurer’s agent.

The Supreme Court considered that this conclusion was consistent with the guidance given in Redrow where Lord Hope asked “Did he obtain anything – anything at all – used to be used for the purpose of his business in return for that payment?” That question was to be understood as being concerned with a realistic appreciation of the transactions in question. So understood, it was plain that WHA did not obtain anything in return for the payment to the garage which was used for the purpose of its business. WHA’s business was the making of the payment.

The Supreme Court (at [27]) observed that the contractual position is “the most useful starting point” but is not conclusive of the taxable supplies being made between the participants in the arrangements. The Supreme Court (at [26]) made the following observation with regards to the scope of the enquiry (emphasis added):

As was also noted in the Aimia case at para 38, the case-law of the Court of Justice indicates that, when determining the relevant supply in which a taxable person engages, regard must be had to all the circumstances in which the transaction in question takes place. Furthermore, as Lord Walker explained in Aimia at paras 114-115, in cases where a scheme operates through a construct of contractual relationships, as in the present case, it is necessary to look at the matter as a whole in order to determine the economic reality. Accordingly, although the transaction of particular importance is that between the garage and WHA, it has to be understood in the wider context of the arrangements between the insured, NIG, Crystal, Viscount and WHA and the garage.

The Tribunal considered that WHA was a case where the Court’s answer resulted in the VAT supply not correlating with the contract.  In WHA the contract was between WHA and the garage; but the supply was found to be between the garage and the owner of the car.  Yet the owner of the car had no obligation to pay the garage for the repair in so far as it was covered by the insurance policy.

The Tribunal considered that it was superficially difficult to distinguish Redrow from WHAon the facts: in both cases there was a tripartite contract under which the “non-owner” was liable to pay for the services, and the owners (in Redrowof the house, and in WHA of the car) were not liable to pay for the services from which they would benefit – yet the House of Lords/Supreme Court reached diametrically opposite conclusions without the Supreme Court overruling the earlier decision of the House of Lords.  The quandary in which this left the Tribunal was described as follows (at [267]):

But how does a tribunal know when to apply the ‘follow the liability to pay’ rule in Redrow/Tolsma/Aimia  and when to apply the ‘economic reality’ rule in Baxi and WHA?

The Tribunal’s answer to that question was as follows (at [270]):

My analysis of the situation is therefore that the Tolsma/Redrow/Aimia ‘follow the liability to pay’ rule is the default rule under which the VAT supply will follow the contracts and that rule applies in tripartite situations unless the economic reality is inconsistent with the contractual position. 

The Tribunal considered that this approach explained the decision in The final consumer of the repair work was the owner of the car, the insured party, but there was no contract with the insured under which the work of repair (for which the insured was indemnified) was carried out.  Economic reality did not match the contracts, so the VAT supply route did not match the contracts.  Following economic reality, the supply was to the insured party and not to WHA, who had the contractual liability to pay for it.

Airtours Holidays Transport Ltd v Revenue and Customs [2014] EWCA Civ 1033 – Court of Appeal

A company (in financial difficulties and owing banks large sums of money) entered into an arrangement under which a professional services firm (PWC) agreed to supply the service of reviewing the company’s restructuring plan and to provide a report on it to creditor banks.  The company was liable to pay PwC’s contract fee.

The question the Court of Appeal considered was to whom did PwC supply their professional services?  Having regard to the various cases decided in the area, including the Supreme Court in LMUK and WHA and the House of Lords in Redrow, the relevant principles were set out by the dissenting Judge as follows (at [37])[6]:

• Consideration of economic realities is a fundamental criterion for the application of the VAT as regards the identification of the person to whom services are supplied.
• Decisions about the application of VAT are highly dependent upon the factual situations involved – a small modification of the facts can render the legal solution in one case inapplicable to another.
• When determining the relevant supply in which a taxable person engages, regard must be had to all the circumstances in which the transaction or combination of transactions takes place. In cases where a scheme operates through a construct of contractual relationships, it is necessary to look at the matter as a whole to determine its economic reality. The relevant contracts have to be understood in the wider context of the totality of the arrangements between the various participants.
• The terms of any contract between the parties, whilst an important factor to be taken into account in determining whether a supply of services has been made, are not necessarily determinative of whether as a matter of “economic reality” taxable supplies are being made as between any particular participants in the arrangements – however the contractual position is generally the most useful starting point for the VAT analysis.
• There may, as a matter of analysis, be two or more distinct supplies within the same transaction. Moreover, a single course of conduct by one party may constitute two or more supplies to different persons.
• The mere fact that a taxpayer has paid for a service does not necessarily mean that it has been supplied to him.

The Revenue contended that the economic reality was that the services were being provided to the banks and not to the taxpayer, who was merely giving third party consideration. Further, the taxpayer received nothing of value from PwC – the taxpayer had no right to require PwC to provide the services and there was no contractual obligation on PwC to provide the services to the taxpayer. It was not sufficient that the appellant might incidentally or consequently have benefitted from the services.

The decision of the majority was that the company did not engage with PwC to provide a report to the banks – on the contrary the banks contracted with PwC to provide them with the report. The language of the letter of engagement was not consistent with the conclusion that PwC undertook an obligation to the taxpayer to provide the services to the banks. The taxpayer’s participation in the contract was limited to incurring an obligation to pay for the services provided by PwC to the banks. The taxpayer therefore provided third party consideration. In coming to this view, the majority (at [99]) observed that:

the question…is not whether the Group needed the report to be produced or whether it obtained a benefit as a result of its production, but whether in producing it PwC were providing a service to the Group for which the Group paid.

The dissenting Judge found that the case was like Redrow, being a case where two distinct supplies of services were provided by PwC within the same overall transaction –the supply by PwC to the banks of the “services” set out in the Engagement Letters and the supply by PwC to the taxpayer of the service of having PwC reporting on the relevant matters to the bank. In this context, Airtours had a contractual right to require PWC to provide the services to the banks.

The Tribunal considered that that decision of the majority was consistent in outcome (if not reasoning) with LMUK and

Conclusions of the Tribunal in Adecco

The Tribunal observed that Adecco saw the economic reality of the arrangement as being that the temp’s work was actually consumed by the client, as indeed it was. However, the Tribunal was of the view that Adecco missed the point – economic reality only ‘trumps’ the rule that supplies follow the same route as the legal liability to pay where that route differs from the economic reality.  In LMUKand Airtours, the person who had the liability to pay for the thing consumed was not the person who consumed the thing. So the legal liability to pay differed from the economic reality of consumption.  Here, on the contrary, the client consumed the temp’s work, but alsohad the liability to pay for the temps work.  It did not matter that that liability to pay was owed to Adecco and not to the temps.  Properly understood, WHA and Airtours did not assist the appellant.

Ultimately, the Tribunal concluded that the economic reality did match the contractual position. At [306] the Tribunal concluded as follows:

The point is that the economic reality which matters for VAT purposes is the identity of the final consumer.  If the final consumer is not the person with liability to pay for the thing consumed, whether goods or services, then economic reality does not match the contractual position.  Here Adecco’s client is the final consumer of the work undertaken by the temps, for all the reasons give by the appellant:  but under the contracts Adecco’s client does have liability to pay for the work it consumes.  So economic reality is consistent with the contracts.

The Australian Experience

In this paper I have considered the following decisions of the Federal Court and the Full Federal Court:

• Secretary to the Department of Transport (Victoria) v Commissioner of Taxation [2009] FCA 1209 (Gordon J), and on appeal [2010] FCAFC 84; (2010) 188 FCR 167 (Kenny and Dodds-Streeton JJ, Jessup J dissenting);[7]
• ATS Pacific Pty Ltd v Commissioner of Taxation [2013] FCA 341 (Bennett J), and and on appeal [2014] FCAFC 33; [2014] ATC 20-449 (Edmonds, Pagone and Davies JJ);[8] and
• Professional Administration Service Centres Pty Ltd v Commissioner of Taxation [2013] FCA 1123 (Edmonds J).

Department of Transport

The Department administered the “Multi Purpose Taxi Program” (MPTP), which provided a 50% subsidy of the metered taxi-cab fare for disabled Victorian residents. Under the program, the member paid the metered fare less the subsidy and the Department paid the subsidy to the taxi-cab operator. The taxi-cab operator paid the GST on the whole fare. The question was whether the Department was entitled to input tax credits in respect of the subsidy paid to the taxi-cab operator.

Decision of Gordon J at first instance

Her Honour’s summary of the applicable principles included the following ([at [42]):

• The concepts of taxable supply and acquisition are related. In other words, a taxpayer makes an acquisition if the taxpayer is the recipient of the supply. As a result, to determine the eligibility of entitlement to input tax credits, the relevant perspective is the standpoint of the entity – referring to Redrow at 412; and
• There is nothing in the GST Act or its explanatory material to prohibit one set of acts constituting two or more supplies. This may include “the right to have goods delivered or services rendered to a third party…[w]here the grant of such a right is itself a supply of services” – referring to Redrow at 418[9].

Her Honour observed (at [45]) that an analysis of the transactions between the participants (the Department, the taxi-cab driver, the taxi-cab operator and the passenger) required consideration of what was supplied to the Department or, to put it in another way, what it acquired when the Department paid the subsidy to the taxi-cab operator?

• The Department contended that the “thing” acquired was the right as against the taxi-cab operator to ensure that the MPTP was implemented, the services of the taxi-cab operator in implementing the MPTP or the cooperation of the taxi-cab operator in implementing the MPTP.
• The Commissioner initially contended that the Department did not acquire anything. After oral argument, the Commissioner departed from that contention and submitted that the Department did make an acquisition, but that it acquired the obligation of the taxi-cab operator to comply with the MPTP and that the obligation was acquired by the Department when the licence was granted to the taxi-cab operator. Her Honour rejected the Commissioner’s contention, observing (at [51]) that while the Commissioner may be correct in asserting that from the Department’s perspective it acquired rights within the meaning of s 11-10(2)(g), that was not the only acquisition and nor was it the relevant acquisition.

Her Honour found (at [52]) that the Department acquired from the taxi-cab operator a service, being the carriage of the passenger in implementation of the MPTP. That service was acquired for consideration because it agreed to pay, and did pay, the taxi-cab operator to carry the disabled person. Her Honour concluded as follows:

The taxable supply to it is the carriage of the disabled person – that is what it acquired. Contrary to the respondent’s contention, the supply by the taxi-cab operator is not just a supply to the MPTP Member. There is also a supply to the DOT – the transport of the disabled person for part of the taxi-cab fare and other fees.

Her Honour (at [57]-[58]) addressed the Commissioner’s contention that there was a single taxable supply by the taxi-cab operator to the passenger by noting that the Commissioner accepted that one set of acts may constitute two or more different supplies and, adopting the language of Lord Millet in Redrow, found that the following questions were to be asked:

…did the DOT obtain anything – anything at all – used or to be used for the purposes of their enterprise in return for that payment? The answer is yes. Next, was the thing that is acquired a taxable supply to it? The answer is yes – upon production of the MPTP card issued by the DOT, the taxi-cab operator carried the MPTP Member on the terms and conditions specified in the licence conditions. Finally, did the DOT provide consideration for that which it acquired? Yes – it paid part of the taxi-cab fare.

In taking this approach, her Honour appeared to adopt the “follow the money” approach in Redrow as identified by the Tribunal in Adecco. Her Honour also appeared to find that the GST outcome was consistent with the contractual position, observing (at [60]-[61]) that a taxi-cab operator had a contractual right to recover the amount due from the Department upon carrying a passenger.

Appeal to the Full Federal Court

A majority of the Full Federal Court dismissed the appeal by the Commissioner.

The Commissioner maintained his position that the only taxable supply was the supply of transport by the taxi-cab operator to a MPTP Member. The majority (at [30]) observed that the Commissioner’s case depended on his characterisation and interpretation of the circumstances in which the Department made a MPTP payment. The contentions of the Commissioner included the following:

• A MPTP member was carried pursuant to the member’s instructions, rather than those of the Department.
• The carriage of the member was carried out pursuant to a contract between the MPTP member and the taxi-cab operator. The member assumed responsibility for the payment of the whole of the fare and the Department merely discharged a part of the member’s liability to the taxi-cab operator.
• The carriage of a member by a taxi-cab operator did not satisfy any obligation owed by the Department to the member and the Department did not receive the benefit of that carriage. Under the MPTP, the Department merely had a funding obligation.
• The question of “taxable supply” was to be determined from the perspective of the supplier – the taxi-cab operator. From this perspective, the taxi-cab operator was providing transport, the consideration for which was the payment of the fare by the member, the member’s liability being partially discharged by the Department’s payment.

In making these contentions, the Commissioner appeared to contend for a different contractual position to that found by the primary judge. Under this contention, the contract was solely between the taxi-cab operator and the member and the payment made by the Department could be properly described as third party consideration.

In approaching the appeal, the majority observed (at [39]) that the following aspect was to be borne steadily in mind:

…although the MPTP arrangement can be seen as tripartite (involving the taxi-cab operator, the MPTP member and the DOT), whether there is a taxable supply from the taxi-cab operator to the DOT, for which the DOT gives consideration, calls for a different analysis from the question whether there is a taxable supply by the taxi-cab operator to the MPTP Member, for which the Member gives consideration. The answer to the one enquiry is not necessarily determinative of the answer to the other.

In making this observation, the majority appeared to be saying that the entirety of the circumstances need to be taken into account in determining the GST consequences of a tripartite agreement.

The majority rejected the Commissioner’s contentions. In particular:

• The majority (at [46]) affirmed the view of the primary judge as to the contractual position under the MPTP, namely that “[o]nce the trip became an MPTP trip, the DOT assumed liability for the MPTP component of the cost of the taxi-cab ride.”; and
• The majority (at [56]) agreed with the finding of the primary judge that there were two supplies, the supply of the transport to the member and the supply to the Department of the transport of the member.

The Commissioner argued that the primary judge was misled by Redrow. The majority noted that the issue under consideration in Redrow arose in different circumstances and under different (though not dissimilar) taxation legislation. However, the majority considered that the primary judge quite properly referred to the approach in Redrow, but made it very clear that she was not treating it as necessarily governing the case before her, noting that (at [62]) “[h]er Honour reasoned to a conclusion by reference to the provisions of the GST Act, as she was required to do”.

Jessup J dissented and found that “the underlying reality” of what occurred was the following (at [76]):

In considering what these services were, in my view, the starting point must be that, on the assumed facts, a taxi was hired by the MPTP member. The service was thus acquired by, and supplied to, him or her was the hire of the taxi. The Department came into the picture because of its policy to subsidise the relevant fare. The transaction as between the taxi operator and the Department does not require characterisation other than as the means by which such a subsidy was provided.

In taking this approach, his Honour appeared to accept the contention of the Commissioner that the role of the Department was simply to fund part of the fare.

His Honour also appeared to doubt the existence of a contractual relationship between the taxi-cab operator and the Department with respect to the liability to pay part of the fare. His Honour observed as follows (at [80]):

It was not, in my respectful view, the taking of the MPTP member as such that gave rise to an obligation on the part of the Department to pay half the fare. Whether an MPTP member used his or her smart card (which the driver was obliged to do pursuant to the conditions attaching to the taxi licence) which gave rise to the operator’s entitlement to payment by the Department. If there was anything done by the operator which is arguably an element in a contract-like transaction with the Department, it was the driver’s forbearance from insisting on full payment by the MPTP member, a course which the driver had no option but to adopt, once a valid smart card had been tendered. That is, rather than the taxi ride as such, should be viewed as the equivalent of a benefit received by the Department in return for its payment is at lease in harmony with the underlying nature of the Department’s relevant role, which is that of a subsidiser of the MPTP member’s fare.

His Honour (at [82]) observed that the position of the Department was to start from the silent proposition that, having undertaken an obligation to make a payment, it is most likely paid for something. However, his Honour was of the view that when you searched for what that thing was, “the only service that was supplied to anyone was the transportation of the member” – there was only one supply. In contrast, the majority (at [56]) was of the view that there were two supplies – the supply of transport to the member and the supply to the Department of the transport of the member.

ATS Pacific

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). ATS’s enterprise was summarised by the primary judge as follows:

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

ATS contended that the supply to the NR Travel Agent was only the provision of the service of booking/arranging services – a GST-free supply under s 38-190(1), item 2. The Commissioner contended that ATS supplied the Products, or the rights thereto, to the NR Travel Agent – a taxable supply.

The case was similar to Adecco in that the contention of ATS was that it did not supply the Products to the NR Travel Agent, but merely supplied the service of a booking or arranging service. Further, it was the NR Travel Agent who promised the NR tourists that the Products would be provided. In rejecting the contention of ATS, the primary judge made a number of observations on the commercial difficulties with ATS’s contention, including:

• The NR Travel Agent 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 Products. 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; and
• 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 primary judge accepted the Commissioner’s contention that in order to fulfill its obligations, 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 judge 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 ATS assumed an obligation that the relevant Product (eg, a hotel room) would be available.

The Appeal

On appeal, ATS sought to attack the finding of the primary judge that there was an implied term in the contract between ATS and the NR Travel Agents that ATS promised the provision of the Products by the Australian Providers to the NR Tourists. Edmonds J (Pagone and Davies JJ agreed) found that it was not necessary to decide this question, for the following two reasons:

• It was open to the primary judge to come to the characterisation conclusion her Honour did without recourse to an analysis of whether the contract between ATS and the NR Travel Agents contained a term, express or implied, that ATS promised the NR Travel Agents that the Australian Providers would provide the Products to the NR Tourists.
• It is not desirable, in the interests of certainty of application of a revenue statute, for the characterisation of a supply made by performance of an executory contract, to depend upon whether or not a term can be implied into the contract, unless it is absolutely essential to give business efficacy to the contract.

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

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

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

The decision on appeal appears to be consistent with the approach adopted by the Supreme Court in WHA, namely that the contract is “a useful starting point” but is not conclusive to characterise a supply. Edmonds J observed as follows (at [29]):

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

Professional Administration Services

The issue was whether the applicant company was entitled to input tax credits in respect of bills for legal services paid by it in respect of an individual’s defence of criminal proceedings. Edmonds J observed (at [40]-[41]) that input tax credits would be available if the applicant acquired “anything” by way of taxable supplies and that the thing was acquired by the applicant in carrying on an enterprise.

His Honour observed that it could be accepted that under the GST Act, in certain circumstances, one set of acts may constitute two or more different supplies of services and may give rise to two or more different acquisitions – referring to Department of Transport. Further, while his Honour considered that it would be dangerous to generalize the circumstances when this might occur, it would at least require the following:

…an agreement between the applicant and the lawyers whereby the lawyers were engaged by the applicant to provide legal services to Mr Felson and, by doing so, provided legal services to the applicant as well.

Based on the evidence, his Honour was unable to comprehend how the payments made by the applicant were for an acquisition of “anything” by the applicant – put another way, the lawyers engaged by the individual made no supply to the applicant. The payments made by the applicant were therefore consideration for the legal services supplied to the individual. His Honour considered that the applicant had an administrative arrangement with the individual to pay the invoices that were rendered by his lawyers.

His Honour concluded that the matter could be readily distinguished from Department of Transport, including by reference to the following:

• Unlike the MPTP, there was no evidence of any pre-existing framework between the applicant and the legal service providers under which the applicant was liable to make payments to the legal service providers as consideration for services provided to either the applicant or the individual;
• The funding agreements unambiguously provide that the legal advisers were to be retained by the individual alone – the applicant simply agreed to with the individual to pay his legal bills; and
• There is an insufficient connection between the legal services provided and the achievement of some purpose of the applicant akin to the statutory objects and functions of the Department of Transport.

The applicant relied on the decision in In an observation consistent with the dissenting judgment of Jessup J in Department of Transport, his Honour concluded that Redrow could not be regarded as authority for the general proposition that a person who enters into a reimbursement obligation makes an acquisition of the supply, the cost of which is to be reimbursed. His Honour considered the following observation of Lord Reed in Aimia (at [68]) to be particularly relevant:

It is also important to bear in mind that decisions about the applicant of the VAT system are highly dependent upon the factual situations involved. A small modification of the facts can render the legal solution in one case inapplicable to another. I would therefore hesitate to treat the judgments in Redrow as laying down a universal rule which will necessarily determine the identity of the recipient of the supply in all cases.

His Honour’s conclusion was succinctly stated as follows (at [55]):

The lawyers acting for Mr Felson made no supply to the applicant. The fact that they looked to the applicant for payment of their fees is not a basis to conclude that those lawyers made a supply of any kind to the applicant.

Propositions that can be derived from the authorities

Having regard to the decisions of the Federal Court (and the appeals) in Department of Transport, ATS Pacific and Professional Administration Services, I consider that the approach in Australia to GST and tripartite agreements is similar to that in the United Kingdom. This is not surprising, given the similarities between the VAT and the GST.

Further, I consider that the following propositions can be derived:

1. Proposition 1 – Decisions about the application of the GST system are highly dependent upon the factual situations involved. A small modification of the facts can render the legal situation in one case inapplicable to another: Professional Administration Services at [54] per Edmonds J referring to LMUK/Aimia at [68]; Airtours at [37(ii)].
2. Proposition 2 – The entirety of the circumstances need to be taken into account in determining the GST consequences of a tripartite agreement and the answer with respect to a supply between two of the parties to the arrangement is not necessarily determinative of the answer with respect to a supply between other parties to the arrangement: Department of Transport (on appeal) at [39]; WHA at [26]; Airtours at [37(iii)].
3. Proposition 3 – One set of acts may constitute two or more supplies and may give rise to two or more different acquisitions. This may include “the right to have goods delivered or services rendered to a third party…[w]here the grant of such a right is itself a supply of services”: Department of Transport (first instance) at [42] referring to Redrow at 418 (on appeal at [56]); Professional Administration Services; LMUK (Court of Appeal); Airtours at [37(v)].
4. Proposition 4 – The contractual position is relevant in characterising a supply, and will generally be a useful starting point: ATS Pacific (on appeal) at [29]; Airtours at [37(iv)]. However, one is not to be “handcuffed” by the terms embodied in the four corners of the contract if the commercial or practical reality points the provision of a supply which goes beyond the conclusion that might otherwise be drawn from a confined contractual analysis: ATS Pacific (on appeal) at [40].
5. Proposition 5 – To determine whether an entity makes a creditable acquisition the question is whether the entity that paid, or was liable to pay, the consideration acquired “anything at all” by way of a taxable supply and that the thing was acquired by the applicant in carrying on an enterprise: Department of Transport (first instance) at [58]] referring to Redrow; Professional Administration Services at [40]-[41]. In considering this issue, the relevant perspective is the standpoint of the entity: Department of Transport (first instance) at [42] referring to Redrow at 412.
6. Proposition 6 – The fact that an entity pays, or agrees to pay, consideration to the supplier does not, in and of itself, necessarily mean that the entity acquires something from the supplier: Professional Administration Services; Department of Transport per Jessup J (dissenting) at [82]; Airtours at [37(vi)].

It must be remembered that each case will depend on its own facts and that these propositions only provide a high-level roadmap through which one can approach a tripartite agreement. Further, while it is true that one is not to be “handcuffed” by contract law, in my view identifying the contractual position will usually be the best starting point and will often provide the answer. It will be an unusual case where the “practical or economic reality” of the arrangement is different to the contractual position.

 

Chris Sievers

1 February 2016

[1] The A New Tax System (Goods and Services Tax) Act 1999. Unless stated otherwise, all statutory references in this paper are to the GST Act.

[2] Assuming each of the elements in s 9-5 are satisfied.

[3] Assuming the remaining elements in s 11-5 are satisfied, being that the thing is acquired solely or partly for a creditable purpose and the acquirer is registered or required to be registered for GST.

[4] I note that the Tribunal concluded that it would not follow an earlier decision of the Tribunal in Reed Employment Ltd [2011] UKFTT 200 that came to the contrary view on the same issue and almost identical facts and effectively invited an appeal so as to allow a higher authority to clarify the VAT issues.

[5] [2007] EWCA Civ 938.

[6] The majority agreed with these legal principles.

[7] The Commissioner’s application for Special Leave to Appeal to the High Court was dismissed on 10 December 2010.

[8] The taxpayer’s application for Special Leave to Appeal to the High Court was dismissed on 17 October 2014.

[9] Her Honour also referred to Plantifor Ltd [2002] 1 WLR 2287 at [32], [50] and [55]; Ashfield District Council v Customs and Excise Commissioners [2001] STC 1706.