No refunds for National Jet

With Qantas dominating the media and attention, the AAT decision in National Jet might not have caught many peoples’ attention.

The case was heard by President Justice Downes and Senior Member Frank O’Loughlin and the decision was handed down on 31 October 2011 – Halloween.

The case involved the operation of:

1. the transitional provisions of the GST law – in particular section 13 of the Transition Act; and
2. the “refund” provision in the Administration Act – section 105-65 of Schedule 1.

Essentially, the taxpayer, National Jet Systems, had entered into lease agreements over aircraft prior to Royal Assent being given to the GST Act but there were amendments to those agreements after that date.  The taxpayer had charged GST on the leases from 1 July 2000 but, in so far as is relevant,  argued that the lease were GST-free pursuant to section 13 of the Transition Act and that it was, therefore, entitled to a refund of the GST overpaid.

The AAT described the issue as follows:

Approaching the question for determination on the basis that the legislative scheme requires an examination of what the consideration after 1 July 2000 was, as a matter of substance, really paid for, the necessary enquiry is whether the consideration paid after 1 July 2000 was for supplies made after that time that were specifically identified for a consideration that can be identified in the terms of a written agreement where those terms were operative before the royal assent date.  It is those supplies that are the subject of the relief conferred by s 13.
The section does not apply to situations where a pre-royal assent date agreement does not identify post-royal assent date supplies and consideration, whatever be the explanation of the lack of connection between agreement and supply.  The supplier in such an agreement and in such a circumstance is taken by the legislative scheme to have been in a position to include the impact of GST in decisions concerning consideration to be charged.  Such a person does not need the relief afforded by s 13 and is not intended to get it.

The AAT found that:

After the royal assent date the suite of goods and related services, viewed as a single supply, specifically identified in the lease, was materially different to the supply identified before the royal assent date, as was the consideration for it.  To begin with, there was an additional aircraft.  This altered the leasing component, the standing charge and the maintenance provision.  Other amendments were made to the body of the lease.  Other significant amendments have been identified above.  In the result, the single supply was varied in each of the critical respects concerning aircraft lease, standing charge and maintenance.  The pre-royal assent date agreement no longer sufficiently identified the post royal-assent date supply or consideration.  What the consideration that was paid after 1 July 2000, viewed as consideration for a single supply, was really for, was, in substance, different to what was identified to be supplied in the agreement that was in place as at the royal assent date and different to the consideration identified or capable of being worked out.  In these circumstances, supplies made pursuant to the lease were not subject to s 13 of the Transition Act and were subject to GST whatever was the reason for the lack of identity between agreement and supply.

That is – GST was payable – no overpayment – no refund – you have reached your destination – thank you for flying with AAT.

However, there are a number of significant observations in the case that are useful for future reference:

1. when is an opportunity to change a part of the consideration relevant to section 13 cases;
2. when do alterations to an agreement make the altered agreement a different agreement from the original;
3. when does the voluntary payment of GST to the supplier change the agreement or represent conduct that constitutes a review opportunity;
4. what are the requirements for a effective notice under section 105-55 of Schedule 1 of the Administration Act (this issue was also dealt with in Central Equity)
5. what considerations are necessary in determining whether the discretion in section 105-65 is to be exercised.

Some useful observations of the Tribunal on GST interpretation and the 105-65 discretion …

The practical business tax thing and intended incidence of a consumption tax

The common approach of the parties that the bundled services provided pursuant to the lease are a single supply can be accepted as consistent with authority … .

These approaches to determining the relevant taxable supply are consistent with authorities suggesting that GST is a business tax and is to be administered in a practical way.  The approach to the operation of the GST system is that it is a tax on business, although ultimately borne by consumers, assessed and paid by businesses, and is to be administered and interpreted in accordance with the understanding of business people.

The anti-windfall argument

The s 105-65 discretion does not have specifically defined criteria or considerations which are relevant to its exercise albeit the threshold conditions to be met before it can be exercised may throw some light on matters to which regard must be had.  In these circumstances the Tribunal is not at large, must have regard to relevant considerations, disregard irrelevant ones, and if it is to be exercised, exercise the discretion for a purpose for which it exists and, while not always bound by it, is entitled to take into account government policy (Drake v Minister for Immigration and Ethnic Affairs (1979) 2 ALD 60, at 69 per Bowen CJ and Deane J)

The intention of the legislature in enacting the s 105-65 discretion included preventing windfall gains (Explanatory Memorandum to the Tax Laws Amendment (2008 Measures No 3) Bill 2008 at [2.2] to [2.4]) and the Commissioner and the Tribunal standing in his shoes are permitted to have regard to this intention in deciding whether that discretion ought to be exercised in a particular circumstance.  This intention manifests itself not just in the Explanatory Memorandum but also in the threshold conditions necessary before the discretion can be exercised.

Having regard to the legislative intention, prevention of windfall gains is the principal criterion to be addressed before any exercise of the discretion.

In the present circumstances, there would be a windfall gain if a refund were to be made.

Thank you for flying with us.