Introduction

This case involved an appeal by the taxpayer and a cross appeal by the Commissioner against the decision of the Tribunal in AP Group Limited and Commissioner of Taxation [2012] AATA 617 (decision on principles [2012] AATA 409).

The facts can be summarised as follows:

• the taxpayer runs a number of motor vehicle dealerships which sells cars to the public. The taxpayer enters into dealership agreements with car manufacturers, including Toyota, Ford and Subaru, which regulate the relationship between the retailer and the manufacturer.
• the Commissioner decided that the following four classes of payment were liable for GST as they were consideration for supplies made by the taxpayer
  • the Toyota “fleet rebates”;
  • the Toyota “run our model support” payments;
  • the Ford “retail target” incentive payments; and
  • the Subaru “wholesale target incentive” payments.
• the Tribunal decided that:
  • the Toyota payments were consideration for the supply of cars to the taxpayer’s customers but not consideration for the supply of services by the taxpayer to Toyota;
  • the Ford payments were not consideration for the supply of anything to either the customers or Ford; and
  • the Subaru payments were not consideration for the supply of anything to Subaru, it not having been argued that the payments were consideration for the supply of anything to customers.

Both the taxpayer and the Commissioner appealed and the case was seen by many as an opportunity for the Full Federal Court to clarify the legal principles on the concept of “nexus” between supply and consideration:

• the taxpayer contended that the Tribunal should have found that the Toyota payments were not consideration for the supply of cars to customers and, by a notice of contention, the Commissioner contended that the Tribunal should have found that the Toyota payments were consideration for services by the taxpayer to Toyota;
• the Commissioner contended that the Tribunal should have found that the Ford payments and the Subaru payments were consideration for the supply of services by the taxpayer to Ford and Subaru respectively.

In an ironic twist, the majority of the Full Federal Court (Edmonds and Jagot JJ) dismissed both appeals on the basis that they did not raise an error of law. Bromberg J dismissed the taxpayer’s appeal for the same reason, but dismissed the Commissioner’s cross-appeal for different reasons.

Nevertheless, the Court made detailed obiter statements and it is quite clear how the Court would have found if it had considered the appeals had raised an error of law. These obiter statements address the interaction between sections 9-5, 9-10 and 9-15 of the GST Act and the meaning of “a supply for consideration” in s 9-5(a). While not binding on future Courts and Tribunals (and indeed taxpayers and the Commissioner), these statements will likely be very persuasive going forward.

The facts

Given the nature of the arguments discussed by the Court, it is necessary to consider the facts in some detail. In this regard, I also refer to the recent observations of Lord Reed of the UK Supreme Court in WHA Ltd v Revenue and Customs [2013] UKSC 24 at [26]:

As this court has recently observed (Her Majesty’s Revenue and Customs v Aimia Coalition Loyalty UK Limited [2013] UKSC 15, para 68), decisions about the application of the VAT system are highly dependent upon the factual situations involved. A small modification to the facts can render the legal solution in one case inapplicable to another. It is therefore necessary to begin by considering carefully the facts of the present case.

The payments were summarised by the majority as follows:

• The Toyota “fleet rebates”: Toyota requires sales of fleets of cars at a price below that paid by ordinary retail customers. For each class, fleet and non-fleet, Toyota sets a maximum that the dealer can charge. Within the fleet class there are sub-classes designated platinum, gold and silver which have different maximum prices, each representing a discount from the maximum price that the dealer could seek that a private customer pay for the same car. Sometimes Toyota and the dealer know in advance that cars are required for fleet purposes, by negotiation either with Toyota or the dealer, in which event Toyota will reduce the wholesale price at which it sells the car to the dealer to reflect the appropriate fleet discount. Other times a fleet customer’s order will be satisfied either in whole or in part from the dealer’s floor stock. If the car sold to the fleet customer was purchased from Toyota for sale to a private customer the dealer will have paid more for that car than it would have paid for the same car for a fleeting customer. Toyota pays the dealer an amount representing the difference, called a “fleet rebate”, in these circumstances provided the conditions of the “fleet rebate” are satisfied which include the dealer pass on to the fleet customer the full extent of the Toyota payment at a discount to the price.
• The Toyota “run-out model support” payments: Toyota would periodically operate programs intended to reduce a dealer’s floor stock of models of cars that were scheduled to be replaced by a new model. If a dealer complied with the conditions of the program (basically, sale of the car during the relevant period on terms no less advantageous to the customer than the terms Toyota proposed), the dealer would be paid a sum of money by reference to each car of the relevant description (the run out stock) sold. There was no requirement that the dealer pass on any discount to the customer related to the “run-out model support” payment the dealer would receive from Toyota on the sale.
• The Ford “retail target incentive” payments: Ford agreed with its dealers to pay certain sums of money to dealers which achieved monthly and quarterly sales targets that Ford set based on the dealer’s size and past performance. Targets were based on the number of cars sold to eligible customers in the qualifying period, not the value of the cars sold. Once a car was sold and delivered to an eligible customer the details would be entered into the vehicle information system and, in the middle of the following month, based on the information so entered Ford would issue the dealer with a tax invoice for the incentive payment plus 10% GST and shortly thereafter pay that amount to the dealer.
• The Subaru “wholesale target incentive” payment: Subaru agreed with its dealers to pay certain sums of money based on the dealer ordering cars from Subaru in accordance with certain minimum and maximum parameters for qualifying periods set by Subaru. A dealer who placed orders not exceeding the maximum and not less than the minimum (set at 70%) for a qualifying period and would receive a payment from Subaru in the month following the month in which each vehicle was ordered in the band of above 70% and not exceeding 100%. The payment was a flat rate of 1.5% of the dealer invoice price for each eligible vehicle ordered. Payments did not depend on any sale to a customer by the dealer.

The decision of the Tribunal

The Tribunal found that none of the payments involved a supply for consideration by the taxpayer to the manufacturers. Such a conclusion would involve “an air of unreality”. Also, the Tribunal conclude that any such supplies (if they were made) would not be taxable supplies because the payments were not made “for”, or even “in connection with” any such supplies.

The Tribunal found that the Toyota payments were consideration for a supply of a vehicle by the taxpayer to its customer because there payments had “a direct and immediate connection” with the supply of the vehicle to the customer. In this context, the consideration the taxpayer received for the vehicle comprised two components, the amount paid by the customer and the payment from Toyota. The arrangement was seen to be no different from that described by Edmonds J in the TT-Line case ([2009] FCAFC 178]).

The Ford payment was not a payment “in connection with” a supply – and was therefore not consideration.

On appeal

I will focus on the decision of the majority. The observations of Bromberg J are dealt with below.

The construction of “supply for consideration”

The first issue addressed by the majority was the issue of the proper construction of s 9-5(a), being “you make the supply for consideration”. The contentions of the parties were described as follows (at [31]):

The AP Group contended that the Tribunal had overlooked the significance of the word “for” in s 9-5(a) and thus, instead of asking itself whether any supply was made for consideration, asked itself only whether the payment was “in connection with” any supply. The Commissioner submitted that the word “for” had no work to do when s 9-5(a) is considered with the definitions of “supply” and “consideration” so that the Tribunal had asked and answered the correct question. 

As can be seen, this issue strikes at the very heart of the GST Act and the concept of taxable supply.

The majority rejected both arguments. Notably, in rejecting the Commissioner’s contention the majority found that the definitions of “supply” and “consideration”, even if read literally do not result in the omission of the word “for” in s 9-5(a). Rather, the section reads as follows:

you make [any form of supply whatsoever] for [any consideration, within the meaning given by sections 9-15 and 9-17 in connection with the supply or acquisition].

As concluded by the majority, the result is as follows (at [33]):

The consideration must be “in connection with” the supply but the supply must also be “for” the consideration….It ensures that not every connection between the giving of consideration and the provision satisfy the first condition of making taxable supply. If it were otherwise, any form of connection of any character between the making of a supply and the payment of consideration would suffice.

The majority also found that the Tribunal looked at both questions in the context of the payments (ie, whether the payments were “for” the supply and also “in connection with” the supply). Accordingly, the Tribunal’s construction of s 9-5 was orthodox and did not involve an error of law.

The majority nevertheless went on to consider the contentions of the parties.

For the Toyota payments the majority agreed that all aspects of the arrangements between the dealer, the manufacturer and the customer had to be considered. This is consistent with the following observation of Lord Reed in WHA Ltd:

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 its economic reality.

The taxpayer sought to characterise the payments by reference to the totality of the arrangement between the manufacturer and the taxpayer, whereas the Commissioner sought to focus on the sale of the individual vehicles. The Full Court agreed with the Commissioner, as shown by the following extract (at [43]):

Ultimately, selection of the appropriate level of generality or particularity at which the assessment is to be carried out is fact-dependant. The critical facts include the nature of the supply said to be involved. This flows from s 9-5 which is concerned with each supply. On the facts of the present case, where there is no doubt that the sale by the dealer of a car to a customer (specifically, the sale of a non-fleet car to a fleet customer) causes or is the trigger for the making of a payment by Toyota to the dealer, it is necessary in terms of the statute to ask whether the dealer made that particular supply for consideration. The appropriate level for the assessment is the particular supply of the car in question by the dealer and the payment which that supply triggers. The price paid by the customer is clearly consideration for the supply. But so too is the fleet rebate paid by Toyota to the dealer. The factors on which the AP Group relied to avoid this result are not as persuasive as those which point to it.

In respect of the Commissioner’s cross-appeal, the majority found that the Tribunal had understood the Commissioner’s arguments and that the Commissioner was relying on the particular obligations which the dealers had accepted in support of his contention that the taxpayer made a supply in connection with the payments. The majority observed as follows (at [49]):

The Tribunal’s real point was that these arrangements reflect the overall relationship between the dealer and the manufacturer which always exist and that there is not supply of a service to the manufacturer by the dealer simply complying with those overall arrangements. The Tribunal thus selected the correct level of focus for its analysis, the level being directed by the facts said to constitute supply for consideration.

In respect of each of the payments, the Commissioner contended that the arrangements involved a number of acts answering the statutory description of a “supply” by the dealer to the manufacturer, being:

• for the Toyota fleet payment – the act of selling motor vehicles to a particular class of customer in particular ways and at particular prices stipulated by Toyota;
• for the Toyota run out payment – the dealer was obliged not to offer arrangements to customers less advantageous than those specified by Toyota in the rules and conditions applying to the “run out” program
• for the Ford payment – acts constituting meeting specific sales targets, reporting sales in ways stipulated by Ford, promoting, marketing and advertising the sale of Ford’s products in particular ways and ordering and estimating the requirements of vehicles in the form and on the dates specified by Ford
• for the Subaru payment – the acts constituting ordering and paying for stock in particular ways stipulated by Subaru, planning vehicle ordering requirements, reducing holdings of aged stock, actively selling off the income stock list an assisting Subaru in supply chain management and the forward ordering of vehicles.

The majority rejected the Commissioner’s contention that the Tribunal merely focused on the “essence or sole purpose” of the arrangements – rather, the Tribunal evaluated the whole of the relationship between the dealer and the manufacturer in order to determine whether there was any supply “for” the consideration, being the various payments in issue. As concluded by the majority (at [53]):

On analysis, the so-called supplies for consideration identified by the Commissioner are nothing more than the encouragement of an overall business relationship between the manufacturer and the dealer for the mutual benefit of both. The relationship involves a whole raft of obligations from one to the other all, presumably, with the ultimate objective of maximising their respective commercial positions. 

The majority concluded that there was no question of law arising on the appeal and agreed with the Tribunal’s decisions about each payment.

Bromberg J agreed with the majority that the appeals should be dismissed, but did so for different reasons in respect of the Commissioner’s cross-appeal.

His Honour noted (at [64]) that the Commissioner’s fundamental point before the Tribunal and on appeal was that the acts or things done in performance of the obligations that the taxpayer assumed under the dealer agreements and the various program documents was (in each case) a supply within the meaning of s 9-5 as defined in s 9-10 of the GST Act. In making that case, the Commissioner did not countenance that the broad language found in the s 9-10 definition of supply ought be read down.

His Honour observed that the Tribunal perceived there to be “an air of unreality” in the Commissioner’s contention and that “the Tribunal was driven to conclude that there must be some limit to the intended reach of the concept of supply”. His Honour referred to the Tribunal’s conclusion that the taxpayer’s acceptance (and performance) of the obligations on which the Commissioner relied were not supplies because they were:

…part of the foundation underpinning the relations [between AP Group and each of the manufacturers], the background to the bargain the parties have made – in a sense, the rule book by which the game is to be played.

His Honour had difficulty with the criteria adopted by the Tribunal between those obligations that are beyond the statutory description of supply and those that are not – in particular, the concept that “supply” does not extend to the entry into and the performance of a ‘foundational’ obligation which underpins a business relationship. As observed by his Honour (at [66]):

However there is no textual support for reading down the meaning of ‘supply’ by reference to ‘foundational’ obligations. “Unreality” or impracticability may support a reading down, but why the line is to be drawn at ‘foundational’ obligations is unclear. What constitutes a ‘foundational’ obligation is also vague and uncertain. If the broad language of s 9-10 is to be read down, a more precise basis for doing so should be identified.

His Honour concluded by observing that while he had concerns about the approach to construction by the Tribunal, he did not disagree with the Tribunal’s conclusion on any basis contended by the Commissioner.