Journal of Australian Taxation
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THE IDENTIFICATION AND CHARACTERISATION OF TAXABLE SUPPLIES FOR GST PURPOSES
By Denham Martin
On 1 July 2000, the goods and services tax began operation in Australia. In terms of its scope, the application of this tax to Australian commercial activities is probably unparalleled.
At the heart of the new tax is the notion of "supply" and understanding what this term encompasses in terms of commercial transactions is critical in determining a taxpayer's GST liability.
While the legislation provides some guidance on the meaning of supply, more difficult supply analyses can only be resolved with an understanding of certain core GST principles and by reference to the way those principles have been applied by judicial authorities when considering the GST implications of diverse commercial situations.
Taxation codes regulating distinct subject areas invariably contain one fundamental concept that underpins their scope and application.[1]
The tax rules governing the introduction of a goods and services tax ("GST") in Australia, contained in A New Tax System (Goods and Services Tax) Act 1999 ("GSTA"), are no exception – the notion of a supply constituting the lynchpin of the legislation.[2]
The existence of a supply is the critical precondition for most liability under the GSTA.[3] It provides the legal foundation for the mutually exclusive ideas of taxable supply, input taxed supply and GST-free supply, it is the vital element in the operation of the transition and jurisdictional rules and it underpins the valuation, creditable acquisition, adjustment, bad debt, anti-avoidance, and most of the other substantive parts of the legislation.
While the GSTA provides statutory guidance on what constitutes a supply and the GST consequences that follow from such a finding, the correct identification of taxable supplies in commercial arrangements is not always a straightforward task. This is particularly so for those unfamiliar with a transaction-based tax like the GST, which demands a commercially sensible and legally-oriented approach to analysis and which is particularly sensitive in tax outcome to incorrect classifications.[4]
The purpose of this article is to explore the GST concept of a supply and to consider what approaches should be adopted and principles applied to the concept in respect of its application to that vast array of commercial situations and transactions that constantly arise in a sophisticated economy like that of Australia.
Section 9-10(1) of the GSTA provides that "a supply is any form of supply whatsoever".
Section 9-10(2) goes on to provide that, without limiting this general meaning, the term supply specifically includes any of the following items:
(a) a supply of goods;
(b) a supply of services;
(c) a provision of advice or information;
(d) a grant, assignment or surrender of real property;
(e) a creation, grant, transfer, assignment or surrender of any right;
(f) a financial supply;
(g) an entry into, or release from, an obligation:
(i) to do anything; or
(h) any combination of any 2 or more of the matters referred to in paragraphs (a) to (g).
(ii) to refrain from an act; or
(iii)to tolerate an act or situation;
A number of points can be made about this statutory definition which become relevant to an identification and characterisation of supplies enquiry.
First, the definition confirms that the concept of supply is intended to be an all-embracing one. It not only covers any form of supply whatsoever but it then goes on in a non-exhaustive fashion to outline a broad class of commercial activities which will constitute "supply" events. There seems little doubt that Australian courts, as with courts in other jurisdictions,[5] will interpret the definition expansively, not only in light of its specific language but also against the fact that GST is intended to operate as a broad-based, multi-stage, consumption tax.[6]
Secondly, and as a corollary of the first point, the potential application of the "supply" notion to most commercial situations is confirmed by the range of transactional situations listed in s 9-10(2). This is helpful to the task of identifying supplies in commercial contexts as one will usually be left in little doubt that a supply or supplies have been made that meet the statutory descriptions.
As a general approach to GST, therefore, one should assume that whenever anything has been provided absolutely from one person to another a supply will have been made.[7] The definition covers both positive conduct (for example, a sale of goods or a supply of services) and negative actions (for example, entering into a restrictive covenant or agreeing not to pursue legal proceedings).[8]
It also covers both tangible (for example, goods[9] and land[10] and intangible (for example, information and rights) forms of property, in terms of both the simplest and most complex commercial arrangements.
Thirdly, the statutory notion of "supply" is supplemented by those specific provisions that deem a supply to have or have not occurred. Generally, these provisions not only create a supply situation but also define its tax status.[11] Provisions of this type assist in the identification of transactional supply situations that are subject to the legislation.
Fourthly, the natural and ordinary meaning of the word supply is "to furnish with or provide".[12] While s 9-10(2) does not expressly state that the commodity must be provided to a person other than the supplier, it is implicit in the definition, the important requirement for consideration in the definition of "taxable supply", and the scheme of the legislation as a whole, that an entity cannot normally supply something to itself.[13]
Fifthly, a supply of money[14] is normally outside the statutory definition.
This exclusion recognises that a payment of money as consideration for a supply received is not itself a supply. Were this not the case, then every money payment for a supply could itself be a supply.[15]
The exclusion also reinforces the proposition that a supply of money, unless it forms part of a financial supply, is prima facie outside the scope of the GSTA. The primary exception to this is a supply of money that is provided for a supply that is itself a supply of money.[16] What this means in terms of the practical operation of the GST is that there may, from time to time, be transactional situations involving a money transfer which the legislation does not recognise as giving rise to a GST charge.
Consider the facts of Chatham Islands Enterprise Trust.[17] There, the issue before the New Zealand Court of Appeal was whether certain payments, made by the Crown to a charitable trust which the Crown had established to acquire and manage certain specific Crown assets and undertakings relating to the economic development of the Chatham Islands, were subject to GST.
The trustees of the charitable trust were required under the terms of the establishment trust deed to carry out certain functions and perform certain services. The performance of these activities and services were, in the opinion of the Commissioner of Inland Revenue, subject to GST. The New Zealand High Court agreed, holding that the payments received from the Crown were subject to GST output tax.
The decision of the High Court was overturned by the Court of Appeal, which ruled that on no sensible commercial or legal basis could the trustees be considered as having provided taxable services or as having assumed either voluntary or contractual obligations to the Crown.
On the question of the existence of a "supply", Tipping J observed:
The Trustees are also said to have supplied services to the Chatham Islanders by dint of them performing the terms of the Trust. While I recognise the width of the definitions of services and supply, I regard it as conceptually unsound in legal terms to say that trustees of a voluntary settlement supply services to the settlor of the Trust or to the beneficiaries when all they are doing is to perform the terms of the Trust.[18]
Sixthly, a careful, rigorous, but commercially sensible approach must be adopted to reviewing any particular commercial arrangement if the correct identification and classification of a supply is to be achieved. The authorities have indicated that they will scrutinise very closely the relevant facts and arrangements to determine whether a supply, and what type of supply, exists. Importantly, the legal arrangements actually entered into will be influential in this enquiry.[19]
Seventhly, GST is not a tax on payments.[20]It is a tax on supplies. While the fact of a money payment would normally suggest the reciprocal provision of some good, service or thing by the recipient of the payment, one should not assume this to be so in every case without scrutinising the legal relationship that exists between payor and payee.
Eighthly, it is also a flawed approach when identifying supplies to regard the business activity of a supplier as determining the nature of a particular supply.
This preoccupation with the status of a particular taxpayer was arguably at the heart of the reasoning of the High Court of New Zealand and the majority of the Court of Appeal in Databank Systems,[21] which was rejected by the majority decision of the Judicial Committee of the Privy Council.[22]
Much of the rejected judicial analysis was based on the erroneous assumption that because the banks were in the business of providing input taxed financial services, and Databank was somehow involved in assisting with these activities, it followed that its own activities and services must also be input taxed. Lord Templeman in the Privy Council, in what is one of the clearest judicial statements as to the correct identification analysis to be adopted when reviewing GST transactions, rejected this approach:
The activity of Databank is the instrument whereby the bank implements its contract with its customer. The activities of Databank and the supply of computer services by Databank do not form part, important or integral or otherwise of the separate activity and supply of financial services by the bank or part of the separate activity and supply of petrol by the garage. Three activities are simultaneous and interdependent but they are separate. There is nothing in the GST Act which infects separate activity with the exempt or non-exempt status of another separate activity.[23]
Further, a significant point in the judgments overturned was confusion surrounding the legal capacity in which Databank had acted – as principal or agent. This type of confusion illustrates the importance for GST analysis of initially establishing with precision the exact legal status and role of any supplier in terms of the supplies being made.
Ninthly, as with other areas of taxation, unlawfulness per se does not negate the operation of the legislation.[24] A supply can occur notwithstanding that the act or situation giving rise to the supply was itself unlawful.[25]
For example, in R v Goodwin and Unstead (Case C-3/97),[26] the issue before the Court of Justice of the European Communities was whether, in terms of art 2 of the sixth VAT directive, VAT was payable on a supply of counterfeit perfumes, in circumstances where Messrs Goodwin and Unstead were accused of fraudulent evasion of VAT for having dealt with the perfumes without being registered. The accused contended that counterfeit goods were not within the scope of VAT, and accordingly no offence of evasion could have been committed.
The Court held that even if the production, purchase and sale of the counterfeit perfume products was unlawful, their sale constituted a taxable supply for the purposes of art 2 of the sixth VAT directive. Although the illegal activities stemmed from the fact that the counterfeit products infringed intellectual property rights, this type of illegality did not prevent the goods in question being traded through the normal economic and commercial channels of the European Community.
As part of its reasoning, the Court outlined the general principles that were to be applied:
The scope of the sixth directive is delimited by art 2 thereof, which provides:
The following shall be subject to value added tax:
1. The supply of goods or services effected for consideration within the territory of the country by a taxable person acting as such;
2. The importation of goods.
In keeping with the general terms in which that provision is framed, the court considers the nature of transactions to be irrelevant for the purposes of VAT liability, since the 'principle of fiscal neutrality [precludes], as far as the levying of value added tax is concerned, a generalised differentiation between lawful and unlawful transactions'.[27]
Finally, in order for a supply to have occurred there must be an identifiable consumer of the supply who has received a quantifiable and tangible benefit. Accordingly, farmers who were compensated for discontinuing milk production were not supplying taxable services, as no identifiable consumer existed, as opposed to all those who benefited from a proper functioning of the European milk market.[28]
A supply that is not made for consideration generally will not trigger a GST liability.[29] This follows because GST is payable only on a taxable supply and consideration is one of the critical preconditions[30] in the statutory definition of this phrase. It follows, perhaps more fundamentally, that in a value added tax system, suppliers of goods, services and things (other than a final consumer) are accounting for tax on, and passing on and recouping from their recipient by way of consideration, the "value added" by them.
In many GST analyses, particularly those involving complex commercial arrangements, the existence, source, and extent of the relevant quid pro quo in the arrangement becomes the primary focus in determining the fact and identity of a chargeable supply.[31] This in turn raises issues as to who is providing the necessary consideration for the supply and whether the consideration is sufficiently linked to the supply made.
Given that a supply of something will normally have occurred in most dealings, it is the presence or absence of consideration (and sometimes whether it is linked to a supply) that invariably operates as the primary jurisdictional precondition in the legislation.[32] Indeed, many of the cases that superficially appear to be "no supply" cases are in fact "no consideration" cases,[33] just underscoring the importance of the latter concept in defining the practical application of the GST rules.
Section 9-15 defines "consideration" (in part) as follows:
(1) Consideration includes:
(a) any payment, or any act or forbearance, in connection with a supply of anything; and
(2) It does not matter whether the payment, act or forbearance was voluntary, or whether it was by the recipient of the supply.
(b) any payment, or any act or forbearance, in response to or for the inducement of a supply of anything.
The statutory definition contained in s 9-15 is deliberately a very broad one.[34] It contemplates payments,[35] acts, and forbearances being given in relation to a supply, all of which features the contractual notion of "consideration" would recognise as "something of value in the eye of the law".[36]
However, the mechanism is broader than it is for contractual purposes.[37] Thus, while at common law a surrender of a claim to money may in certain circumstances fail for want of consideration,[38] it would constitute consideration for GST purposes. Equally, at common law certain promises may fail as consideration if the promises for which they are provided in exchange are defective in some way through illegality (statutory or otherwise).[39] As noted already,[40] an imperfection of this kind is not likely to negate the presence of consideration for GST purposes. Past consideration and consideration not moving from the promisee[41] are contract principles which are also irrelevant for GST purposes. The closing words in s 9-15(2) make plain that consideration does not need to move from the recipient of a supply in order for it to satisfy the statutory test.
A case which illustrates the application of this principle is Turakina Maori Girls College.[42] Here the question before the New Zealand Court of Appeal was the GST treatment of "attendance dues" paid to the proprietors of certain schools by the parents of children attending the schools. The "attendance dues" related only to the school proprietor's capital obligations and had nothing to do with operational matters. The capital obligations were not conditional upon the payment or non-payment of attendance dues.
The Court held that the attendance dues were paid as consideration for taxable services. While they were calculated by reference to the proprietor's debt obligations they were not payments in the nature of "principal" or "interest". Further, while the proprietors did not provide the "education services" to the students, it did provide capital things at the school which parents of students committed to contribute money towards. They did so "in respect of, in response to, or for the inducement of" these things provided by the proprietors. The fact that the proprietor's activities may have also assisted the Crown or the school did not matter because:
... the identity of the recipient is not significant, as long as there is a supply and the provision by some person of consideration in respect of it.[43]
There can still be "consideration" in a dealing where a taxpayer's conduct is directed by the terms of settlement proceedings or a court order.[44] This statutory directive prevents a taxpayer arguing that, say, the act of settling a damages claim out-of-court involves the unilateral act of being compensated and can never therefore involve the reciprocal provision of any "consideration".[45] This contention, without more, would not be enough to negate the presence of "consideration". It could equally be argued in this situation that such action does not involve a "supply".[46]
Also, s 9-15(2B) declares that consideration can be provided to a supplying body, notwithstanding the recipient of the supply is a member of that body or that the supplies are confined solely to members.[47]
While consideration must be present in order for a taxable supply to be made, the precise details of the consideration do not need to be known at the point of supply. Also, just because one has difficulty in calculating what the "consideration" actually is does not mean there is none, although ultimately some value must be ascribed to a transaction if s 9-75 and a GST charge to tax are to apply. The propositions just outlined were discussed in First National Bank of Chicago v C & E Commrs (Case C-172/96)[48] where the issue before the Court of Justice of the European Communities (Fifth Chamber) was the GST status and consideration given in respect of certain foreign exchange transactions.
The Court rejected the arguments that just because no fee or commission was charged, and the actual consideration was speculative and difficult to calculate, it followed that there was no consideration provided commercially. Clearly, there was - the spread recognised and taken by the bank as the difference between the bid price and the offer price over a period of time.
In the course of its judgment, the Court noted:
Nor is it necessary for either the taxable person supplying the goods or performing the service or the other party to the transaction to know the exact amount of the consideration serving as the taxable amount in order for it to be possible to tax a particular type of transaction Argos Distributors Ltd v C & E Commrs (Case C-288/94 [1996] BTC 5,497; [1996] ECR 1-5311, para 21 and 22). Consequently, it does not matter that when the transaction is concluded the parties do not know the basis on which VAT will be charged and that it remains unknown, even afterwards, to the recipient of the service.[49]
First National Bank is also authority for the proposition that in foreign exchange transactions in which no fees or commissions are calculated in relation to specific transactions, the relevant consideration for calculating liability to tax under VAT rules is the net result of the transactions over a period of time.[50]
Some contract doctrines are still relevant in limiting the scope of the concept. For example, purely gratuitous acts do not constitute consideration[51] and this point is endorsed expressly (albeit partially) in the definition in s 9-15(3)(b) in the case of the "making of a gift to a non-profit body".[52]
Interestingly, the Australian Tax Office has indicated that gifts made other than to non-profit bodies might be consideration for a supply.[53] While the limited way in which s 9-15(3)(b) is drafted arguably supports this, the real question is surely the circumstances in which a gratuitous act could sensibly be linked to a supply and constitute "consideration".
The usual attributes of a gift are that:
... a gift will ordinarily be by way of benefaction, a gift will usually be not made in pursuance of a contractual obligation and that a gift will ordinarily be without any advantage of a material character being received in return. I would add, to those usual attributes of a gift, the attribute that a gift ordinarily proceeds from a 'detached and disinterested generosity'.[54]
Where a transaction satisfies all these elements it is difficult to see how it could ever trigger a GST liability,[55] as there would simply be no "consideration" as conventionally understood, or alternatively, there would be no real linkage to any particular supply.
The Australian Tax Office has given as an example of a "gift" constituting consideration for a supply, the situation of an ex gratia payment made by a supplier to a business in recognition of the quality of a particular supply of goods.[56] It seems more likely that examples of this type would not really constitute gifts at all,[57] as they hardly derive from the "detached and disinterested generosity" of the donor and are clearly inspired by the earlier contractual supply of goods. Present in this example is some element of quid pro quo, which will invariably trigger a GST liability, depending on the status of the recipient and the nature of the enterprise and supply being remunerated. Further, while it is accepted that a conditional grant could be a "gift" because it is an act of pure benefaction which does not benefit the donor in any material sense, in practice most grants will be made for "consideration", because they will require something from the recipient in return and will benefit the grantor.[58]
Where a right or option to acquire a thing has been granted, there will be no consideration arising when the right or option is exercised unless additional consideration is provided for the subsequent supply or in relation to the exercise of the right or option.[59]
A redemption of airpoints would be an example of the practical operation of s 9-15(3). Generally, they would constitute rights that were earned as part of other paid-for air travel. They can invariably be redeemed for other air travel without the payment of any further consideration, thus suggesting they formed part of the consideration initially paid when the original supply of air travel was made.[60]
A payment made by a government related entity to another government related entity[61] is not the provision of consideration if the payment is specifically covered by an appropriation under an Australian law.[62]
The term appropriation is not defined in the GSTA. In essence, what is contemplated by the term is the funding of government entities to enable them to carry out their functions.[63] The authority for any allocations of money will usually be under some specific imprest supply or appropriation legislation.
Taxation Ruling GSTR 2000/4 on appropriations notes that the appropriation must be "specifically covered"[64] by an appropriation under an Australian law. In practice, the appropriation will always specify the purpose for which it is made, although the purpose may be stated generally or specifically and require subsequent implementation by, say, a minister.[65]
Clearly, the critical issue with any government-related payment is assessing whether it derives its status from a statutory appropriation. This may require review of statutory or other empowering instruments in particular cases because, if the basis for the exemption is not clearly established, the payment will likely constitute "consideration" for a supply.[66]
The fact of consideration is critical to the existence of a taxable supply. This is not necessarily so in the case of non-chargeable supply categories, where the presence of consideration is not such a critical jurisdictional feature. Most categories of GST-free supplies in Div 38 do not mention consideration, although it can sometimes be a relevant factor in optimising a GST concession.[67]
The fact that both a supply and consideration are present does not automatically mean that a taxable event has occurred for GST purposes.[68]
This extra feature is required by the statutory language. An entity makes a supply for consideration.[69]The definition of consideration suggests that the particular payment, act, or forbearance which constitutes "consideration" must be either in connection with, in response to, or for the inducement of a supply. These references and others:
... underscore the close coupling between the supply and the consideration that is necessary before a payment will be consideration for a supply that will make the supply subject to GST.[70]
In the vast majority of arm's length commercial transactions, the fact of "consideration" will be self-evident. However, it does not follow it will be present in every situation.
The case that best illustrates this feature is the New Zealand Refining[71] case. There the question before the New Zealand Courts was the GST treatment of three payments totalling $85 million, which payments were made by the Crown to the New Zealand Refining Co Ltd as part of a compensation arrangement when the refinery's profits were jeopardised as a consequence of a change in government policy.
Because under the compensation arrangement the refinery was obliged to keep its oil processing operations going, albeit with the assistance of a government subsidy, the Commissioner of Inland Revenue contended that a taxable supply of services (refining services to oil company customers) was being made in consideration for the payments received.
Both the New Zealand High Court and Court of Appeal rejected this contention. While it was true that the payments were received by the taxpayer in the course of its business activities, it did not follow that they were received as consideration for any supply. Indeed, both courts found that the matrix of agreements and other evidence supported the view that the payments were a unilateral contribution by the Crown to the taxpayer's operating expenses, to compensate it for the economic loss it had suffered when the government changed the protections under which its operations had been established. While the payments were intended as an inducement to keep the refinery open they were not linked to any identifiable supply. As the Court of Appeal observed:
In our view the payments related to the structure or framework within which supplies of services were expected to be made. They were to compensate NZRC for the removal of the protections given by the Support Letters and its exposure to the hot winds of competition. It was compensation directed to the same purpose as the grants which repaid the loans. The payments were received in the course of the taxable activity of NZRC but they were not in consideration for any supply made by it. Accordingly, they were not subject to GST.[72]
A comparison of the Australian and New Zealand legislation in this context suggests that the degree of linkage required between supply and consideration is essentially the same. Accordingly, New Zealand case law like New Zealand Refining should be directly relevant.
The New Zealand definition of "consideration" similarly requires that consideration must be in respect of, in response to or for the inducement of the supply[73] to be subject to GST.
The only difference between the Australian and New Zealand legislative texts on this point is that where the New Zealand legislation uses the phrase in respect of, the Australian legislation adopts the alternative phrase in connection with. Both regimes share in common the phrases "in response to" and "for the inducement of".
New Zealand courts have interpreted the linkage requirement in the New Zealand legislation as requiring a recognisable element of reciprocity between the parties, of something being done in exchange. The New Zealand Court of Appeal in Chatham Islands emphasised the need for this reciprocity in respect of any supply, when commenting on the moneys received by the Chatham Islands Enterprise Trust:
The Trust is not making a supply of anything to the settlor in exchange for, or induced by, the payments ... there is no consideration passing to the Trust since the payments are not properly to be seen as an inducement. Without them, it is true, the Trust could not function; indeed, it would not have even come into existence. But in law they cannot properly be characterised as inducing its functions nor can it be said that what the Trust did with the money was a response to the payment. There is an absence of reciprocity in the relationship.[74]
New Zealand courts have also indicated that some payments are simply too remote to be sensibly described as being connected to any type of reciprocal exchange. Such payments are better viewed as some form of "money" payment not linked to a supply.[75]
This requirement for reciprocity is also necessary under the Australian legislation and the use of the phrase "in connection with",[76] rather than the phrase "in respect of", will not alter this. This follows because both the phrases "in connection with" and "in respect of" take their meaning in any particular statutory context from that context, and from the object or purpose of the statutory provision in which they appear, and from the words with which they are associated.
The phrase "in connection with" must be construed in relation to the term "consideration" with which it is statutorily used. While the concept of consideration is wider than its common law counterpart, the mechanism under the GSTA is still largely inspired by fundamental contract notions and imports an element of reciprocity or exchange. There is nothing in the GSTA to indicate that the Act intends to do away with (as opposed to widen) this fundamental contractual characteristic.
The meaning of "in connection with" is coloured in this statutory context by the allied concepts of "in response to" and "for the inducement of" with which it is grouped. These two concepts also import an element of reciprocity. Further, if the phrase "in connection with" were intended to be so comprehensive as to include even vaguer "connections", it would not have been necessary to include these two other narrower terms.[77]
The Australian Tax Office in Taxation Ruling GSTR 2000/11 has quite correctly noted the close similarity between the New Zealand and Australian definitions. In its view, the Australian test is "whether there is a link or nexus that provides a substantial relation between the substance of the obligation and the grant".[78]
While this comment is made in terms of grants of financial assistance there is no reason why it will not apply equally in other commercial contexts. In short, a link between consideration and a particular supply must be made out in every case, and vague and imprecise linkages will be insufficient to satisfy the substantial relation or close coupling thresholds outlined by the Australian Tax Office. Having said this, that element of "relation" or "coupling" will invariably be present in most cases and give rise to more few problems.
The identification of a chargeable supply in commercial arrangements presents few problems where the relevant supply is distinct and independent, fully fits a recognised taxable category of supply[79] and where consideration is provided for in the normal way.
For example, the sale of a motor vehicle at an agreed price and a provision of management services for a fixed fee are two chargeable supply situations that would normally never give rise to any supply identification question. Each transaction is commercially explicable and is complete in itself and could not be characterised in a different or more comprehensive way for GST purposes.
Commercial affairs are not always so straightforward and, increasingly, transactional situations involve the provision of a package of benefits. If individual benefits in the package are identifiable (the relevant legal contracts may of course establish this expressly) and a price has or can be attributed to each thing being provided, then accounting for any taxable supplies will not be problematical, at least if the breakdown of supplies and related prices is defensible.
However, if the package of benefits is provided for at a single price, two supply identification possibilities potentially arise. One could view the component benefits as taking their GST character from the dominant element or benefit provided in the package.[80] Alternatively, one could view the package of benefits as giving rise to separate multiple supplies, each of which has its own tax treatment.[81]
Where a taxpayer correctly treats the provision of a bundle of benefits as a "single" supply, the GST consequences are relatively straightforward. If that single supply is a taxable one then the only arguable GST issue would be whether the transaction price correctly represents the value of all the benefits conferred, which in an arm's length supply context would invariably always be the case.[82]
If, however, the package of benefits is best characterised legally as giving rise to several separate supplies, the supply identification issue becomes considerably more focussed and contestable, because where there is doubt, the Australian Tax Office is likely to adopt an identification and characterisation strategy for transactions that maximises for it GST revenue, essentially by preferring a split between supplies that increases the requirement to account for GST output tax or decreases the entitlement to claim GST input tax.[83]
The correct identification and classification of supplies can also be significant to proper GST compliance and determining tax consequences under those provisions of the legislation that oblige one to adopt a particular supply theory in relation to a commercial situation. For example, is a supply of general insurance, provided as an incidental part of an overall lending package to a customer, an independent taxable supply or an input taxed supply as a result of being an "incidental financial supply" under GSTR 40-14.[84] Similarly, even where the focus is only with a single supply, one is statutorily required to apportion between the taxable, input-taxed and GST-free components for valuation purposes.[85]
While the scheme of the GSTA generally supports an analysis of commercial arrangements in terms of an identification of discrete supplies[86] and directs an apportionment of any individual supply that can be explained in terms of components with different tax treatments, it provides no specific guidelines on how a supply of a "package" of benefits should be addressed.[87] Fortunately, as a consequence of developments in European case law[88] in recent years, a set of principles has emerged which may have some relevance to an application of the Australian legislation, particularly as it contains a reasonable range of non-taxable supply situations.
Determining whether any particular transaction is taxable, GST-free or input taxed in terms of the GSTA is ultimately a question of law for a tribunal.[89] Identifying what the actual transaction is will, unless the facts are undisputed, often involve questions of law and fact.[90] The point must be decided objectively[91] with the motive or intention of either the supplier or the recipient being largely irrelevant.[92]
Any supply identification and classification must be made in light of the specific statutory provisions and scheme of the GSTA. This point was emphasised in Bophuthatswana National Commercial Corporation Ltd v C & E Commrs.[93]
In this case, the issue was whether a non-profit-making corporation established in the United Kingdom by an unrecognised government to provide diplomatic services was subject to tax at standard rates on the provision of those services.
The Customs and Excise Commissioners contended that the corporation was making a single composite supply of "embassy" facilities and services to the Bophuthatswana Government. The corporation argued that it had supplied a package of services to the government some of which were taxable (eg the provision of accommodation for government officers) and some of which were zero-rated being provided in Bophuthatswana.
The trial judge rejected the Commissioners argument, holding that it was not possible to regard the significant array of services provided by the corporation as a single composite supply. The English Court of Appeal upheld this approach, commenting that while in terms of a simple package of benefits (for example, the provision of food on an airline as in British Airways[94]) it might be possible to explain the arrangement in terms of a "single" supply, this would not always be the case in respect of more complex commercial arrangements, where the statutory scheme might compel differing tax treatments. Nolan LJ stated:
The difference in the present case [from that in a case like British Airways] is that, although there may be only a single commercial relationship between BNCC and the government of Bophuthatswana, the individual supplies of goods and services in the course of that relationship appear to vary widely both in nature and in taxability or potential taxability. It cannot be right in my judgment to cast over them a blanket label services of the sort ordinarily provided by a diplomatic mission and to conclude that, since this label does not appear in the relieving provisions, the whole of the services must be charged at the standard rate. It is essential, to my mind, to analyse the individual supplies of goods and services by reference to the specific taxing and relieving provisions of the 1983 Act, as a preliminary to deciding whether any of them are no more than ancillary or incidental to another or others, and to determining whether and if so how the money paid by the Bophuthatswanan government should appropriately and fairly be apportioned between them. This is effectively the view which was formed by the judge ([1992] STC741), and I would uphold the order which he made.[95]
The conclusions of the English Court of Appeal in Bophuthatswana National arguably have relevance for s 9-80, which seems to expressly contemplate the apportionment of a single supply containing separate and different GST components.[96] The following points, however, need to be noted regarding the provision:
• It only applies where a single supply is involved, albeit a supply providing both chargeable and non-chargeable benefits.
• The non-chargeable benefits provided must be either GST-free or input taxed in nature but arguably not both – i.e. if a supply has taxable, input taxed and GST-free elements s 9-80 does not apply, at least on a literal reading.
• Section 9-80 only appears to apply where one has as a matter of fact and law recognised in a supply the existence of separate elements with differing GST statuses. Thus, it would apply, say, where there was a single agreement at one price for the sale of land comprised of two separate legal lots, one lot committed to taxable commercial activity (eg it had on it a building being commercially leased) and the other lot had on it input taxed activity (eg it had on it used residential premises). Similarly, it might apply where a software provider, say, contracted to provide for the one price under the one contract support services to a business having both a domestic and international presence and where the split of services on a time and cost basis could be easily demonstrated. Here, the split would be between the taxable and GST-free components of the supply.
• It does not follow that s 9-80 applies every time one can point to some element existing in a supply, the tax treatment of which is different from the core commodity supplied. For example, the fact that an Australian airline provided some incidental GST-free item to passengers as part of a package of taxable transportation services would not trigger the operation of s 9-80 because, at least on the reasoning in British Airways and British Telecommunications, there would not be a GST-free component to apportion, incidental GST-free items being an integral part of the core taxable supply – the provision of air transportation.
• Underpinning the application of s 9-80 must be some principle of materiality (both in a qualitative and quantitative sense) particularly as commercial practice increasingly is using the provision of supplementary benefits of limited or no value (the grant of which may be tied or optional) to assist in the sale of primary commodities. Arguably, it is only where these "incidental" items can sensibly be regarded as independent things of value that s 9-80 is triggered. However, if a single supply confers a non-taxable benefit that as a matter of commercial reality is of substance, it should be recognised in terms of either an input taxed or GST-free category (hence, the reference by Nolan LJ in Bophuthatswana National to the need to make the assessment "by reference to the specific taxing and relieving provisions of the [Act]") and an apportionment should be undertaken under s 9-80 rather than an attempt being made to create a composite supply.
• As s 9-80 is a mechanism which focuses on the value of each of the different GST components in a single supply, it presupposes one can determine "value". Sometimes it may be impossible with individual components in a supply to ascribe any sensible value to them as isolated items, as their value is only explicable in terms of their being part of a "packaged" commercial outcome.[97]
In approaching the question as to whether a registered supplier has provided a customer with several distinct principal supplies or with a single supply in respect of any commercial situation, regard must first be had to all the circumstances in which that transaction takes place in order to determine its characteristic features[98]
What this directive seems to mean in practice is that a tribunal is entitled to conduct a broad review of the relevant facts and legal arrangements to determine what the correct characterisation of a commercial arrangement is in "supply" terms. While the actual legal contracts underpinning the arrangement will be given considerable weight in resolving any supply characterisation question, they will not necessarily be determinative.
Importantly, the authorities have indicated that it may be necessary when undertaking any supply analysis to step back from the formalistic elements of a transaction providing a bundle of benefits to ask what its essential features are as a matter of commercial reality[99] or from an economic point of view.[100]
In undertaking this broad-ranging and commercially pragmatic review, the following presumptions or principles should be borne in mind, at least in terms of unbundling a package of services:[101]
• Every supply should normally be regarded as distinct and independent.[102]
• A supply which comprises a service from an economic point of view should not be artificially split, as this could distort the proper functioning of the VAT system.[103]
• The fact that separate charges are identified in a contract or on an invoice does not prevent the various supply elements constituting one composite supply or from being ancillary to another dominant supply.[104]
• The fact that the "ancillary" supply feature under review is an optional one that could have been commercially structured differently may also not be relevant. A taxpayer will be judged by what it did, not what it might have done.[105]
Very often where a "package" of benefits is provided, many of the benefits will be structured around the supply of one principal thing. In the case of services, there is now a clear test that should be applied to determine whether the taxable person is supplying a customer with several distinct supplies of services or with a single service:
There is a single supply in particular in cases where one or more elements are to be regarded as constituting the principal service, whilst one or more elements are to be regarded, by contrast, as ancillary services which share the tax treatment of the principal service. A service must be regarded as ancillary to a principal service if it does not constitute for customers an aim in itself, but a means of better enjoying the principal service supplied (C & E Commrs v Madgett (t/a Howden Court Hotel) (Joined Cases C-308/96 and C-94/97) [1998] BTC 5,440, para 24).[106]
British Telecommunications illustrates the application of this test. In this case, the issue before the House of Lords was whether British Telecommunications plc could claim GST input tax on certain transportation and delivery services associated with the acquisition of motor vehicles it had purchased from manufacturers. This was only possible if the supply of the motor vehicles and their delivery were considered to be separate supplies, as no input tax was available on the supply of a motor vehicle.[107]
After carefully reviewing a number of supply arrangements with different manufacturers the Law Lords concluded:
... as a matter of commercial reality there was one contract for a delivered car: it is artificial to split the various parts of transactions into different supplies for VAT purposes. What BT wanted was a delivered car; the delivery was incidental or ancillary to the supply of the car and it was only on or after delivery that property in the car passed. The fact that delivery could have been arranged differently under a separate contract between BT and the transporter or by BT collecting the car itself does not mean that when there is a contract for a delivered car the two supplies must be kept separate.[108]
The Law Lords were influenced also by the fact that although British Telecommunications, because of its buying power, could have structured the deal to have the delivery and transport treated separately and on a more favourable GST basis which would have created an inequity in the VAT system, this should not be condoned as "comparable transactions should for VAT purposes, as far as possible, be treated equally."[109]
As the test from Madgett[110] states, a service must be regarded as ancillary to a principal service if it does not constitute for customers an aim in itself, but a means of better enjoying the principal service supplied.
An application of this test has seen ancillary services held to be single or composite supplies in a wide range of commercial contexts:
• Delivery and transportation services as part of the principal supply of motor vehicles.[111]
• In-flight catering as part of the principal supply of air transportation, and other forms of in-flight service such as in-flight entertainment and toilet facilities.[112]
• Transport as part of a principal supply of accommodation by hotel owners, because it was one of those services "habitually associated with travel" and took up a small proportion of the package price.[113]
• Subsidised travel as part of a principal supply of transporting passengers.[114]
• The provision of meals and accommodation as part of the principal supply of teaching English as a foreign language.[115]
• Managing credit as part of a principal supply of granting and negotiating credit.[116]
By contrast, several multiple supply situations have also been found where the commercial circumstances left little doubt that separate supplies were being provided:
• The provision of drugs and prostheses by a hospital in the course of treating a patient was not ancillary to an overall provision of hospital treatment services because, considering what the real and substantial benefits that were provided to a patient, it was clear multiple supplies were being paid for.[117]
• The provision of transportation to and from distant pick-up points in addition to the provision of hotel accommodation as part of an all-in price, which extra activity went beyond the tasks traditionally entrusted to hoteliers and which could not be earned without a substantial effect on the package price charged, was a distinct supply from that of the accommodation.[118]
When identifying and characterising the status of any supply from a legal and commercial perspective, it is the position of the recipient of the supply, in terms of the benefits received, that is the primary focus. In one sense this is nothing more than trying to assess as a matter of commercial reality the nature and extent of the entitlements that a consumer expects and obtains for their money from a supplier.
The need to focus on the position of the recipient of the supply is emphasised in by Wellington Private Hospital,[119] where the question was that whether the provision of drugs to in-patients in private hospitals and the supply of and surgical fitting of prostheses (such as artificial hip joints or pacemakers) were GST-free for VAT purposes. The supply of drugs or prostheses in the course of hospital or medical care only qualified for zero-rating if they retained their character as supplies of goods rather than being part and parcel of the service of medical care.
In holding that the supply of drugs and other goods was a separate supply from a provision of hospital services, Millett LJ commented:
If one asks what is the real and substantial consideration provided to the patient for his money, there can in my view be little doubt about the answer. Just as the air passenger pays for transportation, so the hospital patient pays for care and treatment. But while the air passenger would regard the provision of in-flight catering, in-flight entertainment and toilet facilities as merely incidental to his transportation by air from his point of departure to his destination, the hospital patient would not regard the provision of drugs and prostheses in the same light...
In my opinion, it is only if one begins by assuming that 'hospital treatment' is a single supply that it is possible to conclude that the supply of drugs or prostheses is an integral part of that supply. But the reality is that care and treatment in hospital involves multiple supplies by different suppliers; and that it is difficult to see why the supply by the hospital of medication prescribed by a consultant should be regarded as 'ancillary' to the accommodation or nursing services supplied by the hospital rather than to the services supplied by the consultant (in which it cannot be subsumed).[120]
A critical feature of any approach following reasoning of the above type is how the initial description of the activities are characterised. If some broad commercial label is attached to the primary supply (like "hospitalisation services") it may be easier to find "ancillary" elements.[121]
Another case that stresses that the focus must be with the position of the recipient of a supply is Trewby (Hurlingham Club) v C & E Commrs.[122] Here there was an unincorporated members club with membership of between 3,000 – 4,000 people. Annual subscriptions in 1973 were in the order of £115,000. The club's facilities were provided free to members. However, members were required to pay for meals and drinks. The Customs and Excise Commissioners sought to impose VAT on subscription fees. Mr Trewby, the secretary of the club, argued that the club's supplies were exempt because in return for their subscription fee the member obtained the grant of an "interest in or right over land" or "license to occupy land" within the relevant legislation, which supplies were exempt.
The Court held that what a member sought to obtain in return for his or her subscription was not a share in the beneficial ownership of the club's property, but the privilege of going on the club's grounds and enjoying the facilities. That was not covered by the relevant exempting terms and, as such, the club's appeal was dismissed.
In the course of its judgment, the Court asked whether a member paid any part of his or her subscription for a share of beneficial ownership. Looking at the matter realistically, the object of becoming a member of the club was to enjoy the facilities of the club. The fact that a member might get a share in the beneficial ownership of land (because it was an unincorporated club) would not occur to prospective members. The Court stated:
In other words, no part of the entrance fee or subscription can properly be said to be referable to such interest in land as the member obtains. Alternatively, the proportion of the subscription which is properly referable to the beneficial interest is so small as to be negligible. The correct approach is to see what in reality the member is getting for his money. What is the appropriate description of the services supplied by the taxable person in return for the member's subscription? The answer here is the privilege of going on the grounds and enjoying the facilities, not the somewhat recondite enjoyment of his share in the beneficial ownership.[123]
Reasoning of the above type will be very important when assessing the correct status of commercial arrangements involving the grant of membership or participation rights which are funded (in whole or in part) through, say, the issue of equity or debt.
In many respects, GST is a simple tax to apply and administer. It needs to be as it will touch the business and private lives of Australians in a substantial way.
However, as the authorities discussed in this article indicate, one area in the operation of the tax that is likely to be problematical is the identification and characterisation of taxable supplies. This is an inevitable consequence of the increasing diversity and complexity of commercial transactions and the fact of different GST outcomes under the legislation, outcomes which will ensure future contests between the Australian Tax Office and taxpayers.
Denham Martin is the principal of Denham Martin & Associates, a law firm specialising in all aspects of tax law. The firm has offices in Australia and New Zealand. Denham has written numerous papers and articles on taxation law (including GST). Denham is a consultant to some of Australia's and New Zealand's leading businesses and professional firms. He is a member of the Editorial Boards of CCH in New Zealand and Australia and has lectured in taxation at the University of Auckland.
[1] For example, the concept of "income" is the cornerstone of income tax rules, a "gift" for rules imposing a gift duty liability, a "capital gains tax event" for capital gains tax liability, and so on.
[2] As Blanchard J observed in the New Zealand Court of Appeal decision of C of IR v New Zealand Refining Co Ltd (1997) 18 NZTC 13187, 13193 ("New Zealand Refining"), citing with approval C of IR v Databank Systems Ltd (1989) 11 NZTC 6093; 12 NZTC 7227 ("Databank Systems"): "It is fundamental to the GST Act that the tax is levied on or in respect of supplies. It is not a tax on receipts or turnover; it is a tax on transactions..." Similarly, in discussing the structure of VAT in the United Kingdom, Lord Millett recently observed in C & E Commrs v Redrow Group Plc [1999] BTC 5062, 5068 ("Redrow") that: "The key concept is that of supply".
[3] The liability for "taxable importations" being an important exception: see GSTA, s 13-15 and Div 13 and A New Tax System (Goods and Services Tax) Regulations 1999 ("GSTR"), r 40-5.12 (item 6).
[4] The GST distinctions that exist between a hire purchase agreement, a finance lease, and an operating lease provide a useful illustration. In commercial terms, these legal arrangements achieve very similar objectives – providing for the use of a particular item of personal property, like a motor vehicle. The GST implications are quite different. The provision of "credit" under a hire purchase agreement is a financial supply and this feature must be separated from the underlying taxable supply of the asset being acquired. Both the finance lease and the operating lease (at least to the extent they satisfy the requirements of GSTR, r 40-16 (item 1)) give rise to taxable supplies of goods, with no input tax element required to be recognised.
[5] In C & E Commrs v Oliver [1980] 1 All ER 353, 354, Griffiths J noted, when commenting on the United Kingdom VAT legislation, that: "There is no definition of 'supply' in the Act itself, but it is quite clear from the language of the Act that 'supply' is a word of the widest import". It seems clear that "supply" as a concept is equally as comprehensive as the legal term "disposition". Supplies, and the terms with which it is linked, are ones that an eminent tax jurist has suggested "breathe comprehensiveness": see comments of Richardson J in Databank Systems (1999) 11 NZTC 6093, 6102. As noted in the Explanatory Memorandum to the A New Tax System (Goods and Services Tax) Bill 1998 ("Explanatory Memorandum"), when commenting on the definition of "supply": "This is defined broadly and is intended to encompass supplies as widely as possible."
[6] See, the Executive Summary in the Explanatory Memorandum: "GST is a broad indirect tax introduced by the Government to replace the wholesale sales tax and a number of State indirect taxes ... Enterprise is widely defined because GST is intended to have a broad base."
[7] Obviously, "anything" would have to be something that the law recognised as capable of being provided from one person to another. In Chatham Islands Enterprise Trust v C of IR (1999) 19 NZTC 15075, 15081 ("Chatham Islands Enterprise Trust"), Tipping J made this point by stating: "Although services are defined as meaning anything which is not goods, it is still necessary for there to have been a supply of something". "Something" could encompass bare legal title as well as a possessory interest, although one has to in this context distinguish between the interest being conveyed and the value provided for the interest. In many situations, say, a distribution of property to a beneficiary, the value provided of the thing being conveyed could be de minimus or zero, at least in the absence of statute deeming the existence of a market value. Under this reasoning, an in-specie distribution of property will constitute a supply, although whether a GST liability is triggered will depend on a range of factors: see position of New Zealand Inland Revenue on this point in Appendix A to Tax Information Bulletin, Vol 1, No 11. Statute can provide a special rule for the transfer of property as it has done in s 9-10(3A) for livestock and game that is to be incorporated into processed food. Finally, the one exception to this principle is a transfer of money.
[8] See, as an illustration of this, Cooper Chasney Ltd v C & E Commrs [1990] 3 CMLR 509 and the definition of "consideration" in s 9-15(2A). Incentive, inducement, and tying arrangements will generally constitute supplies, as they will involve forgoing or refraining from exercising some kind of right.
[9] "Goods" are defined in s 195-1 as meaning "any from of tangible personal property". The term "services" is not defined in the GSTA but in Redrow Group [1999] BTC 5062, 5065-5066, Lord Hope noted that "the word 'services' is given such a wide meaning for the purposes of VAT that it is capable of embracing everything which a taxable person does in the course or furtherance of a business carried on by him which is done for a consideration."
[10] The definition of "real property" includes not just conventional interests in land but also contractual licences and other similar personal rights: s 195-1.
[11] Division 100 covering vouchers is a useful illustration of this point. The act of redeeming a voucher is not a supply: s 100-10(1). The supply of a voucher will often not be a "taxable supply": s 100-5(1). Other situations deeming certain supplies can be found in ss 66-45, 72-5, 78-25, 78-50, 78-60, 78-65, 78-70, 81-10, 84-5, and 90-5.
[12] The Concise Oxford Dictionary (8th ed) defines the verb to "supply" as including: "to furnish with something required; to make available or provide (something desired or lacking); to provide for adequately; satisfy". See also on this point the judgment of Davison CJ in Databank Systems (1987) 9 NZTC 6213, 6223. This interpretation has not been overruled on appeal.
[13] In Case M74 (1990) 12 NZTC 2441, 2444, Bathgate CJ commenting on the New Zealand notion of "supply", stated: "The supply normally envisages a supplier and a recipient". In Chatham Islands Enterprise Trust, (1999) 19 NZTC 15075, 15081, Tipping J in the New Zealand Court of Appeal observed: "... the trustees must be shown to have supplied something to somebody." Similarly, in F B Duvall Ltd v C of IR (1997) 18 NZTC 13470, there was found to be no supply of services as conventionally understood where the administration services were designed to achieve tax benefits, not real commercial benefits for a third party recipient. Note that this finding has subsequently been reversed by the New Zealand Court of Appeal on a procedural ground: F B Duvall Ltd v C of IR (2000) 19 NZTC 15658. Obviously, statute could expressly alter this requirement.
[14] "Money" is defined in s 195-1 as including:
(a) currency (whether of Australia or of any other country); and
(b) promissory notes and bills of exchange; and
(c) any negotiable instrument used or circulated, or intended for use or circulation, as currency (whether of Australia or of any other country); and
(d) postal notes and money orders; and
(e) whatever is supplied as payment by way of:
(i) credit card or debit card; or
(ii) crediting or debiting an account; or
(iii)creation or transfer of a debt.
However, it does not include:
(f) a collector's piece; or
(g) an investment article; or
(h) an item of numismatic interest; or
(i) currency the market value of which exceeds its stated value as legal tender in the country of issue.
[15] See Explanatory Memorandum, para 3.7. The receipt of a dividend is an example of a "money" payment which involves no recognisable GST supply: see Sofitam SA v Ministre charge du Budget (Case C-333/91) [1993] ECR I-3513.2.
[16] See GSTA, s 9-10(4).
[17] (1999) 19 NZTC 15075.
[18] (1999) 19 NZTC 15075, 15,081. That a purely voluntary settlement of money onto a trust does not constitute a supply is arguably also implicit in the decision of the House of Lords in Trustees of the Nell Gwynn House Maintenance Fund v C & E Commrs [1999] BTC 5025 (HL) ("Nell Gwynn House Maintenance Fund") and the same position applies where a body corporate of a time-share resort collects contributions from its members and on-pays them towards the resort's upkeep and maintenance without performing any services in respect of the same: see, Taupo Ika Nui Body Corporate v C of IR (1997) 18 NZTC 13147 ("Taupo Ika Nui").
[19] In New Zealand Refining (1997) 18 NZTC 13187, Blanchard J commented in the following way on this point: "But it remains essential to remember that, unless it is being argued that the documentation masks the true nature of the transaction (and that is not contended in this instance), in taxation disputes the Court is concerned with the legal arrangements actually entered into and the rights and duties they create, not with the economic or other consequences of the arrangements: Marac Life Assurance Ltd (1986) 8 NZTC 5,086 at pp 5,097, 5,098; [1986] 1 NZLR 694 at p 706." This approach is arguably consistent with that reflected in Australian decisions such as FC of T v Orica Limited (Formerly ICI Australia Limited) 98 ATC 4494, 4520 (per Gummow J). Obviously, a wide enquiry can be undertaken to determine what the "legal arrangements" are: Marac Finance Ltd v Virtue [1981] 1 NZLR 586, cited with approval by the Australian Tax Office in its ruling on grants of financial assistance, Taxation Ruling GSTR 2000/11, para 81. Recent VAT decisions have arguably taken a more economic and substance-oriented approach, although the emphasis may prove to be one of degree only: see the discussion below at part 4.2.3. A similar approach can also be found in Canada in Skylink Voyages Inc v The Queen (1999) 96-4400 (GST) G GST 4, where the court commenced its GST analysis by reviewing "the legal framework in which Skylink provided its services".
[20] See Turakina Maori Girls College Board of Trustees & Ors v C of IR (1993) 15 NZTC 10032, 10039 (per McKay J) ("Turakina Maori Girls College"), giving the unanimous judgment of the New Zealand Court of Appeal. Nor is it a tax on "profits" or "gains" and this fact is often part of the difficulty that taxpayers, who are used to tax assessments calculated on "profits" or "gains", have in conceptualising supplies where value is matched and there is no net "profit" or "gain". Thus, barter transactions, club memberships, sponsorship arrangements, are commercial events that may not give rise to, say, an income tax liability, but which will trigger a GST event. As to how to calculate the consideration on some of these more unusual commercial arrangements: see Taxation Ruling GSTR 2000/D11.
[21] (1987) 9 NZTC 6213 (HC); (1989) 11 NZTC 6093 (CA).
[22] (1990) 12 NZTC 7227 (PC).
[23] (1990) 12 NZTC 7227, 7234.
[24] In the income tax context, for example, moneys obtained through, say, embezzlement have been held to constitute taxable income: see, James v United States [1961] USSC 84; 366 US 213 (1961) and R v Poynton [1972] CTC 411, but also to the contrary in a different legislative setting, A Taxpayer v C of IR (1997) 18 NZTC 13350, although now legislated for in s CD6 of the Income Tax Act 1994 (NZ).
[25] See GSTA, s 9-10(3).
[27] A distinction has been drawn in Europe, however, between dealings in items such as narcotics or counterfeit currency because their absolute prohibition as tradeable commodities means they can never be placed on the market or incorporated into commercial channels: see Mol v Inspecteur der Onvoerrechten en Accijnzen (Case 296/86) [1990] BTC 5014, Lange v Finanzamt Furstenfeldbrunck (Case C-111/92) [1993] ECRI-4677, and Staatssecretaris van Financien v Coffeeshop Siberie vof (Case C-158/98) [1999] BTC 5320. It remains to be seen whether this type of distinction will be applied in Australia by the courts when giving effect to the requirements of s 9-10(3) of the GSTA.
[28] See Mohr v Finanzamt Bad Segeberg (Case C-215/94) [1996] BTC 5253.
[29] The requirement for consideration (in various statutory formulations) is a central feature of VAT rules. "...unless the services are rendered for a consideration they cannot constitute the subject matter of a supply": see, Redrow Group [1999] BTC 5062, 5071 (per Lord Millett). In New Zealand while "consideration" is a central precondition of a taxable supply, the legislation also contemplates that a supply can be made for no consideration in which case its value will be nil: s 10(19) of the Goods and Services Tax Act 1985 (NZ). A similar position is contemplated in Australia in GSTA, Div 72 which is an exception to the notion that the absence of consideration cannot give rise to a taxable supply.
[30] GSTA, s 9-5 states:
You make a taxable supply if:
(a) You make the supply for consideration; and
(b) The supply is make in the course or furtherance of an enterprise that you carry on; and
(c) The supply is connected with Australia; and
(d) You are registered, or required to be registered.
However, the supply is not a taxable supply to the extent that it is GST-free or input taxed (emphasis added).
[31] For example, in C & E Commrs v Battersea Leisure Ltd [1992] BTC 5011, the question was whether a contribution payment by a vendor to remove asbestos from a site it had sold was a taxable supply of services. In finding that it was, Kennedy J stated that the critical issue was whether a quid pro quo existed for the contribution payment. His Honour noted at page 5014: "From the opinion of the Advocate General and the judgment in the Apple and Pear case and from the judgment of Slade LJ in Trafalgar Tours it emerges that: ... (2) the essence of the supply of services for consideration is that the payment should be "for" the services rendered. It should be a quid pro quo. There must therefore be a direct link between the services provided and the consideration received." In The Trustees, Executors and Agency Co New Zealand Ltd v C of IR (1997) 18 NZTC 13076, 13085 ("Trustee Executors"), Chisholm J stated: "The statutory scheme implemented by the [New Zealand GST Act] means the crux of the matter is the definition of 'consideration'."
[32] The statutory concepts of enterprise, connected with Australia, and registered are other critical jurisdictional prerequisites in the definition of "taxable supply" in GSTA, s 9-5. This article does not discuss these other concepts in detail because it proceeds on the assumption that most supply identification (and classification) problems arise in circumstances where the transaction(s) in issue would normally satisfy these features in the legislation.
[33] Chatham Islands Enterprise Trust (1999) 19 NZTC 15075 is a case in point. The majority of the New Zealand Court of Appeal rested their judgment squarely on the basis that no services were provided by the trustees of the Trust for which the moneys given could be viewed as consideration. The New Zealand Refining case is also explicable solely on the basis that no linkage existed between the Crown payments made and the provision of any consideration by the taxpayer. A case having both a "no supply" and "no consideration" element is Case M129 (1990) 12 NZTC 2839, where certain wage subsidy payments received by taxpayers under a Job Opportunities Scheme administered by the New Zealand Labour Department were characterised as not being consideration for a supply provided by the taxpayer and it was also held that no supply had been provided by the taxpayer to the Labour Department.
[34] "Consideration for GST is intended to be very broad": see Explanatory Memorandum, para 3.9.
[35] In Trustee Executors (1997) 18 NZTC 13076, 13085, Chisholm J described the phrase any payment made as being "clearly of wide import". Chisholm J went on to note that the phrase would clearly cover the payment of rates by a lessee under the terms of a lease and nor did it matter (as it does not under the definition s 9-15) whether the payment was made voluntarily or not.
[36] A classic description of what must be given in exchange for a promise in order to make an enforceable contract: see Thomas v Thomas [1842] EngR 260; (1842) 2 QB 851, 859. This notion of something of value passing was also referred to by Henry J in the New Zealand High Court's decision in New Zealand Refining (1995) 17 NZTC 12307, 12314 when his Honour commented that: "The scheme of the [New Zealand GST Act] is clearly directed at taxing all forms of value by the taxpayer for services supplied." See also above, note 7.
[37] See Explanatory Memorandum, para 3.9. This is a point made clearly by Chisholm J when commenting in Trustee Executors (1997) 18 NZTC 13076, 13085 on the New Zealand statutory definition, which in many respects is identical to that contained in GSTA, s 9-15. His Honour stated: "I go straight to the extended statutory definition of "consideration". In the context of this matter I am not persuaded that it is helpful or appropriate to reflect upon the ordinary meaning of the word. The statutory definition extends the ordinary meaning and it is the scope of the extended statutory definition which needs to be determined."
[38] See, for example, D & C Builders Ltd v Rees [1966] 2 QB 716.
[39] For example, they may be void because they are contrary to public policy.
[40] See the discussion at part 2.7.
[41] See the discussion above of Turakina Maori Girls College and to similar effect C & E Commrs v Telemed [1992] STC 89, where consideration was found in a supply of medical videos to doctors which were paid for by advertisers.
[42] (1993) 15 NZTC 10032.
[43] (1993) 15 NZTC 10032, 10037.
[44] See GSTA, s 9-15(2A).
[45] In essence this argument was accepted by the New Zealand courts in New Zealand Refining. See also New Zealand Inland Revenue publication Tax Information Bulletin Vol 1, No 11.
[46] See Case S77 (1996) 17 NZTC 7483, where no taxable supply was held to exist where a farming couple reached an out-of-court settlement with neighbours in respect of losses caused by a fire they had negligently started.
[47] See GSTA, s 9-15(2B). Transactions of this type would often not trigger a direct tax liability: See Royal Automobile Club of Victoria v FC of T [1974] VicRp 80; (1973) 4 ATR 567. The provision of membership and subscription services and rights will be supplies, and this fact alone will require many clubs, associations and co-operatives to register for GST.
[48] [1998] BTC 5332 ("First National Bank").
[49] [1998] BTC 5332, 5349.
[50] [1998] BTC 5332, 5350. The ability to net off in this way arguably runs against a specific supply-by-supply analysis, but may have to be recognised in respect of certain types of commercial dealing: see also Glawe Spiel v Finanzamt Hamburg-Barmbek-Uhlenhorst (Case C-38/93) [1994] BTC 5242. Whether this approach will be followed in Australia is still conjectural.
[51] See Blackstone's Commentaries on the Laws of England (14th ed, 1966) vol 2, 440.
[52] The term "non-profit body" is not defined in the GSTA but conventionally they are entities established principally to achieve goals or purposes, as opposed to producing profit. See also Australian Tax Offices discussion of the meaning of the term in Taxation Ruling GSTR 2000/11, paras 50-56.
[53] Taxation Ruling GSTR 2000/11, para 69.
[54] See comments of Deane J in Leary v FC of T 80 ATC 4438, 4455 ("Leary").
[55] At least outside say a GSTA, Div 72 situation.
[56] See Taxation Ruling GSTR 2000/11, para 69.
[57] It is hard to see in this example how it has the elements of "detached and disinterested generosity" referred to by Deane J in Leary, as it clearly flows out of the earlier contractual performance.
[58] GTE Sylvania Ltd v R [1974] 1 FCR 726, states that a "grant" at law is: "... a gift or assignment of money by government or public authority out of public funds to a private or individual or commercial enterprise deemed to be beneficial to the public interest." See also the illustrations used by the Australian Tax Office in Taxation Ruling GSTR 2000/11.
[59] GSTA, s 9-15(3).
[60] However, one would always need to carefully assess with tied benefits like this whether something additional of value had to be provided by the customer to perfect their entitlement. See the Australian Tax Office's position on frequent flyer programmes in its Media Release of 1 March 2000.
[61] The term "government related entity" is defined in GSTA, s 195-1 as:
(a) a government entity; or
(b) an entity that would be a government entity but for subparagraph (e)(i) of the definition of government entity in the A New Tax System (Australian Business Number) Act 1999; or
(c) a local governing body established by or under a State law or Territory law.
[62] See Income Tax Assessment Act 1997 ("ITAA97"), s 995-1 for a definition and also the terms of Taxation Ruling GSTR 2000/4 covering "appropriations".
[63] In Taxation Ruling GSTR 2000/4, para 16 the Australian Tax Office provide the following definition of an "appropriation": "The allocation of a sum of money to a particular purpose. The annual Appropriation Act authorises the issue from the Consolidated fund of money required to meet government expenditure and allocates it between departments and by reference to itemised heads of expenditure."
[64] Taxation Ruling GSTR 2000/4, paras 19-24.
[65] Obviously internal transfers of money between government departments may not constitute "supplies": see the discussion at part 2.3.
[66] Taxation Ruling GSTR 2000/4 notes that if the paying agency receives something in exchange for its payment it may constitute an ordinary commercial event subject to GST.
[67] See, for example, GSTA, s 38-250 covering the non-commercial activities of charitable institutions.
[68] The Australian Tax Office acknowledge this in Taxation Ruling GSTR 2000/11, para 71: "It will not be sufficient for there to be a supply and consideration."
[69] See GSTA, s 9-5(a).
[70] See Taxation Ruling GSTR 2000/11, para 77 where the other statutory references supporting this approach are discussed. A similar "coupling" is required in other jurisdictions. VAT law in the European Community refers to the supply being "effected for consideration", see art 2(1) of the Sixth VAT Directive. New Zealand's GST legislation specifies the link in the definition of consideration." see Goods and Services Tax Act 1985 (NZ), s 2(1).
[71] (1997) 18 NZTC 13187.
[72] (1997) 18 NZTC 13187, 13194.
[73] See definition of "consideration" in Goods and Service Tax Act 1985 (NZ), s 2(1).
[74] See Chatham Islands Enterprise Trust, 19 NZTC 15075, 15077 (per Blanchard J). Similarly, in the New Zealand High Court's decision in Taupo Ika Nui (1997) 18 NZTC 13147, 13150, Gallen J reviewing the status of certain contribution payments to a body corporate running a timeshare resort stated: "The definition [ie of "consideration"] contemplates consideration as a return for the services supplied... The question arises therefore, whether the definition is so worded that there is no need for an element of reciprocity. With some hesitation I have come to the conclusion that it does not." VAT authorities also demand this reciprocal feature, as noted earlier.
[75] One of the best descriptions of this feature is that of Henry J in the High Court decision in New Zealand Refining (1997) 18 NZTC 13187: "The tax is chargeable against payments which go to make up the value of an identifiable supply which has been made. Payments which are received in the course of carrying on a taxable activity are not chargeable unless they also have that additional quality or character..." This approach is also implicit in VAT authorities like Trustees of the Nell Gwynn House Maintenance Fund [1999] BTC 5025 and Tolsma v Inspecteur der Omzetbelasting Leeuwarden (Case C-16/93) [1994] BTC 5124.
[76] In Hatfield v Health Insurance Commission [1987] FCA 286; (1981) 15 FCR 487, 491, Davies J noted that: "Expressions such as 'relating to', 'in relation to', 'in connection with' and 'in respect of' are commonly found in legislation but invariably raise problems of statutory interpretation. They are terms which fluctuate in operation from statute to statute ... The terms may have a very wide operation but they do not usually carry the widest possible ambit, for they are subject to the context in which they are used, to the words with which they are associated, and to the object or purpose of the statutory provision in which they appear."
[77] Having said this New Zealand courts have interpreted the phrase "in respect of" so broadly it is questionable whether the other phrases include anything additional: see the discussion on New Zealand Refining.
[78] See Taxation Ruling GSTR 2000/11, para 79.
[79] See the discussion at Part 2.1 above. The Australian Tax Office observes (correctly it is suggested)that the more exhaustive statutory description of "supply" situations means that there needs to be "less creative use" of a GST concept like "services" to encompass, say, an undertaking to reduce production: see Taxation Ruling GSTR 2000/11, para 28.
[80] Supplies of this type, the components of which all end up with the GST status of the predominant component of the supply, are generally known as "composite" or "single" supplies.
[81] Supplies of this type, the individual components of which will have a different GST character, are generally known as "mixed" or "multiple" supplies.
[82] If the parties were "associated" for the purposes of Div 72 of the GSTA then the Australian Tax Office might be concerned to determine whether the price was a proper one and whether the correct amount of GST output tax had been accounted for. However absent this feature or tax avoidance, the Australian Tax Office would generally be reluctant to second-guess a price freely determined: see, for example, Europa Oil (NZ) Ltd v C of IR 70 ATC 6012, and indeed may be unable to in light of the terms of s 9-75.
[83] The pressure to recharacterise is evident in cases like Card Protection Plan Ltd v C & E Commrs [1999] BTC 5121 ("Card Protection Plan"), where having for seven years treated the services provided by the taxpayer as exempt, the United Kingdom Commissioners of Customs and Excise then reversed its position and treated them as taxable (at 5127). Nor will this recharacterisation always be GST neutral, because where output GST is increased the "extra" GST may not be able to be contractually recouped by a supplier or claimed as an input tax credit by the recipient of the supply (for example, the recipient may be an unregistered consumer). On attempting to sue the Commissioners of Customs and Excise for damages for alleged negligence in giving rulings on VAT positions, see F & I Services v C & E Commrs, Case Nos CO/3546/98 & CO 1217/99, High Court of Justice, Queens Bench (14 April 2000).
[84] GSTR, r 40-5.10 provides that if something is supplied to an entity directly in connection with a financial supply to the recipient by the entity, it is an incidental financial supply.
[85] GSTA, s 9-80 of the Act
provides that:
If a supply (the actual supply) is:
(a) partly a taxable supply; and
(b) partly a supply that is GST-free or input taxed;
the value of the part of the actual supply that is a taxable supply is the proportion of the value of the actual supply (worked out as if it were solely a taxable supply) that the taxable supply represents.
[86] See, for example, the comments by Lord Templeman in Databank Systems (1989) 12 NZTC 7227, 7234 when describing a commercial arrangement in terms of there being "... three separate activities, three (at least) separate contracts and three separate supplies for three separate considerations".
[87] Nor does VAT legislation either. See to this effect the comments made in proceedings in Card Protection Plan.
[88] Probably due to the fact of fewer non-chargeable areas, the question of "mixed" supplies has not been the subject of extensive judicial analysis in New Zealand, with perhaps the exception of C of IR v Coveney; C of IR v Dooley; C of IR v Swain (1995) 17 NZTC 12193 ("Coveney"), where the question before the New Zealand Court of Appeal was how one apportioned for input tax credit purposes the supply of a farm property (together with a dwelling house) sold as a single undivided unit for a single sum, where the relevant contract for sale neither contemplated nor allowed as between the parties for apportionment of either the subject-matter or the consideration.
[89] See British Railways Board v C & E Commrs [1977] 1 WLR 588, 591 (per Lord Denning) and 595 (per Browne LJ) ("British Railways"), where the issue before the English Court of Appeal was whether the provision of a travel card to a student at a nominal fee, which card on presentation entitled the student to a reduced ticket price for a train trip, constituted a zero-rated supply because it was for the "transport of passengers".
[90] See the analysis of Browne LJ on this feature in British Railways [1977] 1 WLR 588, 595-596.
[91] "In my judgment, the transaction must be looked at objectively in order to decide whether or not the "supply" involved in it does or does not fall within item 4 of Group 10, Schedule 4": British Railways [1977] 1 WLR 588, 598 (per Browne LJ). This approach was adopted in British Airways Plc v C & E Commrs [1990] BTC 5176, 5178 ("British Airways").
[92] "...in this case, they might suggest that the nature or intention of the person receiving the service is a relevant factor, which in my view it is not. Equally, the nature or intention of the person supplying the service is equally irrelevant...": British Railways [1977] 1 WLR 588, 597 (per Browne LJ).
[93] [1993] STC 702. This directive is also one the New Zealand Court of Appeal has made in an analogous context: see Coveney, 17 NZTC 12193, 12196.
[95] [1993] STC 702, 708.
[96] GSTA, s 9-80 is in one sense the reflex for GST output tax of ss 11-20 to 11-30 covering apportionments for GST input tax. New Zealand has several provisions in its legislation that contemplate apportionment of GST output tax - s 5(14) (taxable and GST-free); s 5(15) (real property supplied with dwelling); and s 10(18) (allocation of consideration).
[97] See the discussion of First National Bank at part 3.2.2 above.
[98] See Faaborg – Gelting Linien A/S v Finanzamt Flensburg (Case C-231/94) [1996] BTC 5391, 5400, where the question before the Court of Justice of the European Communities (Sixth Chamber) was whether, certain restaurant transactions on board a ferry running between Demark and Germany constituted supplies of goods or supplies of services. This approach was also endorsed more recently by the House of Lords in C & E Commrs v British Telecommunications plc [1997] BTC 5273, 5281 (per Lord Hope) ("British Telecommunications") and English Court of Appeal in C & E Commrs v Pilgrims Language Courses Ltd [1999] BTC 5295, 5304 ("Pilgrims Language Courses").
[99] The description of the ultimate assessment that needs to be made that was referred to by both Lord Hope and Lord Slynn in British Telecommunications [1997] BTC 5273.
[100] The description referred to by the Court of Justice of the European Communities (Sixth Chamber) in Card Protection Plan [1999] BTC 5121.
[101] Many of the relevant authorities have dealt with bundled "services", there is no reason to think that the same principles do not apply to bundled "goods" or mixed packages of both: see C & E Commrs v Wellington Private Hospital Ltd [1997] BTC 5140 ("Wellington Private Hospital").
[102] For a statement of this principle see Card Protection Plan [1999] BTC 5121.
[103] See Card Protection Plan [1999] BTC 5121.
[104] See British Telecommunications [1997] BTC 5273, 5279 (per Lord Slynn). There can of course be a difference of view as to what exactly is the nature of the core or dominant supply, particularly in respect of complex commercial transactions: see C & E Commrs v FDR Ltd [2000] BTC 5277 in respect of the provision of credit card services by FDR to banks. As FDR notes, this will often be determined by identifying what is "the true and substantial nature of the consideration for the payment".
[105] British Telecommunications [1997] BTC 5273, 5280 (per Lord Hope).
[106] Ibid, 5281.
[107] Under art 7(1) of the Value Added Tax (Input Tax) Order 1992 (SI 1992/3222) (UK). Transportation and delivery costs were not blocked from a claim to input tax, hence why the taxpayer sought to argue for separate supplies.
[108] [1997] BTC 5273, 5280 (per Lord Hope).
[109] Ibid 5282.
[110] [1998] BTC 5440.
[111] British Telecommunications [1997] BTC 5273, 5282 (per Lord Hope).
[112] See British Airways [1997] BTC 5273.
[113] See C & E Commrs v Madgett (tla Howden Court Hotel) Joined (Cases C-308/96 and C-94/97) [1998] BTC 5440 ("Magdett").
[114] See British Railways [1977] 1 WLR 588.
[115] See Pilgrims Language Courses [1999] BTC 5295.
[116] C & E Commrs v Lloyds TSB Group Ltd [1998] STC 528.
[117] Wellington Private Hospital [1997] BTC 5140.
[118] Madgett [1998] BTC 5440.
[120] [1997] BTC 5140, 5155.
[121] This characterisation task and the problems associated with it is rather like that involved with identifying what constitutes the "market" when assessing monopoly behaviour.
[123] Ibid, 206. See also other illustrations of this principle: Exeter Golf and Country Club Ltd v C & E Commrs [1981] STC 211 and The Arsenal Football Club plc [1996] BVC 2775.
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