HP Mercantile Pty Ltd v Commissioner of Taxation of the Commonwealth of Australia [2006] HCATrans 320 (16 June 2006)

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HP Mercantile Pty Ltd v Commissioner of Taxation of the Commonwealth of Australia [2006] HCATrans 320 (16 June 2006)

Last Updated: 29 June 2006

[2006] HCATrans 320

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
Sydney No S368 of 2005

B e t w e e n -

HP MERCANTILE PTY LTD

Applicant

and

COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

Respondent

Application for special leave to appeal

GUMMOW ACJ
KIRBY J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 16 JUNE 2006, AT 11.57 AM

Copyright in the High Court of Australia

MR I.S. YOUNG: May it please the Court, I appear with my learned friend, MR B.R. YOUNG. (instructed by Versace McKenzie Lawyers)

MR A. ROBERTSON, SC: I appear for the respondent, if the Court pleases. (instructed by Australian Government Solicitor)

GUMMOW ACJ: Yes, Mr Young.

MR YOUNG: Your Honour, this case represents the first opportunity for this Court to consider the operation of the goods and services tax.

GUMMOW ACJ: So, what follows from that?

MR YOUNG: I thought you would appreciate the - - -

KIRBY J: It is not made more attractive by the title of the Act, A new tax system (Goods and Services Tax) Act.

MR YOUNG: Colloquially known as the ANTS Act, your Honour.

GUMMOW ACJ: Where do you say Justice Hill erred in his understanding of the structure and scope of this taxation system and its application to your client’s situation?

MR YOUNG: Your Honour, we identify the error particularly at paragraphs 40 and 41 of his Honour’s decision at pages 36 to 37 of the application book. Section 11-15(2)(a) – if I can call it the GST Act – provides for the denial of input tax credits where those expenses - in the Act they are called acquisitions, but if I can use the word “expenses” – where those expenses relate “to making supplies that would be input taxed”. In the applicant’s submission, the word “making” imports a significant restriction and limitation and that the expenditure must relate to the making of supplies.

GUMMOW ACJ: What is the statutory provision that uses the expression?

MR YOUNG: Section 11-15(2)(a), your Honour. It is set out in his Honour’s reasons at page 30 of the application book, paragraph 20 at lines 29 to 30.

GUMMOW ACJ: So it comes down to these words “relates to”, does it not?

MR YOUNG: Not just “relates to”, your Honour, but “relates to making supplies that would be input taxed”. The main point that the applicant relies on is that, although there is no dissenting judgment by his Honour Mr Justice Allsop, to all intents and purposes, however, his Honour Justice Allsop accepts that textually the expenditure in issue in the case in relation to the debt collection expenses - - -

GUMMOW ACJ: That is why I asked you about what was the error on the part of Justice Hill concerning the statutory scheme and purpose and context of the legislation because that is what in the end persuaded Justice Allsop. If you got here, that is what would loom large here.

MR YOUNG: Your Honour, Justice Allsop refers to the textual analysis. The problem in this particular case arises in the context of financial supplies. The acquisition of debts for the purposes of collection, the act of acquiring the debts is specifically a financial supply. However, the collection of the debt and the amount collected is not deemed to be a financial supply.

GUMMOW ACJ: The debts were $160,000, were they not?

MR YOUNG: No, your Honour, that is what was paid for the portfolio of the debts.

GUMMOW ACJ: Yes, that is right.

MR YOUNG: The face value of the debts - - -

GUMMOW ACJ: The diligence fee was 150,000.

MR YOUNG: That is correct, your Honour, plus GST.

GUMMOW ACJ: Something was going on.

MR YOUNG: Your Honour, the issue between the parties concerns the construction of the section.

GUMMOW ACJ: I realise that.

MR YOUNG: In the courts below both at the Tribunal and the Full Federal Court, the Commissioner has test case funded the applicant. The circumstances under which the portfolio of debts was acquired was considered by both parties and the Tribunal and the Full Federal Court not to be relevant. Your Honour is quite correct. There is a convergence in the amount of the due diligence expense and the amount paid for the portfolio of debts. The underlying value of the portfolio of debts in the submissions in reply is referred to as possibly up to $92 million.

If I can come back to answer your Honour’s question, Justice Allsop drew, in our respectful submission, a distinction between the act of acquiring the debt and the debt itself. What is deemed to be a financial supply is the act of acquisition. It is the acquiring, not the debt itself. In this case we have expenses of two different types. We have debt collection expenses and we have expenses on a feasibility study or what is called the due diligence. The debt collection expenses if they relate to anything, they relate to collecting the debt. They do not have a logical obvious connection to the act of buying the debts or acquiring the debts in the first place. Justice Allsop says - - -

GUMMOW ACJ: There is this temporal point, is there not, you rely on?

MR YOUNG: It is not just a temporal point, your Honour, it is partly a temporal point and it is partly the making of supplies that would be input taxed. It is both the making as well as the temporal input into output question, which was what in large part featured in his Honour Mr Justice Hill’s decision in the court below.

GUMMOW ACJ: What do you say about paragraph 13 of Mr Robertson’s submissions at page 82:

the whole raison d’etre of the acquisition of the debts was to derive value from them by means of enforcing them – acquisition and recovery being a single commercial continuum –

That strikes one as a fairly sensible statement.

MR YOUNG: The problem in this particular case is that you have two legs to a transaction. You have acquiring debts and you have collecting of them. The problem comes about - - -

GUMMOW ACJ: You keep saying that.

MR YOUNG: The problem comes about because the collection leg is not specifically dealt with. It is not specifically deemed to be a financial supply. What we have happening here is, in my respectful submission, an attempt by the Commissioner and accepted in the court below to, as it were, rewind the expenses, if I can call them that, look backwards and attribute and look to a connection with the acquisition of the debts themselves, whereas in truth the obvious connection is with the collection, not the prior act of acquiring the debts ab initio.

KIRBY J: I thought your argument that you put forward was arguable. I thought that the propositions of law that you are advancing are arguable but, as Justice McHugh and other Judges have repeatedly said, by the time you get to this Court many matters are arguable. We have said that normally matters of tax law will finish in the Federal Court, though, as we have shown, we will take these on. What is the importance of your case that warrants bringing a possibly arguable case up into this Court?

MR YOUNG: I can put the answer to that at two levels, your Honour, if I may.

KIRBY J: It does seem to be rather special facts.

MR YOUNG: Your Honour, the issue of principle involves the proper construction of 11-15(2)(a). There is a problem to start with because the legislation uses the language of “you” trying to address a taxpayer personally.

GUMMOW ACJ: I said that earlier this week.

MR YOUNG: The second problem that comes about is what does “would be input taxed” mean? The third problem comes about about the use of the word “making” in conjunction with the word “supplies”. Other sections of the Act talk about “the making of financial supplies”. This section just talks about “making supplies”. The short answer to your Honour’s question is that the whole banking and finance industry, 11-15(2)(a) is the gateway through which the allowability or otherwise of input tax credits for the whole banking and finance sector is predicated. It is the threshold. It is the gateway through which they are either allowable or they are not.

KIRBY J: But that will depend in every case. There are millions of these transactions on the particular facts. What is so special about this case?

MR YOUNG: Debt collection is one particular aspect of the banking and finance industry. A decision in this case, albeit with respect to comparatively perhaps limited small scale debt collection operation compared with one of the major banks, nonetheless a decision in this case has applicability or potential applicability to all the debt collection expenses undertaken by financial institutions, including banks, credit unions and other non-bank financial institutions. It impacts across all of those institutions because they all have the same set of problems. Do their debt collection expenses relate to the debt, be it alone, be it a debt portfolio that they may have acquired, be it even in relation to the allotment of shares, your Honour, because allotment of shares is again deemed to be a financial supply.

The final level in answer to your question about the importance of the case, the Commissioner by his own actions has recognised this is a significant case. A case involving a comparatively small amount of revenue has been test case funded at all stages and the Commissioner in this Court does not seek costs against the applicant in the event it is unsuccessful.

KIRBY J: What are we to infer from that unusual act of generosity and kindness on the part of the Tax Commissioner?

MR YOUNG: It is somewhat unprecedented on the Commissioner’s part, your Honour. In my respectful submission, what it shows is that the issue is a live issue to the Commissioner.

GUMMOW ACJ: No, it does not. It shows that the Commissioner did not want us to be inflamed by some suggestion of oppression.

MR YOUNG: Your Honour, I cannot help with the inflaming. In the applicant’s respectful submission, Justice Allsop was correct in the distinction that he drew. His Honour Justice Allsop then says “The policy considerations that Justice Hill has referred to have convinced me otherwise and I am also convinced otherwise by what his Honour has had to say about section 11-15(5)”. I am referring now to - - -

GUMMOW ACJ: An acquisition is not treated for the purpose of paragraph (2)(a), et cetera.

MR YOUNG: That is correct, your Honour. I was referring to paragraph 89 of Justice Allsop’s decision, lines 45 to 46. Section 11-15(5) of the GST Act deals with a special category of financial supplies, namely a loan. What it is directed at in essence is borrowing expenses on a loan. The definition of “financial supply” is much broader than just simply a borrowing. In this case the acquisition of shares is deemed to be a financial supply. The allotment of shares is a financial supply. The exception in 11-15(5) goes to one class or one category of financial supply alone.

When your Honours go back to have a look at what Justice Hill says about 11-15(5), that is contained at paragraph 36 of his Honour Justice Hill’s judgment at page 35 of the application book. It is a compact self-contained paragraph dealing with 11-15(5). His Honour is talking about in the context of whether a direct or an indirect relationship might suffice for 11-15(2)(a) purposes. He refers to:

the relationship contemplated here might be indirect follows, probably –

not definitely –

from s 11-15(5) -

and then he summarises the body of the section and in the last sentence of the paragraph:

In other words, s 11-15(5) would appear to contemplate –

not it does, not it definitely does –

that an acquisition having an indirect connection –

That is as far as I can discern the totality of the reference to 11-15(5) in his Honour Mr Justice Hill’s decision. The words in that paragraph are “probability” and “would appear to contemplate”. Yet those words of “probably” and “appear to contemplate” nonetheless seem to be - - -

GUMMOW ACJ: You have to read that with paragraph 35, have you not?

MR YOUNG: Yes, your Honour. The conclusion expressed with respect to 11-15(5) by his Honour Mr Justice Hill is, if I might use the word, tentative, not definitive, not laid out in a categoric sense.

GUMMOW ACJ:

There was some discussion on the question whether the relationship could be indirect or had to be direct, although it did not seem that anything turned upon that in the submissions of the Trustee.

MR YOUNG: The point that I make with respect to 11-15(5) is that it singles out one particular category of financial supply only, and that is borrowing and borrowing expenses. The conclusion expressed by Justice Hill in paragraphs 35 and 36 is in the language – I hesitate to say speculation, but it is in the language of tentativeness, probability, it would appear, yet that tentative probable conclusion is what is identified as one of the criteria – the first criteria identified by Justice Allsop to change his mind about what would otherwise flow from the textual analysis.

Thus far in 11-15(2)(a) I have focused on the word “making” and “making supplies”. In his Honour Mr Justice Hill’s decision there is reference to two other sections: 189-15 and 132-4. Those sections actually use that form of words, “relates to the making of a financial supply”. In our respectful submission, that is the construction which should be adopted in relation to 11-15(2)(a). Does the expense relate to the making of a financial supply?

The second group of sections that his Honour refers to, and that includes the explanatory memorandum, section 9-30(2) and section 40-1 are in terms of what – in answer to your Honour’s question before I talked about the input into the output question. They use the language of – and your Honour can see them at application book pages 40 and 41 where the sections are set out at paragraphs 55 and 56, 57. They are cast in the terms of the language of:

an input tax credit for anything acquired or imported to make the supply –

It is a different form of words, “to make the supply”, which is then the basis of what has been argued in the court below as what I have called the input into output question. Does the acquisition relate to, lead into, does it flow into, a taxable output? Textually on the ordinary grammatical meaning of the section, the applicant submits the word “making” has significant work to do. Debt collection expenses in this case do not relate to the making, the acquisition of the debts. Your Honours, I do not know if I can assist the Court any further on that point.

The second category of expenses in the case are the due diligence. The due diligence expenses fall into a different category because the expense here occurs before the debts were acquired. The issue with respect to the due diligence feasibility expenses are – is that an expense incurred by an enterprise which is related to the subsequent financial supply. The simple point with respect to the feasibility study is that at that point, at the point of time when the expense is incurred, the decision to acquire the debts has not been made. Feasibility studies for the purposes of flicking the switch, yes, no. Yes, do I invest? No, do I do not.

The Full Court, the decision of Mr Justice Hill – and this appears at paragraph 76 of the decision – appears to suggest that an input tax credit for feasibility studies would be available if there is a choice of GST, input tax applies,.....supplies or so on. It is a situation where in his Honour’s opinion the input credit is only available if it is about making a choice, a choice to go down one of two or three alternative paths. It does not in his Honour’s decision encompass the situation of a straight out yes, no. Yes, I will go ahead. No, I will not. The point being until the decision is made to make a financial supply, until that decision is actually made, the feasibility expense cannot be sought to be related to that.

GUMMOW ACJ: I think you are about to run out of time.

MR YOUNG: If the Court pleases, those are the submissions for the applicant.

GUMMOW ACJ: Thank you. We do not need to call on you, Mr Robertson.

Despite the strong arguments put by counsel for the applicant we reached a conclusion similar to that of Justice Allsop in the Full Court of the Federal Court. A purely textual analysis of section 11.15(5) of the A New Tax System (Goods and Services Tax) Act 1999 (Cth) may give some support to the argument for the applicant. However, as Justice Hill showed in what was the leading judgment delivered in the Full Court, the statutory scheme and legislative context and purpose carry the day for the respondent Commissioner.

On balance we are not convinced that the application would enjoy sufficient prospects of success to warrant the grant of special leave and special leave is refused.

We will adjourn to reconstitute.

AT 12.19 PM THE MATTER WAS CONCLUDED