ATS Pacific Pty Ltd v Commissioner of Taxation
Document type: Decision Impact Statement
Venue: Federal Court of Australia (NSD 991 of 2013 (FCAFC))
Judgment date: 27 March 2014
Date published: 12 November 2014

Summary of decision:
Outlines the ATO's response to this case which concerned the characterisation, for GST purposes, of supplies made by an inbound tour operator (ITO) to its non-resident travel agent clients.

Overview of facts:
The taxpayer, an ITO, entered into contracts with numerous non-resident travel agents (NR travel agents) relating to the provision, in Australia, of the components of a tour package (Products) by Australian-based entities (Australian Providers) to non-resident tourist clients of the NR travel agents (NR tourists). The Products included accommodation in hotels and serviced apartments, transfers, car hire, tour guides, meals, and similar products and services. | Many dealings between the taxpayer and the NR travel agents occurred through the taxpayer's website which allowed NR travel agents to (amongst other things): • review the Products of the Australian Providers that were available for booking by the taxpayer • access lists of tariffs, inclusive of the taxpayer's fees, for the Products • build a tour package for a NR Tourist by selecting particular Australian Providers and their Products, and • obtain (in many cases) instant confirmation that the taxpayer was able to book the Products selected. | • review the Products of the Australian Providers that were available for booking by the taxpayer • access lists of tariffs, inclusive of the taxpayer's fees, for the Products • build a tour package for a NR Tourist by selecting particular Australian Providers and their Products, and • obtain (in many cases) instant confirmation that the taxpayer was able to book the Products selected. | The terms and conditions on the website stated that the amount the taxpayer charged included both the cost of the Products and a fee for arranging the Products. | Once agreement with an NR travel agent had been reached, the taxpayer entered into contracts with Australian Providers relating to the provision of Products to the NR tourists. In doing so, the taxpayer acted as principal, and not as an agent of the NR travel agent. The taxpayer was obliged to pay the Australian Providers and claimed the associated input tax credits. | Decision at First Instance | On 15 April 2013, the Federal Court at first instance (Justice Bennett) found that the taxpayer made two supplies; the supply of a promise to ensure that the Products would be supplied to a NR tourist (which was taxable) and the supply of arranging or booking services (which was GST-free) [1] . The consideration for the former was the price the taxpayer was liable to pay the Australian Provider for the Product, and the consideration for the latter was the taxpayer's margin. | The taxpayer appealed from the finding that it made a taxable supply of a promise, and the Commissioner cross-appealed from the finding that the taxpayer made a GST-free supply of arranging or booking services. | Issues Decided by the Full Federal Court | The Full Federal Court dismissed the taxpayer's appeal and allowed the Commissioner's cross-appeal. | The issue on appeal | In concluding that the primary judge did not err in characterising the taxpayer's supply as the supply of a promise to ensure the Products would be provided, the Full Federal Court found: • The issue of characterisation of the taxpayer's supply is 'undoubtedly a question of fact' [2] that is to be determined with regard to 'practical or business reality'. [3] • The text of the terms and conditions of a contract 'is not conclusive of the character of the supply that is made [in performance of that contract]'. [4] Rather, the character will depend as much 'on the manner of performance' and on the 'commercial or business purposes' of the contracting parties. [5] • A court should not be confined to the terms of the contract, and this is 'more so...where the contract is but one link in a chain of contracts or where, by reference to the factual matrix of the entirety of the arrangements, the commercial or practical reality points to [a different conclusion to that which might otherwise be drawn from confined analysis of the contract]'. [6] • In determining the character of a supply made pursuant to the performance of a contract between B and C that is related to a contract between A and B, to a contract between C and D, and to consumption by D of what A supplied to B, one may have regard to the terms and conditions of those other two contracts and to D's consumption of what A supplied to B. [7] • 'No evidence was adduced by ATS that would lead one to infer... that the conclusion of the primary judge did not accord with the commercial reality of the transaction'. [8] • 'ATS has not simply provided a service whereby a non-resident travel agent, or a non-resident tourist, can contract directly with those ultimately providing the service in Australia... ATS is essentially the wholesaler of a retail product'. [9] • It was open to the primary judge to characterise the supply as the supply of a promise without the need to analyse the contract to determine whether it contained an express or implied term reflecting that promise. [10] | • The issue of characterisation of the taxpayer's supply is 'undoubtedly a question of fact' [2] that is to be determined with regard to 'practical or business reality'. [3] • The text of the terms and conditions of a contract 'is not conclusive of the character of the supply that is made [in performance of that contract]'. [4] Rather, the character will depend as much 'on the manner of performance' and on the 'commercial or business purposes' of the contracting parties. [5] • A court should not be confined to the terms of the contract, and this is 'more so...where the contract is but one link in a chain of contracts or where, by reference to the factual matrix of the entirety of the arrangements, the commercial or practical reality points to [a different conclusion to that which might otherwise be drawn from confined analysis of the contract]'. [6] • In determining the character of a supply made pursuant to the performance of a contract between B and C that is related to a contract between A and B, to a contract between C and D, and to consumption by D of what A supplied to B, one may have regard to the terms and conditions of those other two contracts and to D's consumption of what A supplied to B. [7] • 'No evidence was adduced by ATS that would lead one to infer... that the conclusion of the primary judge did not accord with the commercial reality of the transaction'. [8] • 'ATS has not simply provided a service whereby a non-resident travel agent, or a non-resident tourist, can contract directly with those ultimately providing the service in Australia... ATS is essentially the wholesaler of a retail product'. [9] • It was open to the primary judge to characterise the supply as the supply of a promise without the need to analyse the contract to determine whether it contained an express or implied term reflecting that promise. [10] | The court agreed with the primary judge's conclusion that the supply of the promise is not GST-free, but provided its own reasoning, noting that: • For the accommodation component of a tour package - the supply of a promise that a hotel proprietor would provide accommodation to a NR tourist is a supply of 'real property' within the meaning of that term in section 195-1 of the GST Act, and thus it does not fall within the scope of the GST-free exemption in subsection 38-190(1). [11] • For the non-accommodation component of a tour package - the supply of a promise that Australian Providers would provide goods and services 'carries with it a right to acquire those goods and services'. This, together with the fact that the supply of the goods and services would be connected with Australia, means that the supply of the promise is excluded from being GST-free by subsection 38-190(2). [12] | • For the accommodation component of a tour package - the supply of a promise that a hotel proprietor would provide accommodation to a NR tourist is a supply of 'real property' within the meaning of that term in section 195-1 of the GST Act, and thus it does not fall within the scope of the GST-free exemption in subsection 38-190(1). [11] • For the non-accommodation component of a tour package - the supply of a promise that Australian Providers would provide goods and services 'carries with it a right to acquire those goods and services'. This, together with the fact that the supply of the goods and services would be connected with Australia, means that the supply of the promise is excluded from being GST-free by subsection 38-190(2). [12] | The court found that the exclusion in subsection 38-190(3) had no application to the non-accommodation component and noted that, in the context of Australian inbound tourism, the application of subsection 38-190(3) 'would seem to be confined to situations where the Australian Provider contracts directly with NR Travel Agents.' [13] | The issue on cross-appeal | In concluding that the primary judge erred in finding that ATS supplied a GST-free arranging service (in addition to the supply of the promise), the Full Federal Court found: • The relevant question is whether, in addition to the supply of the promise, there is 'another non-ancillary, non-incidental supply from ATS to the NR Travel Agents'. [14] • The adoption of a practical and business point of view [15] 'impels one to the conclusion here that there is one supply - the supply of the promise...- or if that embodies a supply of arranging services by ATS ... [the supply of arranging services] is to be regarded as ancillary and incidental. [16] • The conclusion that there is one taxable supply 'better accords with the policy design of taxing such consumption in Australia manifest in the extrinsic material [17] ... which made it clear that Australia asserted jurisdiction to tax the value of the supply from the NR Travel Agents to the NR Tourists but was content to settle for tax on the supply by ATS to NR Travel Agents in order to simplify compliance and administration'. [18] | • The relevant question is whether, in addition to the supply of the promise, there is 'another non-ancillary, non-incidental supply from ATS to the NR Travel Agents'. [14] • The adoption of a practical and business point of view [15] 'impels one to the conclusion here that there is one supply - the supply of the promise...- or if that embodies a supply of arranging services by ATS ... [the supply of arranging services] is to be regarded as ancillary and incidental. [16] • The conclusion that there is one taxable supply 'better accords with the policy design of taxing such consumption in Australia manifest in the extrinsic material [17] ... which made it clear that Australia asserted jurisdiction to tax the value of the supply from the NR Travel Agents to the NR Tourists but was content to settle for tax on the supply by ATS to NR Travel Agents in order to simplify compliance and administration'. [18]

Issues decided:
The Full Federal Court dismissed the taxpayer's appeal and allowed the Commissioner's cross-appeal. | The issue on appeal: In concluding that the primary judge did not err in characterising the taxpayer's supply as the supply of a promise to ensure the Products would be provided, the Full Federal Court found: • The issue of characterisation of the taxpayer's supply is 'undoubtedly a question of fact' [2] that is to be determined with regard to 'practical or business reality'. [3] • The text of the terms and conditions of a contract 'is not conclusive of the character of the supply that is made [in performance of that contract]'. [4] Rather, the character will depend as much 'on the manner of performance' and on the 'commercial or business purposes' of the contracting parties. [5] • A court should not be confined to the terms of the contract, and this is 'more so...where the contract is but one link in a chain of contracts or where, by reference to the factual matrix of the entirety of the arrangements, the commercial or practical reality points to [a different conclusion to that which might otherwise be drawn from confined analysis of the contract]'. [6] • In determining the character of a supply made pursuant to the performance of a contract between B and C that is related to a contract between A and B, to a contract between C and D, and to consumption by D of what A supplied to B, one may have regard to the terms and conditions of those other two contracts and to D's consumption of what A supplied to B. [7] • 'No evidence was adduced by ATS that would lead one to infer... that the conclusion of the primary judge did not accord with the commercial reality of the transaction'. [8] • 'ATS has not simply provided a service whereby a non-resident travel agent, or a non-resident tourist, can contract directly with those ultimately providing the service in Australia... ATS is essentially the wholesaler of a retail product'. [9] • It was open to the primary judge to characterise the supply as the supply of a promise without the need to analyse the contract to determine whether it contained an express or implied term reflecting that promise. [10] • The issue of characterisation of the taxpayer's supply is 'undoubtedly a question of fact' [2] that is to be determined with regard to 'practical or business reality'. [3] • The text of the terms and conditions of a contract 'is not conclusive of the character of the supply that is made [in performance of that contract]'. [4] Rather, the character will depend as much 'on the manner of performance' and on the 'commercial or business purposes' of the contracting parties. [5] • A court should not be confined to the terms of the contract, and this is 'more so...where the contract is but one link in a chain of contracts or where, by reference to the factual matrix of the entirety of the arrangements, the commercial or practical reality points to [a different conclusion to that which might otherwise be drawn from confined analysis of the contract]'. [6] • In determining the character of a supply made pursuant to the performance of a contract between B and C that is related to a contract between A and B, to a contract between C and D, and to consumption by D of what A supplied to B, one may have regard to the terms and conditions of those other two contracts and to D's consumption of what A supplied to B. [7] • 'No evidence was adduced by ATS that would lead one to infer... that the conclusion of the primary judge did not accord with the commercial reality of the transaction'. [8] • 'ATS has not simply provided a service whereby a non-resident travel agent, or a non-resident tourist, can contract directly with those ultimately providing the service in Australia... ATS is essentially the wholesaler of a retail product'. [9] • It was open to the primary judge to characterise the supply as the supply of a promise without the need to analyse the contract to determine whether it contained an express or implied term reflecting that promise. [10] The court agreed with the primary judge's conclusion that the supply of the promise is not GST-free, but provided its own reasoning, noting that: • For the accommodation component of a tour package - the supply of a promise that a hotel proprietor would provide accommodation to a NR tourist is a supply of 'real property' within the meaning of that term in section 195-1 of the GST Act, and thus it does not fall within the scope of the GST-free exemption in subsection 38-190(1). [11] • For the non-accommodation component of a tour package - the supply of a promise that Australian Providers would provide goods and services 'carries with it a right to acquire those goods and services'. This, together with the fact that the supply of the goods and services would be connected with Australia, means that the supply of the promise is excluded from being GST-free by subsection 38-190(2). [12] • For the accommodation component of a tour package - the supply of a promise that a hotel proprietor would provide accommodation to a NR tourist is a supply of 'real property' within the meaning of that term in section 195-1 of the GST Act, and thus it does not fall within the scope of the GST-free exemption in subsection 38-190(1). [11] • For the non-accommodation component of a tour package - the supply of a promise that Australian Providers would provide goods and services 'carries with it a right to acquire those goods and services'. This, together with the fact that the supply of the goods and services would be connected with Australia, means that the supply of the promise is excluded from being GST-free by subsection 38-190(2). [12] The court found that the exclusion in subsection 38-190(3) had no application to the non-accommodation component and noted that, in the context of Australian inbound tourism, the application of subsection 38-190(3) 'would seem to be confined to situations where the Australian Provider contracts directly with NR Travel Agents.' [13] | The issue on cross-appeal: In concluding that the primary judge erred in finding that ATS supplied a GST-free arranging service (in addition to the supply of the promise), the Full Federal Court found: • The relevant question is whether, in addition to the supply of the promise, there is 'another non-ancillary, non-incidental supply from ATS to the NR Travel Agents'. [14] • The adoption of a practical and business point of view [15] 'impels one to the conclusion here that there is one supply - the supply of the promise...- or if that embodies a supply of arranging services by ATS ... [the supply of arranging services] is to be regarded as ancillary and incidental. [16] • The conclusion that there is one taxable supply 'better accords with the policy design of taxing such consumption in Australia manifest in the extrinsic material [17] ... which made it clear that Australia asserted jurisdiction to tax the value of the supply from the NR Travel Agents to the NR Tourists but was content to settle for tax on the supply by ATS to NR Travel Agents in order to simplify compliance and administration'. [18] • The relevant question is whether, in addition to the supply of the promise, there is 'another non-ancillary, non-incidental supply from ATS to the NR Travel Agents'. [14] • The adoption of a practical and business point of view [15] 'impels one to the conclusion here that there is one supply - the supply of the promise...- or if that embodies a supply of arranging services by ATS ... [the supply of arranging services] is to be regarded as ancillary and incidental. [16] • The conclusion that there is one taxable supply 'better accords with the policy design of taxing such consumption in Australia manifest in the extrinsic material [17] ... which made it clear that Australia asserted jurisdiction to tax the value of the supply from the NR Travel Agents to the NR Tourists but was content to settle for tax on the supply by ATS to NR Travel Agents in order to simplify compliance and administration'. [18]

ATO view of decision:
Although the decision relates to specific facts, the Commissioner remains of the view (for the reasons set out in the Decision Impact Statement which the Commissioner issued in response to the primary judge's decision [19] ) that the decision applies to all ITOs which: • transact as principal (and not as an agent of a NR travel agent); • are engaged by NR travel agents to enter into contracts with Australian Providers for the provision of Products to NR tourists | • transact as principal (and not as an agent of a NR travel agent); • are engaged by NR travel agents to enter into contracts with Australian Providers for the provision of Products to NR tourists | Under the court's reasoning, the supplies made by these ITOs to their NR travel agent clients are properly characterised as supplies of promises to ensure Products are provided. | The supplies are wholly taxable [20] . | Diagrammatically, the supplies [21] (clear lines) and payments (dotted lines) involved in arrangements of this type can be represented as follows: | Agency arrangements not impacted | The court's decision has no implications for an ITO in relation to the supply of any given Product if: • The contract for the supply of that Product is between the NR travel agent and the Australian Provider, with the result that the NR travel agent has rights against the Australian Provider in the event the Product is not provided. • The ITO acts as agent [22] of the NR travel agent, and is not itself a party to the contract. | • The contract for the supply of that Product is between the NR travel agent and the Australian Provider, with the result that the NR travel agent has rights against the Australian Provider in the event the Product is not provided. • The ITO acts as agent [22] of the NR travel agent, and is not itself a party to the contract. | Diagrammatically, the supplies (clear lines) and payments (dotted lines) involved in arrangements of this type can be represented as follows: | The Commissioner considers that an ITO would fit within this scenario if, in documentation with both the NR travel agent and each Australian provider, the ITO indicates that it is acting as an agent for the NR travel agent and the arrangements as a whole are not inconsistent with the conclusion that the contract for the supply of the Product is between the Provider and the NR travel agent. | If the documentation between the parties does not expressly indicate that the ITO is acting as agent, the Commissioner may not conclude that the contract for the supply of the Product is between the NR travel agent and the Australian Provider. However, each case would need to be assessed on its merits. | Administrative Treatment - Implications for Rulings | The court's reasoning is consistent with the views set out in Goods and Services Tax Rulings GSTR 2001/8 [23] , GSTR 2005/6 [24] , GSTR 2006/9 [25] , and GSTD 2004/3 [26] . The Commissioner will update these products to include references to the court's decision. | The court's reasoning is generally consistent with the views set out in Goods and Service Tax Industry Issue: Land product supplied to non-residents (as principal). The Commissioner will update this public ruling to reflect the court's characterisation of the taxpayer's supply as the supply of a promise to ensure the Products would be provided. The Commissioner will also expand the scope of the ruling so that it covers the agency arrangements. | Administrative Treatment - Amounts owed by taxpayers | The Commissioner requests that all ITOs that have transacted as principal and have an outstanding amount due to the ATO (as a result of treating their margin or entire supply as GST-free) contact the following ATO officer within 28 days of the publication date of this Decision Impact Statement to discuss payment of the amount owed. In working out the total amount owed, the Commissioner will have regard to any entitlement an ITO has to a refund of overpaid income tax that arises because it did not take into account the correct amount of GST payable in working out its assessable income. Mr Craig Morelande Craig.morelande@ato.gov.au Ph: (07) 3149 5173 | ITOs that consider that they are not affected by the decision on the basis that they operate as an agent (see discussion above under 'ATO view of decision') are nevertheless asked to contact Mr Morelande within the 28 day period. | Following the expiration of the 28 day period, the Commissioner will take steps to identify any ITO with an outstanding liability that has not approached voluntarily. The Commissioner may commence recovery action without any further notice being provided to these entities. | In determining whether remission of general interest charge and penalties (if applicable) is warranted for any ITO that has an outstanding liability, the Commissioner will have regard to all relevant factors including the steps taken by an ITO to engage with the ATO and resolve their outstanding liability.

Administrative treatment:

Legislative references: A New Tax System (Goods and Services Tax) Act 1999 subsection 38-190(1) subsection 38-190(2) subsection 38-190(3)
Case references: ATS Pacific Pty Ltd v Commissioner of Taxation [2013] FCA 341 2013 ATC 20-383 Westley Nominees Pty Ltd v Coles Supermarkets Australia Pty Ltd [2006] FCAFC 115 2006 ATC 4363 (2006) 62 ATR 682
Other references: Decision Impact Statement on ATS Pacific Pty Ltd v Commissioner of Taxation [2013] FCA 341