Source: http://law.ato.gov.au/atolaw/view.htm?docid=GST/GSTR20069/NAT/ATO/00001
Timestamp: 2017-05-23 08:55:46
Document Index: 667886623

Matched Legal Cases: ['art 1', 'art 3', 'art 3', 'UKHL ', 'EWCA ', 'art 4', 'UKHL ', 'art 1']

GSTR 2006/9 - Goods and services tax: supplies (As at 20 August 2014)
This document is currently being reviewed as a consequence of the decisions outlined in the Decision Impact Statements for ATS Pacific Pty Ltd v Commissioner of Taxation and MBI Properties Pty Ltd v. Commissioner of Taxation
Ruling with Explanation32
Detailed contents list273
This document was published prior to 1 July 2010 and was a public ruling for the purposes of former section 37 of the Taxation Administration Act 1953 and former section 105-60 of Schedule 1 to the Taxation Administration Act 1953. From 1 July 2010, this document is taken to be a public ruling under Division 358 of Schedule 1 to the Taxation Administration Act 1953. A public ruling is an expression of the Commissioner's opinion about the way in which a relevant provision applies, or would apply, to entities generally or to a class of entities in relation to a particular scheme or a class of schemes. If you rely on this ruling, the Commissioner must apply the law to you in the way set out in the ruling (unless the Commissioner is satisfied that the ruling is incorrect and disadvantages you, in which case the law may be applied to you in a way that is more favourable for you - provided the Commissioner is not prevented from doing so by a time limit imposed by the law). You will be protected from having to pay any underpaid tax, penalty or interest in respect of the matters covered by this ruling if it turns out that it does not correctly state how the relevant provision applies to you. [Note: This is a consolidated version of this document. Refer to the Tax Office Legal Database (http://law.ato.gov.au) to check its currency and to view the details of all changes.] What this Ruling is about
Note: The Addendum to this Ruling that issued on 1 July 2009 explains the Commissioner's view of the law as it applied before and after its date of issue. You can rely on this Addendum from its date of issue (1 July 2009) for the purpose of section 105-60 of Schedule 1 to the Taxation Administration Act 1953. 2. Part 1 of the 'Ruling with Explanation' section discusses the concept of 'supply' in the GST Act and the meaning of 'supply' in section 9-10. This part lists the special rules that qualify or affect that meaning in the GST Act. The special rules are set out in paragraph 47 of this Ruling.
The Addendum to this Ruling that issued on 14 December 2011 explains the Commissioner's view of the law as it applied before and after its date of issue. Subject to the transitional arrangements at paragraphs 9A and 9B of this Ruling, you can rely on this Addendum from its date of issue (14 December 2011) for the purposes of section 357-60 of Schedule 1 to the Taxation Administration Act 1953 .
The Addendum to this Ruling that issued on 10 July 2013 explains the Commissioner's view of the law as it applied on and from 1 July 2013. You can rely on this Addendum from its date of issue for the purposes of section 357-60 of Schedule 1 to the Taxation Administration Act 1953 .
9B. In the circumstances described in paragraph 9A of this Ruling, if an affected supplier relies or has relied on this Ruling to determine that they did not make a taxable supply then no GST is payable on that supply. This means that the amount of input tax credit to which a recipient is entitled is zero.FA1
9C. From 1 July 2012, some of the supplies referred to in paragraph 9A are GST-free under section 38-60.A2
10. GST is a broad based indirect tax payable on consumption in Australia. Generally, GST is payable on the value added at each stage of the commercial chain of dealings with goods, services and other things. The GST Act describes these dealings as 'supplies'. In the absence of a supply (or importation) GST cannot arise.1 The Full Federal Court noted the importance of supply in Sterling Guardian Pty Ltd v. Commissioner of Taxation (Sterling Guardian) :2
11. Chapter 2 of the GST Act has the basic rules dealing with liability for GST and the obligations for recording and reporting GST noted in Sterling Guardian . The basic rules provide for when and how GST arises, who is liable to pay GST and how input tax credits arise.
13. A recipient who is registered for GST is generally able to claim input tax credits for acquisitions it makes in the course of its business. By providing for input tax credits the GST Act ensures that there ordinarily is no cascading of GST for taxable and GST-free supplies. It provides that tax will be payable by each supplier in a chain only upon the value added by that supplier. Subject to some exceptions, input tax credits are not available for acquisitions in relation to making input taxed supplies so that the inputs to these supplies will be taxed and not the value added by the supplier.3
18. The High Court has considered the relevance of context both in a broad sense and in relation to the text of specific provisions within an Act. The judgment of Brennan CJ, Dawson, Toohey and Gummow JJ in CIC Insurance Ltd v. Bankstown Football Club Ltd 4 indicates it is appropriate to consider the context '...in its widest sense to include such things as the existing state of the law and the mischief which, by legitimate means such as those just mentioned, one may discern the statute intended to remedy.' The Court went on to add that '...inconvenience or improbability of result may assist the court in preferring to the literal meaning an alternative construction which, by the steps identified above, is reasonably open and more closely conforms to the legislative intent.'
19. However, consideration of the context of supply in its broadest sense in the GST Act does not obviate the need for close attention to the text of the provisions chosen by Parliament under consideration and the context of the provision in the GST Act. As the High Court noted in the judgment of Gleeson CJ, Gummow, Hayne and Heydon JJ in Stevens v. Kabushiki Kaisha Sony Computer Entertainment 5 'No particular theory or "rule" of statutory interpretation, including that of "purposive" construction, can obviate the need for close attention to the text and structure of [the relevant part of the legislation].'6 Ultimately, the task of the courts and the Commissioner is to construe the language of the statute.7
20. Further, as has been noted by Kirby J in The Queen v. Lavender 8 it is important to take a consistent approach to issues of statutory interpretation and not '...pluck out considerations of "context", "purpose" and "history" arbitrarily, so as to sustain the outcomes of interpretation ... in some, but not other cases.'
Proposition 1 For every supply there is a supplier (paragraph 52) Proposition 2 Generally, for every supply there is a recipient and an acquisition (paragraphs 53 to 62) Proposition 3 A supply may be mixed, composite or neither (paragraphs 63 to 66) Proposition 4 A transaction may involve two or more supplies (paragraphs 67 to 70) Proposition 5 To 'make a supply' an entity must do something (paragraphs 71 to 91) Proposition 6 'Supply' usually, but not necessarily, requires something to be passed from one entity to another (paragraphs 92 to 94) Proposition 7 An entity cannot make a supply to itself (paragraphs 95 to 98) Proposition 8 A supply cannot be made by more than one entity (paragraphs 99 to 101) Proposition 9 Creation of expectations alone does not establish a supply (paragraphs 102 to 111) Proposition 10 It is necessary to analyse the transaction that occurs, not a transaction that might have occurred (paragraphs 112 to 113) 23. The propositions discussed in Part 3 are:
Proposition 11 The agreement is the logical starting point when working out the entity making the supply and the recipient of that supply (see paragraphs 119 to 122) Proposition 12 Transactions that are neither based in an agreement that binds the parties in some way nor involve a supply of goods, services, or some other thing, do not establish a supply (paragraphs 123 to 129) Proposition 13 When A has an agreement with B for B to provide a supply to C, there is a supply made by B to A (contractual flow) that B provides to C (actual flow) (paragraphs 130 to 176) Proposition 14 A third party may pay for a supply but not be the recipient of the supply (paragraphs 177 to 216) Proposition 15 One set of activities may constitute the making of two (or more) supplies (paragraphs 217 to 221) Proposition 16 The total fact situation will determine the nature of a transaction, the entity that makes a supply and the recipient of the supply (paragraphs 222 to 246) Comparison with the United Kingdom and New Zealand
24. The concept of supply is also fundamental to value added tax regimes in other countries and, as such, foreign law may shed light on the meaning of supply. However, it needs to be appreciated that differences exist between the Australian GST and value added tax regimes in other countries. Relevant places in this Ruling explain some of the differences contained in the United Kingdom Value Added Tax Act 1994 (the UK VAT Act), the Sixth VAT Directive of the European Council (the Sixth Directive),9 and the New Zealand Goods and Services Tax Act 1985 (the NZ GST Act).
30. Under subsection 2(1) of the NZ GST Act 'services' means 'anything which is not goods or money'. In Case S65 10 Willy DJ warned that there are limits to this definition. In that case a costs order was made against a solicitor who was struck off the roll by the New Zealand Law Practitioners Disciplinary Tribunal. The costs order required the solicitor to pay amounts to the New Zealand Law Society and the District Law Society for their costs and expenses relating to the disciplinary proceedings. Willy DJ held that these payments were not consideration for a supply of services by the Law Societies to the solicitor. He ruled that the ordinary meaning of the word supply limited the breadth of the phrase 'supply of services', which was only so wide as to include activities where the provider has done something for , not against , the recipient. To rule otherwise would lead to absurdity because it would allow the concept of a supply to encompass situations where a person sues for recovery of property, or steals something from someone else. The analysis in Case S65 is consistent with the Commissioner's analysis of the effect of payments made under court orders or out-of-court settlements in GSTR 2001/4.11
9-10 Meaning of supply (1)
This is defined broadly and is intended to encompass supplies as widely as possible.12
[It] provides a list of things that are included as supplies. It is not an exhaustive list. It does not limit the possible breadth of the definition of supply in subsection 9-10(1).13
See also paragraphs 24 to 27 of GSTR 2012/2 ( Goods and services tax: financial assistance payments ).
See paragraphs 82 to 97 of GSTR 2003/7 (Goods and services tax: what do the expressions 'directly connected with goods or real property' and 'a supply of work physically performed on goods' mean for the purposes of subsection 38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999 ?).
See paragraphs 28 to 31 and 44 to 56 of GSTR 2012/2 ( Goods and services tax : financial assistance payments ).
See also paragraph 26 of GSTR 2003/7 (Goods and services tax: what do the expressions 'directly connected with goods or real property' and 'a supply of work physically performed on goods' mean for the purposes of subsection 38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999 ?).
37. The Full Federal Court noted in Westley Nominees Pty Ltd v. Coles Supermarkets Australia Pty Ltd (Westley) 14 that for various reasons it thought the ordinary meaning of supply in subsection 9-10(1) 'is arguably extended by pars (f) and (g), if not by pars (a) - (e)' of subsection 9-10(2). Given the breadth of subsection 9-10(1) being stated to mean 'a supply is any form of supply whatsoever', the Commissioner is of the view that whilst paragraph 9-10(2)(f) expands subsection 9-10(1) in relation to financial supplies, subsection 9-10(2) does not limit the operation of subsection 9-10(1). This non-limitation is expressly stated in the opening words of subsection 9-10(2).
Under the GST Act something that is done illegally may constitute a supply. For example, in applying subsection 9-10(3), the Commissioner considers that a second hand car dealer who sells cars, which the dealer has either stolen or has received knowing they have been stolen, is making supplies.15
41. The European Court of Justice (ECJ), in interpreting the Sixth Directive, has held that the principle of fiscal neutrality precluded a generalised differentiation between lawful and unlawful transactions 'except where, because of the special characteristics of certain products, all competition between a lawful economic sector and an unlawful sector is precluded'.16 The ECJ has held that there was no liability to VAT on the illegal distribution of prohibited drugs because their supply was subject to a total prohibition in the member states (except within strictly controlled economic channels for medical and scientific purposes).17
45. Subsection 9-10(4) provides that a supply does not include a supply of money unless the money is provided as consideration for a supply that is a supply of money.18
subsection 48-40(2)
subsection 49-30(1)
paragraphs 54-40(2)(a) and (c)
subsections 78-25(1), 78-60(1), 78-65(2) and 78-70(2)
subsection 79-85(1)
subsections 81-5(3) and 81-10(3)
section 9-25, subsection 96-5(1)
subsection 100-10(1)
subsection 105-5(3)
Income tax related transactions
Principals and intermediaries as separate suppliers or acquirers
Subdivision 153-B
Proposition 1 For every supply there is a supplier (paragraph 52) Proposition 2 Generally, for every supply there is a recipient and an acquisition (paragraphs 53 to 62) Proposition 3 A supply may be mixed, composite or neither (paragraphs 63 to 66) Proposition 4 A transaction may involve two or more supplies (paragraphs 67 to 70) Proposition 5 To 'make a supply' an entity must do something (paragraphs 71 to 91) Proposition 6 'Supply' usually, but not necessarily, requires something to be passed from one entity to another (paragraphs 92 to 94) Proposition 7 An entity cannot make a supply to itself (paragraphs 95 to 98) Proposition 8 A supply cannot be made by more than one entity (paragraphs 99 to 101) Proposition 9 Creation of expectations alone does not establish a supply (paragraphs 102 to 111) Proposition 10 It is necessary to analyse the transaction that occurs, not a transaction that might have occurred (paragraphs 112 to 113) 51. Transactions may also require consideration of the total fact situation. The Ruling discusses the total fact situation as Proposition 16 in paragraphs 222 to 246. While this is discussed in Part 3 of the Ruling, the need to consider the total fact situation is also relevant in analysing two party transactions.
54. To make an acquisition you have to be the 'recipient' of the supply of the thing you are acquiring. Although the term 'recipient' does not appear in Division 11, it is defined in section 195-1 to mean the entity to which the supply was made. This definition suggests that there is a supplier, a recipient and that something is passed from the supplier to the recipient.19
55. The supplier and the recipient have to be different entities because an entity cannot make a supply to itself20. Also, the recipient has to be identified, as you cannot make a supply to the world at large. However, a supply can be made for no consideration.
57. An entity that is the recipient of a supply may make a creditable acquisition of that supply and be entitled to an input tax credit.22 An entity makes a creditable acquisition under section 11-5 if:
59. Division 81, together with the GST Regulations22A made for the purposes of Division 81, provides that certain payments of Australian taxes, fees and charges are not the provision of consideration.22B However for certain other Australian taxes, fees and charges, Division 81 (together with the Regulations) may provide that the payment is treated as the provision of consideration. Further, this consideration is taken to be provided to the entity to which the tax, fee or charge is payable for a supply that the entity makes. In these circumstances, the GST Act treats a supply as having been made, if there was not one, and the payment of the tax, fee or payment is consideration for that supply.
61. Paragraph 115 of GSTR 2002/2 (Goods and services tax: GST treatment of financial services and related supplies and acquisitions) explains that 'A financial supply consisting of the acquisition of a financial interest is treated by the legislation as being "made to" a recipient, so it does not matter that the recipient of the acquisition-supply may not actually receive something. The GST regulations23 treat the receipt of this interest by the acquirer as being a supply to the provider.' Paragraphs 110 to 116 of GSTR 2002/2 provide further information on the acquisition of a financial interest.
67. In a straight forward commercial transaction, a supply is made to a recipient, who provides consideration in the form of money to the supplier. As the payment of money in these circumstances is not a supply,24 the recipient's payment of money is not a supply.
68. However, if the recipient provides consideration in a non-monetary form, the consideration itself is a separate supply.25 In a transaction of this kind between two entities, there are two supplies, one going each way. As a result, each party to the transaction needs to account for any GST on the supply it makes, and each party needs to account for any input tax credit entitlement for the acquisition it makes.
69. In GSTR 2001/626 the Commissioner points out that the recipient of a supply may provide or make a thing available for the supplier to use in making the supply. However, the provision of such a thing is not necessarily consideration. The corollary of this proposition is that providing or making the thing available does not necessarily give rise to a supply. It will depend on the facts and circumstances of the transaction between the parties whether the supplier's use of, for instance, facilities provided by the recipient in order to make the supply is simply part of the circumstances in which the supply is to be made, or does in fact involve a supply by the recipient to the supplier.
71. In overseas jurisdictions the term 'supply' has been held to take its ordinary and natural meaning, being 'to furnish or to serve' or 'to furnish or provide'.27 The Commissioner picks up this meaning in considering the meaning of supply in the GST Act at paragraph 41 of GSTR 2004/9,28 a ruling which is about the assumption of liabilities:
72. The use of the word 'make' in the context of section 9-5 was considered by Underwood J in Shaw v. Director of Housing and State of Tasmania (No. 2) ('Shaw')29 in relation to the payment of a judgment debt. His Honour was of the view that GST only applies where the 'supplier' makes a voluntary supply and not where a supply occurs without any action by the entity that would be the 'supplier' had there been a supply. He considered the actions of the judgment creditor with respect to the extinguishment of the debt when the judgment debtor made the payment of the judgment sum to meet the judgment debtor's obligations.
73. The Commissioner agrees with Underwood J's decision that there was no supply by the judgment creditor, as the judgment creditor did not do any act or thing to extinguish the obligation when the judgment debtor paid the judgment debt.30
74. However, Underwood J was of the view, with which the Commissioner also agrees, that an entity can still make a supply even if the supply is made under the compulsion of statute if the entity takes some action to cause a supply to occur. His Honour went on to compare a supply resulting from a positive act against a situation where there is no supply because nothing is done:31
76. In Westley the Full Federal Court considered two questions: whether the acquisition of real property in the form of commercial premises subject to an existing lease constituted a 'supply' for the purposes of section 9-10; and whether, for purposes of section 13 of the A New Tax System (Goods and Services Tax Transition) Act 1999 , a review opportunity arose when the lease provided for a rent review. The Court noted that the ordinary meaning of 'supply' required a positive act31A and continued on to suggest paragraphs 9-10(2)(f) and (g), 'arguably', extend the ordinary meaning of supply. At paragraph 16 the Court said:32
The concept of 'supply' in its ordinary meaning in subs 9-10(1) of the GST Act does seem to require some act of provision, furnishment, conferral or giving of some thing. The inclusions in subs 9-10(2) specifically identify some of these things, without limitation to subs (1), as goods, services, advice or information, real property and any right, (pars (a) - (e) inclusive). On the other hand, the concept of 'financial supply' in par (f) is defined in the GST Regulations 1999 (40-5.09) to include, amongst other things, the acquisition of an interest in or under specified financial instruments and par (g) extends the concept of 'supply' to include the entry into an obligation to do something, to refrain from doing something or to tolerate an act or situation. For these reasons, the ordinary meaning of 'supply' is arguably extended by pars (f) and (g), if not by pars (a) - (e) inclusive.33
While the matter is not free from doubt, we have concluded that when the appellants purchased the reversion they assumed the obligation of Lake Eerie to honour the lease according to its terms and in that sense entered into an obligation to tolerate an act or situation and in consequence, made a 'supply' by virtue of s 9-10(2)(g). The fact that the obligation arises by operation of law does not, in our view, impede this conclusion; after all, the reference to 'obligation' in s 9-10(2)(g) must be a legal obligation, although not necessarily one sourced in contract.34
78. The Court's wider comments about 'supply' and 'obligation' in paragraphs 16, 22 and 23 of its decision were expressed with some caution. With respect, the Commissioner does not consider the Court has stated a general principle, contrary to our proposition, that a supply can be brought about by operation of law in the absence of an entity taking any positive action. The Commissioner distinguishes something brought about solely by operation of law where there is no supply, from something done by an entity as a consequence of a legal requirement where there may be a supply, as was the situation noted by Underwood J in Shaw citing the example of the liquidator's actions in St Hubert's Island.35 The Commissioner also distinguishes an action that results in obligations arising by operation of law, as the Full Court found in Westley , where there may be a supply by the entity taking the action.
79. Also, the Court did not discuss whether Westley made an ongoing supply in relation to honouring the existing lease, as this question was not central to its conclusion that Westley assumed the obligation to honour the lease. The Commissioner's view is that a purchaser who has acquired a reversionary interest in commercial premises subject to a lease is making a positive act by continuing to tolerate the lessee's occupation subject to the terms of the existing lease. The Commissioner is also of the view that, following the sale of the reversion, there is a continuing supply by the purchaser to the lessee.35AA
82A. However, in other cases the owner may do something or undertake some action such that it does make a supply of the land that vests in the authority. For example, see the decision in Re Hornsby Shire Council v. Commissioner of Taxation 35A in which the Administrative Appeals Tribunal found that, in the circumstances35B the owner, CSR Limited, made a supply of its land by way of entry into an obligation and the surrender of its land when it issued a notice, pursuant to statute, compelling the Hornsby Shire Council to acquire its land.35C
83A. In contrast to the circumstances described in paragraph 83 of this Ruling, the land owner may, at a time subsequent to the authority's acquisition of the target land, request that the authority acquire the remaining land on the basis that it is of no practical use or value to the owner. Consistent with the decision in Re Hornsby Shire Council v. Commissioner of Taxation ,35D in these circumstances it is the Commissioner's view that the owner has taken some action by requesting that the remaining land be acquired and makes a supply of the remaining land by way of surrender to the authority. In such cases, the acquisition of the remaining land is not integral, ancillary or incidental to the authority's compulsory acquisition of the target land.
85. A government authority is compulsorily acquiring land and interests relating to that land, including the native title rights under a particular statute. The effect of compulsory acquisition is that every registered and unregistered interest in the land is extinguished, and each person who formerly held such an interest has that holding converted into a claim for compensation. 86. As required by the statute, the authority has made a public announcement that it is acquiring the land, and as a result, a number of groups of claimants have registered their respective native title over the land. 87. The authority has negotiated with each of the claimant groups as required by the statute, as to just compensation for the extinguishment of their rights over the land, and has entered into a deed with them. The deed sets out, among other things, that: ·
the claimants accept the compulsory acquisition and extinguishment of any and all native title rights and interests in the land and agree to withdraw a related objection made under the statute to compulsory acquisition; and ·
the authority undertakes to provide compensation to the native title claimants in the form of funding, land and certain services. 88. Although the claimants have agreed to accept the compulsory acquisition and the amount of the compensation, the agreement does not cause claimants' rights to be extinguished. These rights over the land are extinguished when all the limitations, reservations and restrictions over the land are revoked by the operation of the statute. The claimants are not making a supply of surrendering their rights. 89. It may be argued that the native title claimants are making a supply of entering into an obligation to withdraw any objections made under the relevant native title statute. However, no part of the compensation is consideration for a supply of withdrawing objections to the compulsory acquisition. The compensation relates to the loss suffered by the claimants on the extinguishment of their interest in the land. 90. In contrast, the extinguishment of an owner's interest by statute needs to be distinguished from the doing of a thing that is compelled by statute.36
100. As part of its judgment, the House of Lords in The Trustees of the Nell Gwynn House Maintenance Fund v. Customs and Excise Commissioners [1999] 1 All ER 385 ( Nell Gwynn ) endorsed Millett LJ's statement above.37 In Nell Gwynn the House of Lords considered whether maintenance fees paid to an entity other than the lessor or the lessor's agent were consideration for the grant of the lease. The trustees submitted that the grant of the lease and provision for the supply of maintenance services all formed part of a single economic transaction and should be treated as one exempt supply.
101. The House of Lords rejected this approach. The court held that it was not possible to view the supply of the services and the supply of the lease as a single supply because the supply of services was separate from the supply of the lease and they could not be a single supply because the services and the lease were supplied by different taxpayers.38
103. The New Zealand Court of Appeal noted there was an expectation among the parties that the refinery would continue to operate, but that there was no contractual obligation to that effect.39 The Government's only recourse in the event that the refinery ceased to be operational was to stop making payments. Although the payments were intended as an inducement to keep the refinery open, they were not linked to any identifiable supply:
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 course of the taxable activity of NZRC but they were not in consideration for any supply made by it. Accordingly, they are not subject to GST.40
104. In Europe for a supply to occur there is a requirement for a pre-existing framework of a reciprocal legal relationship between the supplier and the recipient. This is illustrated in former Article 2(a) of the Sixth Directive, replaced by Article 2(1), under which taxable transactions within the framework of the VAT system presuppose the existence of a transaction between the parties in which a price or consideration is stipulated.41 That is, the linkage between the supply and consideration is worked out between the parties in advance.
107. The definition of consideration in section 195-141AA states:
107A. In the Full Federal Court decision of TT-Line Company Pty Ltd v. Federal Commissioner of Taxation ,41A Edmonds J confirmed that given the express statement in subsection 9-15(2), there does not have to be an enforceable entitlement to receive a payment for that payment to be characterised as consideration.41B
108. For GST purposes you may still make a supply in the absence of enforceable obligations, provided there is something else, such as goods, services or some other thing, passing from the supplier to the recipient.42 For the supply to be a taxable supply there must also be consideration and a sufficient nexus between the supply and the consideration.43 The Ruling considers 'sufficient nexus' further in paragraph 180.
109. A restaurant run by a sole trader accepts tips from its customers, including tips on bills paid by credit card. These tips are unsolicited and are in addition to the price stipulated by the restaurant in the bills presented to the customers. The sole trader does not pass these tips on to the restaurant's employees. 110. The tips are voluntary payments made in connection with the restaurant supplies made by the sole trader to its customers. Although there is no obligation on the customers to make these payments, the tips form part of the consideration for the restaurant supplies by the sole trader to its customers. 111. On the other hand, if the sole trader passes the tips on to the restaurant's employees, the payments are not for the restaurant supplies by the sole trader. The tips constitute income of the restaurant employees44 and such payments are not subject to GST as the employees are not carrying on an enterprise for GST purposes.45 If the bill is paid by credit card and the amount of a tip is marked on the payment slip the restaurateur would need to demonstrate that the tip is passed on to the employee. Proposition 10: it is necessary to analyse the transaction that occurs, not a transaction that might have occurred
112. There may be a number of different ways by which an entity could achieve a desired end result. In addition, parties to an arrangement may contemplate an entity making a supply of a particular kind but, as events transpire, a different supply may actually be made by the entity. In determining whether the entity has made a supply, and the true character of any supply it has made, what is relevant is what the entity actually did, rather than what it might have done.45A
117. The propositions used to characterise two party transactions hold true for characterising tripartite arrangements. But, as Lord Millett points out in Customs and Excise Commissioners v. Plantiflor Ltd [2002] UKHL 33 ( Plantiflor )46, the involvement of a third entity in a tripartite arrangement calls for close analysis. This part of the Ruling uses some further propositions to analyse the transaction. They are:
Proposition 11 The agreement is the logical starting point when working out the entity making the supply and the recipient of that supply (see paragraphs 119 to 122) Proposition 12 Transactions that are neither based in an agreement that binds the parties in some way nor involve a supply of goods, services, or some other thing, do not establish a supply (paragraphs 123 to 129) Proposition 13 When A has an agreement with B for B to provide a supply to C, there is a supply made by B to A (contractual flow) that B provides to C (actual flow) (paragraphs 130 to 176) Proposition 14 A third party may pay for a supply but not be the recipient of the supply (paragraphs 177 to 216) Proposition 15 One set of activities may constitute the making of two (or more) supplies (paragraphs 217 to 221) Proposition 16 The total fact situation will determine the nature of a transaction, the entity that makes a supply and the recipient of the supply (paragraphs 222 to 246) Grandma's flowers
A enters into a contract with B for B to provide goods to C. A is an individual, B is a florist, the goods are flowers, and C is A's grandmother: Proposition 11: the agreement is the logical starting point when working out the entity making the supply and the recipient of that supply
121. If you take a contractual approach in analysing the arrangement in Grandma's flowers , then the only contractual relationship is between A and B. Under this contract B makes a supply of flowers to A and consideration is paid by A to B. That supply is provided by B to C:
125. M is a manufacturer of goods. M supplies goods to authorised dealers who on-supply those goods to end users. M makes a standing offer to end users that if an end user's purchases from an authorised dealer reach a certain level, M will pay the end user a 'loyalty payment'. 126. D is a dealer and E is an end user. The supply chain is that M supplies goods to D and D supplies goods to E. E receives a loyalty payment from M. 127. There is no supply from E to M in relation to the loyalty payment. There is a contract between M and E as a result of E's acceptance of M's standing offer to make the loyalty payment. However, E is not under any binding obligation to M to purchase goods through D and does not make a supply to M simply by making acquisitions from D. 128. It is E's entry into the contract with D for supply of the goods to E that constitutes E's acceptance of M's standing offer and the contract between M and E is formed at this time. Although M is obliged to make the loyalty payment to E, at no point can M compel E to complete the contract of sale with D. 129. In the absence of any entry into an obligation by E to complete a contract of sale with D, E also does not provide or furnish anything else to M that may be considered to be a supply. There is no supply of goods, services or some other thing by E to M. The loyalty payment made by M to E cannot be consideration for a supply from E to M because E does not make a supply to M. Further, the payment does not give rise to an adjustment event for either M or E.47 However, if the payment is made on or after 1 July 2010, and the requirements of Division 134 are met, M will be entitled to a decreasing adjustment of 1/11th of the third party payment. If E is making the acquisition wholly for a creditable purpose and is registered or required to be registered E will be subject to an increasing adjustment of 1/11th of the third party payment. Proposition 13: when A has an agreement with B for B to provide a supply to C, there is a supply made by B to A (contractual flow) that B provides to C (actual flow)
133A. A further example of this distinction, in an Australian GST context, between a supply 'made' to an entity but 'provided' to someone else occurred in Meridien Marinas Horizon Shores Pty Limited v FC of T .47A Greenwood J, at paragraph 88, referred to the application of Division 87 of the GST Act to the facts of that case, which is about long-term Zaccommodation in commercial residential premises, provided to individuals. His Honour observed:
There may be a taxable supply of commercial accommodation to a range of entities, provided in commercial residential premises that are predominantly for long-term accommodation, in circumstances where a natural person exercises the right in every case. 134. In contrast, 'provided' is used elsewhere in the GST Act in a number of other senses, for example:
136. The Commissioner does not accept that Redrow supports this view.48 As pointed out in GSTR 2003/8:49
137. The grant of a right or entry into an obligation may be a term or condition of a larger transaction. Where the grant of the right or entry into the binding obligation is the substance of the transaction it will be the subject matter of a supply.50
139. In Redrow , a builder, Redrow, constructed new houses for sale. Most prospective Redrow purchasers could not purchase a Redrow home unless they had a buyer for their existing home. To expedite sales of its homes Redrow instructed an estate agent to value the prospective purchaser's existing home and to handle the sale.
146. Redrow was applied in British Airways plc [2000] BVC 2207 ( British Airways) . British Airways had an arrangement where food outlets provided food to passengers of delayed flights. When there was a flight delay, an announcement was made to passengers that vouchers of a specified amount were available for passengers' use at food outlets. Passengers could use their boarding pass when a voucher was not available.
149. The Commissioner agrees there is a supply made to British Airways, but, respectfully, it is considered that the character of the supply made by the food outlets to British Airways is a supply of a meal. The meal is provided to the passengers. In this case there is a contract between two entities, British Airways and the food outlet, under which a third entity is to be provided with the thing that is the subject of the supply between the first two entities. That is, British Airways and the food outlet have contracted for the food outlet to provide a meal to the passengers. For GST purposes the Commissioner considers British Airways is analogous to the scenario in Grandma's flowers .
150. The British Airways case above was not the first time British Airways disputed the VAT treatment of this arrangement. Before Redrow, British Airways had argued a case in the VAT tribunal and on appeal to the High Court.51 Those earlier decisions focused on whether there was a supply of goods rather than services to British Airways. The definition of supply of goods under both the Sixth Directive and the UK VAT Act required a transfer of dispositive power. As British Airways never had dispositive power over the supply of food, the tribunal and the court could not hold that a supply of goods had been made to British Airways.
In each of these cases the relevant entity failed in its Redrow type argument because it did not contract for the supply from the supplier. This proposition, Proposition 13, was at work in the UK VAT before Redrow . For example, the proposition was successfully argued in P&O European Ferries (Dover) Ltd [1992] BVC 955 where it was found on the evidence that the company instructed the relevant solicitors and was the contractual recipient of the solicitors' services 'notwithstanding that the individual employee also received the benefit of those services'.
155. Under the GST health provisions in Subdivision 38-B, subject to certain exceptions51A, the supply is only GST-free where an individual receiving that service or specific health treatment is the recipient of that supply. This outcome results from the specific wording in some health provisions, whilst in other provisions it is due to the nature of the services themselves. Where this requirement is imposed, a GST-free supply of a health service cannot be made to a business entity or a non-profit body.
156A. Under certain multi-party arrangements, an entity may make a GST-free supply of goods or services to an individual which results in the supplier making a further supply to a third party.51B The supply made to the third party will not be GST-free under provisions within Subdivision 38-B that require the individual receiving the relevant goods or services to be the recipient of the supply. However, in some cases the supply will be GST-free under section 38-60.
156B. Where an entity makes a supply to an insured person and that supply is either wholly or partly GST-free under Subdivision 38-B (the underlying supply), a supply of the service of making the underlying supply by the entity to an insurer, in the course of settling insurance claims under an insurance policy (including private health insurance policies and taxable insurance policies) of which the insurer is an insurer, is GST-free under subsection 38-60(1) to the extent that the underlying supply is GST-free. For the purposes of subsection 38-60(1), an operator of a statutory compensation scheme is treated as an insurer and a claim for compensation under the statutory compensation scheme is treated as a claim under an insurance policy.51C
156E. However, the supplier and the recipient of the supply may agree for a supply not to be treated as GST-free under section 38-60.51D
157. A, a supplier of ambulance services, enters into an agreement with B, a hospital, under which A agrees to provide ambulance services as and when B requests them and B agrees to pay for the services. B is not an Australian government agency.The obligations under the agreement between A and B are binding. 158. Pursuant to the agreement, A transfers C, a patient, from hospital B to another hospital. The transfer of C is in the course of C's treatment and B pays A to provide A's services to C. 159. The recipient of A's supply of ambulance services is hospital B. A's supply is made to B and provided to C. 160. One of the requirements under subsection 38-10(5) for a supply of an ambulance service to be GST-free is that the service is supplied in the course of treating the recipient of the supply. As hospital B is the recipient of the supply, not the patient, and there is no treatment of the hospital, the supply of the ambulance service is not GST-free.51E Example 5: occupational therapist
161. A, an occupational therapist, is engaged by B, a company, to assess the needs of C, its employee. C suffers from multiple sclerosis and needs to use a wheelchair. A and B enter into an agreement which requires A to undertake an assessment of C's condition, to give recommendations in a report to B and for B to pay for the service. 162. A's supply of services is made to B. Although C may benefit from these services, it is B who contracts for the supply of these services and is the recipient of the supply. 163. This supply is not GST-free under subsection 38-10(1). This is because paragraph 38-10(1)(c) requires the supply to be generally accepted in the relevant profession as being necessary for the appropriate treatment of the recipient of the supply. B is the recipient of the supply. The supply is not for the treatment of B. Paragraph 38-10(1)(c) is not satisfied.51F 164. If C engages the occupational therapist to supply its services and B merely pays the therapist on behalf of C, the recipient of the occupational therapist's services is C. This supply will be GST-free if all of the requirements of subsection 38-10(1) are satisfied. Example 6: teaching services
165. A, a supplier of teaching services, enters into a contract with B, a course provider, to provide teaching services to B's students. 166. B conducts professional or trade courses that are GST-free under section 38-85. Students enrol with, and pay fees directly to, B. When a student completes the course, B is authorised by the relevant State or Territory authority to conduct a test. If a student passes the test, B facilitates the issuing of the qualification/licence by the relevant State or Territory authority. 167. A has no contractual relationship with the students. 168. A makes a supply of the teaching services to B and A provides this supply to the students. A's supply is not a GST-free supply of a professional or trade course. 169. However, B does make a GST-free supply of a professional or trade course to the students. The students enter into contractual arrangements with B for the supply of the professional or trade course. B makes a supply of the course to the students. It does not matter whether B's employees do the actual teaching or B subcontracts the teaching to another entity (in this case A). 170. Based upon these contractual arrangements, the students are the recipients of the supply of the professional or trade course made by B, and B is the recipient of the supply of teaching services made by A. Example 7: community care
171. A, a community care provider, receives Health and Community Care funding to provide home and maintenance services to people living at home, who are frail and have a moderate or severe disability. A sets the fees for its services according to the care recipient's ability to pay. 172. C, a client of A, is the care recipient. C is assessed by A as being entitled to receive a lawn-mowing service every fortnight at the subsidised rate of $10. There is a contractual relationship between A and C for the supply of the lawn-mowing service at the subsidised rate of $10. 173. A engages B, an independent contractor, to provide the lawn mowing service to C. A agrees to pay B $44 for its service. B is not the recipient of funding under the Home and Community Care Act 1985. 174. C is required to pay A $10 for the service, but A directs C to pay the amount to B on A's behalf. A then pays B the balance of $34. 175. There is no contractual relationship between B and C. 176. B is making a supply of the lawn-mowing service (S1) for $44 to A but providing that service to C51G. A is also making a supply of a lawn mowing service (S2). A's supply is to C at the subsidised rate of $10. 52
176A. A, an insurer, enters into an agreement with B, a dentist, for B to provide dental services to insured individuals for the purposes of settling claims under insurance policies that A issues. The agreement between the parties outlines that A will pay B if B provides services to identified individuals. A and B have not entered into an agreement to treat supplies B makes to A as not being GST-free.52A 176B. C, an insured individual, advises A on 1 May 2013 that they require dental treatment. A refers them to B, and B provides the treatment to C. A pays B under the terms of the pre-existing agreement .
176C. Under this arrangement, B supplies dental services to C, while also supplying a service to A (being the service of making the supply to C ). The supply of the dental services is made to settle C's claim under an insurance policy A issued to C .
176D. The supply of the dental service B makes to C is GST-free under subsection 38-10(1 ). The supply of the service B makes to A is GST-free under subsection 38-60(1 ).
Note : the outcome in this example would be the same if A and B did not have a pre-existing agreement but instead A contracted with B for B to provide the dental services to C . Example 9: GST-free health related supply
176E. A, an Australian government agency, implements a program to fund supplies of hearing aids to individuals who satisfy specified criteria. As part of the program, A forms an agreement with B, an audiologist, for B to supply hearing aids to eligible individuals, for which A is liable to pay. A and B have not entered into an agreement to treat supplies B makes to A as not being GST-free.52AA 176F. C, an eligible individual, attends an appointment with B on 1 March 2013 and receives a hearing aid. B then notifies A that they have made a supply of the hearing aid to C. A pays B in accordance with the pre-existing agreement .
176G. Under the arrangement, B supplies the hearing aid to C while also supplying a service to A (being the service of making the supply to C ).
176H. The supply of the hearing aid by B to C is GST-free under subsection 38-45(1 ). 52AAA The supply of the service B makes to A is GST-free under subsection 38-60(3 ).
177A. For example in the Full Federal Court decision in TT-Line Company Pty Ltd v. Federal Commissioner of Taxation52B the Court observed that the payments made by the government entity formed part of the consideration for the supply of transport made by the ferry operator to the eligible passengers.52C
180. In other GST rulings the Commissioner discusses the close coupling between supply and consideration in the GST Act.53 In determining whether a payment is consideration under section 9-15 and whether there is a 'supply for consideration' those rulings take the view that:
the test is whether there is a sufficient nexus between the supply and the payment made;54 this test is objective;
180A. Where a third party makes a payment, the recipient of the supply does not necessarily need to be aware of that payment for that payment to be consideration for a supply made to the recipient.54A However, the knowledge of the recipient is one of the facts and circumstances of the arrangement that may be relevant in establishing if a payment by a third party forms part of the consideration for the supply to the recipient.
180B. Further, in identifying the character of the connection, the word 'for' ensures that not every connection between supply and consideration meets the requirements for a taxable supply. That is, merely having any form of connection of any character between a supply and payment of consideration is insufficient to constitute a taxable supply.54B
consideration for a supply made to the payer and the payer is the recipient of that supply;55
not consideration for a supply;56 or
212A A subsidy program is managed by a Government Department. The subsidy program provides that individuals are entitled to a subsidy payment when certain criteria are satisfied. Under the program, the amount of the subsidy is payable to the individual. Where a supply is made to the individual, the individual provides the consideration to the supplier for that supply and then claims the subsidy payment from the Department .
212B Alternatively, under the program, an individual, the Department and a supplier may enter into an arrangement under which the subsidy entitlement of the individual is paid by the Department directly to the supplier rather than to the individual, on authorisation by the individual. Where this occurs, the subsidy entitlement of the individual is assigned by that individual to the supplier, with the payment being applied by the supplier in satisfaction of the liability owed by the individual to the supplier .
212C Under this arrangement which involves payments being made directly to the supplier under the subsidy program, the supplier is required to comply with certain rules in respect of its supplies to individuals. These rules include a requirement to accept the amount of the subsidy as full payment for the supply to the individual, which may be less than the amount that the individual would otherwise pay to the supplier if this arrangement was not used. The rules also include a requirement to provide information in relation to the supply to determine the amount that is payable by the Department and to be potentially subject to audit or investigation in respect of payments under these arrangements .
212D While there is a pre-existing framework which requires the supplier and the Department to act in a particular way under the arrangement, the payment by the Department to the supplier is merely an administrative arrangement to pay on behalf of the individual for a liability owed by the individual to the supplier. That is, the subsidy payment is an entitlement of the individual which is then assigned to the supplier, rather than being a liability owed by the Department to the supplier. Accordingly, the supplier is not making a supply to the Department for which the subsidy payment is consideration .
213. L, a legal firm, is engaged by C, a client, to provide legal services. As part of the service agreement, prior to the provision of the legal services, C deposits money into L's trust account. This money is treated as an advance for later disbursements made by L on behalf of C and as security for payment for future services. 214. L then advises C to seek the service of a third party, T. C contracts with this third party directly. 215. L, acting as agent for C, pays for T's services using funds from the trust account: 216. The recipient of the supply of the service by T is C, not L. L is merely paying for a supply on behalf of C. As the recipient of the supply and the payer of the consideration, C will make a creditable acquisition if all the other requirements of section 11-5 are met. Proposition 15: one set of activities may constitute the making of two (or more) supplies
217A. This proposition is illustrated by Federal Commissioner of Taxation v. Secretary to the Department of Transport (Vic)63A (Department of Transport ), where the activity undertaken by the taxi operator of transporting the eligible passenger resulted in two supplies being made:
the supply to the Department of the service of transporting the eligible passenger.63B
218. Redrow has also been referred to as authority for the proposition that 'one set of acts can constitute two different supplies'64 or 'a single course of conduct by one party may constitute two or more supplies to different persons'.65 In Redrow , both Redrow and the prospective purchaser contracted for the estate agent's services. The agent's activities resulted in the agent making a supply of services to both Redrow66 and the prospective purchaser.
221. Where there are two supplies made based on one set of acts, it is possible that one of those supplies may be made to one entity and provided to another. For example, for a claim under an insurance policy, the insured may be required to pay an insurance excess to a repairer, who is not acting as agent of the insurer. The one set of acts, the repairs by the repairer, can, depending on the particular facts, result in a supply made by the repairer to the insurer and provided to the insured, and a supply made and provided by the repairer to the insured. This is consistent with the UK Court of Appeal decision in Brown & Davis Ltd v. Galbraith 67 where it was held that, although the primary contract was between the insurance company and the repairer for a supply of repair services, there was a second contract between the insured and the repairer requiring the insured to pay for the repairs only to the extent of the excess under the policy.68
221C. The pre-existing framework or agreement can take various forms, including licence conditions (as occurred in Department of Transport ). The pre-existing framework or agreement must set out the terms and conditions governing the parties and require the supplier to act in a particular manner with respect to supplies to third parties. Those requirements may include a binding obligation to make a supply to a third party, complying with licence conditions which are binding on the supplier or a requirement to charge a lower amount to the third party.
221D. If the 'requirement' to act in a particular manner is optional then it is unlikely that a supply would be made to the payer. This situation may arise where the pre-existing framework or agreement allows, but does not require, the supplier to act in a particular manner and the payer makes a payment because the supplier has satisfied eligibility criteria for the payment. In these circumstances there may instead be a third party payment. [ Proposition 14: a third party may pay for a supply but not be the recipient of the supply, paragraphs 177 to 216 of this Ruling .]
However, if there is no pre-existing framework or agreement which identifies the classes of third parties and which triggers the payer's obligation to make a payment to the supplier in the event of the relevant supplies being made to those third parties, the mere act of payment, in the absence of anything else, would not give rise to a supply to the payer. There may instead be a third party payment. [ Proposition 14: a third party may pay for a supply but not be the recipient of the supply, paragraphs 177 to 216 of this Ruling .]
221F. The payer's obligation to pay the supplier in the event of a supply to the third party must be a liability that arises for the payer in its own capacity and not an administrative payment arrangement on behalf of the third party. That is, the obligation to pay imposed on the payer must not be for a liability owed by the third party recipient of the supply. The pre-existing framework or agreement surrounding the payment obligation of the payer should be one where the payer (and not the third party) is liable to make the payment to the supplier.68A
221H. A State's legislation provides that certain amusement related services may be provided to school age children only by providers issued with a licence by the relevant State government Minister. The legislation provides that licences may include such conditions that the Minister determines. The State government's policy is that eligible low income residents (E) should have access to such amusement services for their school age children at a scheduled price. In implementing this policy, the State government (G) issues eligibility cards to E .
221I. G provides, through the Minister, a licence to a company (C) enabling it to provide the relevant amusement services to school age children. The licence includes a condition that, where C supplies services to E, C must supply those services to E for a scheduled price provided that E presents their eligibility card to C when the services are supplied. The scheduled price is lower than the usual retail price, and in accordance with the licence condition C is entitled to receive from G a specified amount in the event C supplies the services to E for the scheduled price. The specified amount is calculated as the difference between the usual retail price and the scheduled price .
221J. There is nothing in the terms of the licence issued by G to C which binds C to make amusement supplies to E. It is relevant to apply the factors listed at paragraph 221B of this Ruling to the circumstances surrounding the payment by G to C for amusement services provided to E. In particular :
there is a pre-existing framework, in the form of the licence conditions, that contemplates that the parties act in a particular manner in respect of amusement supplies that are to be made to E (C is required to discount the fee for any supply it makes of amusement service to E. G is obliged to pay C the amount of any such discount ); and ·
the pre-existing framework provides a mechanism, that is, a card, for checking of the eligibility of E at the time of the provision of the amusement service. The card, used to ascertain E's eligibility for the lower scheduled fee, is the mechanism by which C, in effect, obtains authorisation from G that it will pay the difference between the usual retail price and the scheduled price .
221K. Weighing up the facts against the factors listed at paragraph 221B of this Ruling, a supply is identified as having been made by C to G. The payment by G to C is consideration for the supply by C of a service to G, rather than forming part of the consideration for the supply C makes of amusement services to E. Assuming the other elements of section 9-5 are met, C makes a taxable supply to G. As the recipient of the supply, G makes a creditable acquisition if the other requirements of section 11-5 are met .
221L. A State government's policy provides that any eligible resident (E) of specified country areas should have access to telecommunications services that are accessible through specialised equipment, at a scheduled price .
221M. The State government (G) enters into a contract with a retailer of specialised equipment (R) where if R sells the specialised equipment to an eligible person, R must charge the eligible person a scheduled price. The scheduled price is lower than the recommended retail price and under the agreement R is entitled to receive from G a specified amount when R sells specialised equipment to E for the scheduled price. The specified amount is calculated as the difference between the recommended retail price and the scheduled price .
221N. To assist R in identifying eligible residents, G issues an eligibility card to E that is presented to R when E purchases the specialised equipment .
221O. If R does not supply the specialised equipment to E for the scheduled price, for example, because E does not present the eligibility card, and therefore E buys the specialised equipment at the recommended retail price, E cannot seek the specified amount from G .
221P. Each time R sells specialised equipment to E for the scheduled price, R will be entitled to claim the specified amount from G. Under the contract between R and G, R makes a supply to G because it enters into and fulfils an obligation to provide specialised equipment to E for the scheduled price .
221Q. G's payment of the specified amount to R is the contractual consideration G provides to R under the contract between them in return for R undertaking and fulfilling its contractual obligations. The specified amount received by R from G is consideration for the supply made by R to G .
221R. If R is registered or required to be registered for GST, R has made a taxable supply to G for consideration which is calculated as the difference between the recommended retail price and the scheduled price charged to E. R issues a tax invoice to G where the specified amount is the GST-inclusive price of the supply to G. R is liable to remit GST and G has made a creditable acquisition and is entitled to claim input tax credits if the requirements of section 11-5 are met .
221S. When R supplies E with the specialised equipment R makes a taxable supply to E for consideration from E of payment of the scheduled price. This is a separate supply to the supply that R makes to G. R issues a tax invoice to E with the scheduled price paid by E as the GST-inclusive price of the supply to E. R is liable to remit GST for this taxable supply and if E is registered or required to be registered for GST then E is entitled to claim input tax credits if the requirements of section 11-5 are met .
223. Australian courts have held that an arrangement between the parties will be characterised not merely by the description the parties give to the arrangement, but by looking at the transactions entered into and the circumstances in which the transactions are made. This was made clear by McTiernan J in Radaich v. Smith (1959) 101 CLR 209 at 214:69
225. In New Zealand the GST consequences of a transaction are determined by the arrangements actually entered into and not by any economic consequences. The Commissioner agrees with the comment by Blanchard J in New Zealand Refining :
...in taxation disputes the Court is concerned with the legal arrangements actually entered into and the rights and duties they create, not with economic or other consequences of the arrangements...70
the High Court decision in Customs and Excise Commissioners v. Reed Personnel Services Ltd [1995] BVC 222 ( Reed ) that established this proposition, with which the Commissioner agrees, as a principle in the UK;
the House of Lords decision in Eastbourne Town Radio Cars Association v. Commissioners of Customs and Excise [2001] BVC 271 ( Eastbourne ) which confirmed the principle at the highest level; and
the more recent Court of Appeal decision in Commissioners for Her Majesty's Revenue and Customs v. Debenhams Retail plc [2005] EWCA 892 ( Debenhams ) which followed the principle.
228. In Reed the issue was whether a nursing agency, Reed, made supplies of nurses to hospitals or exempt supplies of nursing services to the hospitals.71
236. Lord Slynn of Hadley, after citing Reed , looked beyond the contractual arrangements and said, at paragraph 17:
239. The House of Lords' endorsement of Reed was noted by the Court of Appeal in Debenhams .72 This case concerned trading terms where, if a customer paid the retailer Debenhams by credit or debit card, 2.5% of the payment was said to be consideration for an exempt supply of card handling services by a separate card issuing company (DCHS).
240. It was held that there was no separate contract between Debenhams' customers and DCHS for which 2.5% of the sale price was being paid:73
242. Rex, a respected member of a charitable institution, passed away. Tom, a representative of the charitable institution, contacted the surviving spouse and made it known that the charitable institution wanted to organise and pay for Rex's funeral service. This was in recognition of Rex's extensive voluntary work for the charitable institution. 243. Tom contacted the funeral service company and organised a meeting between himself, the surviving spouse and the funeral director. With the surviving spouse's consent, Tom made the arrangements with the funeral director. At the direction of Tom, the surviving spouse signed the relevant documents for the service. It was the accepted practice that the surviving spouse was the appropriate person to sign the relevant documents. Tom made it known to the funeral director that the charitable institution would be responsible for all the costs of the service. The funeral director accepted that the surviving spouse was signing the documents on behalf of the charitable institution and that the surviving spouse was not responsible for the costs of the service. 244. Although there is a written contract signed by the surviving spouse as a starting point for the analysis, it is necessary to look at all the surrounding circumstances to determine who the recipient of the supply is. 245. The fact the charitable institution has bound itself to pay for the supply is not sufficient in itself to make it the recipient of the supply. It is possible that the charitable institution is binding itself to pay for a supply made to another entity. 246. In this case the facts and surrounding circumstances demonstrate that it was the charitable institution that commissioned the supply and was also the recipient of the supply because: ·
the charitable institution made it known to the supplier that it was commissioning the supply and that it would be liable to pay for that supply; ·
the charitable institution exercised complete control over how that supply was to be delivered (albeit with the surviving spouse's agreement); and ·
the surviving spouse signed the contract under the direction of Tom a representative of the charitable institution. Part 4: Case studies
247. The House of Lords' decision in Customs and Excise Commissioners v. Plantiflor Ltd [2002] UKHL 33 ( Plantiflor ) is a significant UK VAT case on multiparty arrangements. Plantiflor involves the application of several of the propositions discussed in this Ruling. Plantiflor is examined to illustrate the analysis of multiparty transactions.
249. Plantiflor entered into a five year contract with Parcelforce for the delivery (at a reduced rate) of bulbs to its customers. Plantiflor's goods delivered through Parcelforce were treated as 'postal packets' the conveyance of which qualified for exemption from VAT.74 Customs and Excise said that VAT was chargeable on the total of Plantiflor's invoice price (including the postage component) for the delivered goods to its customers. This meant that Plantiflor could not deduct the input tax on the amounts it paid to Parcelforce as this was for exempt supplies, but it was accountable for VAT on the postage included in the price of the delivered goods to its customers.
250. Plantiflor's argument that it acted as an agent for the customers in its dealings with Parcelforce found favour in the Court of Appeal decision.75 According to this argument, when Plantiflor commissioned the supply from Parcelforce it did so for undisclosed principals - their customers. As a consequence, rather than there being a supply by Parcelforce to Plantiflor, there was a supply by Parcelforce to the customers (an exempt supply).
The difficulty with this analysis, however, is that it does not fit the facts. As Law J correctly held, Parcelforce does not deliver the goods pursuant to the contract with the customer or his agent. It makes delivery pursuant to its contract with Plantiflor, which both parties entered into as principals. This is plain from the terms of the contract, [ the agreement is the logical starting point, Proposition 11, paragraphs 119 to 122 ] which was to last for a term of five years, contained an obligation on the part of Plantiflor to deliver a minimum number of parcels in each year, and provided for the annual indexation of postal charges. The minimum volume obligation, for example, which indirectly affects the price per parcel payable by Plantiflor, does not attach to any individual customer or to all the customers collectively. The conclusion is inescapable that neither party entered into the contract as agent for Plantiflor's future customers as undisclosed principals; and the contrary has not been suggested.
255. The Commissioner considers the construction of the transaction between Plantiflor and the customer that there was an agreement for the supply of delivered goods to be the better view. If customers did not come to collect the goods, the delivery was necessary for the customers to enjoy the goods and did not represent an end in itself. Hence, the delivery was integral to the supply of the goods and the supply was one of delivered goods. This is consistent with the view in paragraph 4 of GSTD 2002/376 that 'You supply delivered goods where the delivery is integral, ancillary or incidental to the supply of the goods.' The Commissioner also considers that the supply by Parcelforce to Plantiflor of the service of delivering its customer's goods is made to Plantiflor and provided to Plantiflor's customer as there was no contractual or reciprocal relationship between Parcelforce and Plantiflor's customer.
This accords with Proposition 10, discussed at paragraphs 112 to 113 of this Ruling, that it is necessary to analyse the transaction that occurs, not the transaction that might have occurred.77
260. The Commissioner agrees there is a distinction between a subcontracting arrangement and an arranging service. The Commissioner also agrees with the analysis of a subcontracting arrangement in Plantiflor . In a subcontracting arrangement, a supplier contracts with a customer for the supply of something. The first supplier then contracts with a second supplier (the subcontractor) for the provision of the thing to the customer. This diagram illustrates a subcontracting arrangement:
261. However, the Commissioner considers a supply can only be a supply of arranging for a supply to be made to the customer (or another entity) if that is what the first supplier has been contracted to supply. If the first supplier arranges for a second supplier to contract with the customer to supply the required thing, the first supplier is responsible for arranging for the second supplier to supply that thing. This was not the case in Plantiflor . This diagram illustrates an arrangement with the supply of arranging and the supply of the thing arranged:
Case study 2 - The Bus Company78
263. A State Government Transport Authority wishes to improve transport services to residents in a particular rural locality. The authority enters into an agreement to pay the Bus Company78A a grant of $5 million to enable it to purchase the buses it needs to establish a bus service in the locality. In return for the grant, the Bus Company agrees to use the buses to operate commercial bus services in the locality. Passengers will pay reasonable commercial fares to the Bus Company for trips they take.
264. The grant from the authority is consideration for the supply to it from the Bus Company of the entry into the obligation to operate the agreed bus service. The Transport Authority makes an acquisition of a corresponding right and will make a creditable acquisition if the other requirements of section 11-5 are met [ Proposition 6: 'supply' usually, but not necessarily, requires something to be passed from one entity to another, paragraphs 92 to 94 of this Ruling ].
265. After the bus service has been operating for some years the Department for Rural Industry rationalises the main rural industry in the locality. This leads to a downturn in the activities of businesses in the locality, including the Bus Company which has a reduction in passenger numbers. The Department offers compensation to the Bus Company and other affected businesses in the locality. The Department and the Bus Company agree that if the company is still operating a business in the locality it will receive a payment from the Department of $50,000 at the end of each of the following three financial years.79
266. The Bus Company does not make a supply to the Department for the payments from the Department [ Proposition 9: creation of expectations alone does not establish a supply, paragraphs 102 to 111 of this Ruling ]. The Bus Company does not enter into an obligation to operate a business in the rural locality [ Proposition 12: transactions that are neither based in an agreement that binds the parties in some way nor involve a supply of goods, services, or some other thing, do not establish a supply, paragraphs 123 to 129 of this Ruling ]. In addition, while there is a pre-existing framework governing the payment from the Department to the Bus Company, the obligation of the Department to pay the Bus Company is not dependent on any supply by the latter to a third party [ Proposition 15: one set of activities may constitute the making of two (or more) supplies, paragraphs 221A to 221K of this Ruling ].
268. The Bus Company makes the supply of the bus service to the Education Department and this supply is provided to the particular schools [ Proposition 13: when A has an agreement with B for B to provide a supply to C, there is a supply made by B to A (contractual flow) that B provides to C (actual flow), paragraphs 130 to 176 of this Ruling ]. As the recipient of the supply, the Education Department will make a creditable acquisition if the other requirements of section 11-5 are met.
Hence, the payments from the Department are consideration for the supplies of a service of transporting the students made by the Bus Company to the Department. [ Proposition 15: one set of activities may constitute the making of two (or more) supplies, paragraphs 217 to 221 of this Ruling .]
272. The consequent reimbursement payments to the Bus Company from the agency are not made in connection with the supply to the Bus Company of converting the buses and as such are not consideration for the supply. The consideration for that supply has been paid by the Bus Company. The Bus Company acquired, and provided the consideration for, the supply of converting the buses and will be entitled to an input tax credit for that acquisition. The Bus Company does not make any undertaking or other supply to the agency in return for the reimbursements, it merely accepts the agency's unilateral standing offer for reimbursement. Also, as the Bus Company has not made any supplies to the agency, the agency has not made creditable acquisitions in connection with the reimbursement payments [ Proposition 6: supply usually, but not necessarily, requires something to be passed from one entity to another, paragraphs 92 to 94 of this Ruling; Proposition 12: transactions that are neither based in an agreement that binds the parties in some way nor involve a supply of goods, services, or some other thing, do not establish a supply, paragraphs 123 to 129 of this Ruling ].
What this Ruling is about 1 Date of effect 8 Background 10 The meaning of supply in the context of the GST Act
Ruling with Explanation 32 Part 1: The concept of 'supply' in the GST Act
Case Study 2: The Bus Company
Detailed contents list 273 Commissioner of Taxation
This paragraph refers to Division 81 after amendment by Tax Laws Amendment (2011 Measures No. 2) Act 2011 . The amended law applies to the payment, or the discharging of a liability to make a payment, relating to an Australian tax, or an Australian fee or charge, imposed on or after 1 July 2011. However, the amended law is subject to a transitional measure that provides continued exemption from GST for Australian taxes, and Australian fees and charges imposed before 1 July 2012 which are of a kind specified by the Division 81 legislative determination that was in force immediately before the commencement of the amendment to Division 81. In addition, paragraph 81-15.01(1)(h) of the GST Regulations extends the exemption from GST of Australian fees and charges specified by the Division 81 legislative determination that were imposed before 1 July 2013.
This is further explained in Goods and Services Tax Determination GSTD 2012/2 Goods and services tax: what are the GST consequences following the sale of commercial premises that are subject to a lease? For the Commissioner's view on residential premises, see Goods and Services Tax Determination GSTD 2012/1 Goods and Services tax: what are the GST consequences following the sale of residential premises that are subject to a lease? [35A]
The Commissioner explains this in paragraphs 870 and following of GSTR 2005/6 Goods and services tax: the scope of subsection 38-190(3) and its application to supplies of things (other than goods or real property) made to non-residents that are GST-free under item 2 of the table in subsection 38-190(1) of the A New tax System (Goods and Services Tax) Act 1999 .
In Berry v. FC of T (1953) 89 CLR 653 at 659 Kitto J noted that consideration will be in connection with property where 'the receipt of the payment has a substantial relation, in a practical business sense, to that property'. His Honour was considering the meaning of consideration 'for or in connection with' goodwill in a lease premium for purposes of former section 84 of the Income Tax Assessment Act 1936 .
It may be argued that the supply made by the estate agent to Redrow was provided to the purchaser. However, this question was not the issue in dispute in Redrow . See paragraphs 882 to 883 of GSTR 2005/6.
In Brown & Davis Ltd v. Galbraith , the issue was whether there was an implied contract between the insured and the repairer to pay for the main cost of the repairs in the event that the insurance company did not pay those costs. When the insurance company went into liquidation, the repairer sought to recover the main costs of the repairs from the insured. It was held that there was no implied contract between the insured and the repairer in respect of these costs. Rather, there were two contracts, one between the insurance company and the repairer whereby the insurance company undertook to pay the main repair costs and the second between the insured and the repairer whereby the insured would pay the excess to the repairer. For further discussion on insurance settlements see GSTR 2006/10 Goods and services tax: insurance settlements and entitlement to input tax credits.
For example, in the Full Federal Court decision in Department of Transport , Kenny and Dodds-Streeton JJ at paragraph 45 observed: 'The DOT made a MPTP payment to a taxi-cab operator, or assumed the liability to make such a payment, only when the taxi-cab operator made a MPTP trip.' [emphasis added] Their Honours observed at paragraph 47, 'Once the trip became an MPTP trip, the DOT assumed liability to make a MPTP payment.'
The facts here are analogous to those in New Zealand Refining . Paragraphs 102 to 103 of this Ruling discuss this case.
Previously issued in draft form as GSTR 2005/D8ReferencesATO references:
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