On 31 August 2011, the Commissioner released a draft addendum to GSTR2003/8 – the ruling concerned with the treatment of “rights” for use outside of Australia. The addendum seeks to find a pathway between adopting the basis of the High Court’s decision in Travelex and giving item 4 of subsection 38-190(1) an appropriate interpretation.
There are two aspects of the addendum and the way Travelex was approached in the High Court which have combined to produce a less than desirable outcome in the addendum to the ruling.
The tortuous description of identifying “rights” for the purposes of item 4, could also be reviewed in the light of the decision on 1 September of the Full Federal Court in Qantas where the court adopted a more straightforward analysis – essentially identifying the character of the supply by reference to what the customer was paying for and what the supplier was agreeing to supply.
The two critical aspects
The two aspects of the approach in the addendum (and resulting from the High Court in Travelex) that are making the practical operation of item 4 confused are:
Firstly, the parties before the High Court agreed that the term “for use” should be interpreted as “intended use”. The addendum has not diverted from this view. The application of this approach is both impractical and, arguably, inconsistent with the purpose of the provision. While the addendum refers to the United Kingdom VAT Tribunal decision in IDS Aircraft Ltd (where the question was whether the aircraft was for use outside the EU) in support of the “intended use”, a more relevant description can be found in the Federal Court’s decision in Sunchen’s case (where the question was the meaning of “to be used predominantly for residential accommodation”) which rejected the relevance of the subjective intention of the purchaser. The Court preferred the meaning given to the term “for use” in subsection 82AF(1) of the 1936 Act by the Full Federal Court in Smith (W) v Federal Commissioner of Taxation (1982) 41 ALR 315, where it was held:
The reference to plant or articles for use in or primarily and principally in connection with “(ii) sport” is apt to describe the attributes of the property which the draftsman is seeking to identify. It does not in its terms introduce any notion of use by a particular person. Indeed, it is not easy to read into a description of an article by reference to the use for which it is suited a further qualification limiting that use to use by a particular person. In our view para (f) is clearly concerned with the nature of the articles and not the identity of the users.
The characterisation of the “rights” in item 4 according to their attributes rather than the intention of the purchaser, also finds support in the treatment and characterisation of royalties under subsection 6(1) of the 1936 Act where reference is made to “rights to use copyright”.
This approach requires the rights that are the subject matter of the supply to be examined to ascertain whether there is a jurisdictional character of their use. As indicated below, the NZ GST provision from which item 4 is sourced makes obvious the type of rights that are to be addressed by item 4. An interpretation of the provision that looks to the character of the rights and their jurisdictional use, would seem to give the provision an operation more consistent with its purpose and object.
The second aspect of the Commissioner’s approach that adds to the uncertainty of the intended scope of item 4, seems to flow from the first aspect. If it were concluded that it was the character of the jurisdictional reach of the rights that determined the “for use” question, it would give a meaning to the nature of the rights in question – that is, they are rights that have some jurisdictional relevance.
The result of the Commissioner’s approach is the description of what is meant by “rights” flounders in the search for a character. The Commissioner asserts there are three categories:
Category 1 – Supplies identified in paragraph 9-10(2)(e )
64. The creation, grant, transfer, assignment or surrender of any right is a supply that is made in relation to rights for the purposes of item 4.
65. Where a transaction comprises a bundle of features and acts, you must consider all of the circumstances of the transaction to ascertain its essential character. While many transactions involve rights being supplied, Category 1 only covers a supply if:
- the essential character or substance of the supply, or the dominant part of a composite supply, is one of rights; or
- the essential character of a separately identifiable part of the supply is one of rights.
66. Where rights are merely integral, ancillary or incidental to another dominant part of the supply, the supply is characterised by the dominant part. …
Category 2 – Supplies of things that derive their value solely from rights
73. A supply of a thing is a ‘supply that is made in relation to rights’ for the purposes of item 4 if:
- the thing supplied derives its value solely from rights; and
- through the supply, the supplier either supplies the rights to the recipient or surrenders the rights.
74. For this purpose, it does not matter whether the supply of a thing is properly characterised as a supply of rights for GST purposes or whether the supply is a supply under paragraph 9-10(2)(e). The supply must, however, encompass rights and the value of the supply must be in the rights. For this to occur, any tangible thing that passes between supplier and recipient which evidences the rights (such as a bank note) must, without those rights, be worthless or of negligible worth.
Category 3 – Supplies of services relevantly connected with rights
75. A supply of services (including the provision of advice or information) that has a relevant connection with rights is a supply that is made in relation to rights for the purposes of item 4.
How has all this confusion arisen?
A reference to the equivalent NZ provision (from which nearly all of Subdivision 38- E is sourced) shows how item 4 might have been intended to operate.
Under subsection 11A(1) of the NZ GST Act, a supply or services is zero-rated if:
(n) subject to subsection (4), the services are—
(i) the filing, prosecution, granting, maintenance, transfer, assignment, licensing or enforcement of intellectual property rights, including patents, designs, trade marks, copyrights, plant variety rights, knowhow, confidential information, trade secrets or similar rights; or
(ii) other services in respect of rights listed in subparagraph (i), including services involved in the making of searches, the giving of advice, opposing a grant or seeking the revocation of the rights, or opposing steps taken to enforce the rights; or
(o) the services are the acceptance of an obligation to refrain from pursuing or exercising in whole or in part rights listed in paragraph (n) to the extent that the rights are for use outside New Zealand;
Subsection 11A(4), in hauntingly familiar terms states:
(4) Subsection (1)(n) applies only to the extent that—
(a) the rights are for use outside New Zealand; or
(b) the services are supplied to a person who is a non-resident and who is outside New Zealand when the services are performed.
The confused and uncertain state of the operation of the Australian law may stem from the reluctance of:
- the Howard Government to disturb the GST law once it was enacted; or
- the Commissioner to refer to the source of the Australian provisions in foreign VAT law; or
- the Courts to refer to foreign VAT law as an explanation of ambiguities in the Australian law.
There does not seem to be any justification for maintaining this confusion and uncertainty. The role and scope of item 4 could be resolved by the adoption of paragraphs similar to 11A(1)(n) and (o) of the NZ law.
Happily for those of us who regard, with distaste, the absorption of financial intermediation services within the scope of item 4, it would also repair the damage done in Travelex to the scope of GST-free financial services.
If the States have an interest in the GST revenue base, the simple repair of item 4 to cover the ground that was intended would also secure their revenue.
Michael – the financial service provisions are littered with inconsistencies (actual and conceptual), oddities and the completely strange. Personally, I find fully taxable entities being denied ITCs because they (a) acquire shares from another Australian entity or (b) they only making taxable supplies but hedge against exchange price or commodity price movements, more “distasteful” than the Travelex decision. After all Travelex is a consequence of our unique FS regime (a regime I am sure will always be unique to Australia!). There are many other aberations that should be fixed. Apart from the 2 mentioned above we should include the FS provisions in the GST Act rather than the regs and in the process get rid of the ridiculous notion of an acquisition supply.
Qantas decision – I’m interested to know if you agree with the decision of the Full FC or not, and moreover, whether you believe it will be overturned (assuming the Commissioner seeks special leave and its granted)?
Speaking personally, my difficulty with the judgment is that Ithink it wrongly identifies the consideration for the supply paid for by the customer. The Court, quite correctly in my view, says that what the customer paid for was a flight and because they did not receive the flight, they don’t make a supply.
However, I don’t think that’s the correct issue which is in dispute. The issue which is in dispute is the cancellation fee. That is, the entitlement of Qantas to retain funds contributed by the customer. Those funds are not paid for the flight – they are retained in recognition of the various obligations that Qantas has incurred in holding itself ready and willing to fly the customer (albeit not at a given time).
I think the decision of Downs and Frost in the AAT is the correct one. I also think that the Full FC has applied the same type of reasoning in Qantas as they did in Reliance Carpets – the ‘nothing more, nothing less’ mantra is repeated.
Your thoughts Mr Evans?
A number of you have questioned whether I agree with the decision in Qantas or not. My initial comments (GSTR 2009/3 … you’re cancelled) support the approach that asks “what was the customer paying for?”. In adopting this approach, we are able to better discern both the subject matter of the supply and the nexus between the payment and the “supply”. It overcomes the impracticality of the analysis that seems to have arisen over the last few years where the enquiry seems to be:
– what things that are done (or legal rights that are created); and
– what payment or other act is done; and
– is there a connection.
This approach has not explained what question to ask about the connection to ascertain whether there is the requisite nexus between the two things done for the purposes of paragraph 9-5(a) of the Act. The nature of the question is, in my view, the question of law. Whether there is the requisite connection is the question of fact.
If the things for which the customer paid is not supplied and the amount payable for that “outcome” is not refundable, the question is what, if anything, the agreement to allow the retention of the amount is “for” (or “in connection with”). To say that it is in recognition of Qantas obligations appears to be a conclusion of legal effect rather than a factual finding. One can draw an analogy with an early termination of a lease which, if done pursuant to an agreement in the lease to do so for a fee, may be a supply for which the fee is consideration. But if the lease is terminated as a result of default by the lessee and the lease contains an agreement of an amount payable on default, it is difficult to see that the payment made as a consequence of termination because of default is “consideration” for the lease or its termination – it is because of the lessees default and not “for” the lease or its termination. This is consistent with Emmett J’s view of the LPP in Amex at first instance and with the acceptance of the UK VAT law in the lease termination ruling.
But, I agree with your comments where the payment was made for the flight but the customer is a “no show”. This was the distinction in Bass plc, British Telecom and Societe Thermale (and is inherent in the deeming of a supply for lay-by sales in section 102 of the Act) – if we agree to make a supply and to make a payment for it and you don’t show up, the payment was for the supply that the supplier tried to make and for which you chose not to enjoy. If you cancel the transaction prior to the supply time, however, the question of what was the amount paid for is a question of construction of the agreement isn’t it? It might have been paid for you to agree to fly me – is it your agreement to make the supply and the supply itself if I don’t cancel before hand?
At the end of the day the AAT and the Federal Court did not consider the different scenarios under which “cancellation fees” might arise. The courts overseas have drawn a distinction between no shows and “compensation” for cancellation. The Australia law also has an adjustment event for a cancellation – while the example in the EM talks about a refund being made, it is not an adjustment event because of change in consideration. It applies if a supply is cancelled, the GST attributed at an earlier time is not correct. This may mean that, on cancellation, the GST attributed in advance of the supply that is cancelled is not payable. Then we must consider if the retention of the $ is “for” something other than the supply for which it was consideration – this is consistent with the section 102 lay-by sale – and the “wait and see” Div 99.
It is interesting, in this respect, what to make of customers that don’t claim the refund to which they are entitled as a result of cancellation. I think the British Telecom case says that overpayments are not consideration for a supply – until they are applied as such – that’s a bit like the “statutory mandate” in Div 99.
Will the Commissioner seek leave – I think the joint judgment invites him to doesn’t it?
Will the Federal Court survive a hearing from the High Court? They way in which it has proceeded to date means that it is difficult for the High Court to deal with the various scenarios under which Qantas received and retained cash – will they want to? Is the High Court able to make the findings of fact for each scenario? Will the parties ask them to? Like Amex, it doesn’t seem to be suitable for the High Court. I don’t think there is an answer (as a matter of law) that covers the factual circumstances for each but both the AAT and FFC seem to have proceeded as if “one size fits all”.
My thoughts – subject to all the normal qualifications. Thank you for your thoughtful contribution – I think, however, we have shared this exchange in the past.