American Express Wholesale Currency Services Pty Ltd v Commissioner of Taxation; American Express International Inc v Commissioner of Taxation

[2011] HCATrans 114

[2011] HCATrans 114

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney  No S238 of 2010

B e t w e e n -

AMERICAN EXPRESS WHOLESALE CURRENCY SERVICES PTY LTD

Applicant

and

COMMISSIONER OF TAXATION

Respondent

Office of the Registry
  Sydney  No S239 of 2010

B e t w e e n -

AMERICAN EXPRESS INTERNATIONAL INC

Applicant

and

COMMISSIONER OF TAXATION

Respondent

FRENCH CJ
GUMMOW J
HAYNE J
HEYDON J
KIEFEL J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON WEDNESDAY, 4 MAY 2011, AT 10.17 AM

Copyright in the High Court of Australia

__________________

MR J.W. DE WIJN, QC:   May it please the Court, I appear with my learned friend, MR T.M. THAWLEY, for the applicants.  (instructed by Minter Ellison Lawyers)

MR A.H. SLATER, QC:   If it please the Court, I appear with my friends, MS R.L. SEIDEN and MR T.H.J. HYDE PAGE, for the respondent.  (instructed by Australian Government Solicitor)

FRENCH CJ:   Thank you.

MR DE WIJN:   Your Honours, can I start with the statutory scheme?  Your Honours should have received a combined bundle of legislative provisions that both my learned friend and I intend to work from.  The case, of course, is concerned with GST.  GST is a form of consumption tax, sometimes called a value‑added tax, but as a matter of strict legal analysis it is not consumption which is taxed but a particular type of supply called a taxable supply; sometimes this is referred to as output tax.  Notwithstanding that, the principle underlying this legislation is that it is the consumer that will ultimately bear this tax and that is why, as your Honours will be familiar, we have a concept of a tax invoice which one frequently gets and one can see the amount of tax embedded on a particular acquisition or supply. The charging provisions start at section 7‑1, and I will just take your Honours to these quickly:

GST is payable on “taxable supplies –

We are not concerned with importations – this is at page 4 of the bundle – and –

Entitlements to input tax credits arise on “creditable acquisition –

Again, we are not concerned about importations.  We next turn in the legislative scheme to the definition of “taxable supply” and “supply”.  Those terms are defined in section 9‑5 and 9‑10.  Can I first go to the meaning of “supply”?  It is very wide and it clearly includes things which are not property.  Your Honours will see that at 9‑10:

(1)      A supply is any form of supply whatsoever.

(2)      Without limiting subsection (1), supply includes any of these:

Of course it includes a “supply of services” or a “provision of advice or information”.  This is an important point, in our submission, because although the definition of “supply” and in turn “taxable supply” is not limited to the supply of something recognised as property, when we come to the term “financial supply”, with which this case is concerned and which is a form of input tax supply, the definition is specifically limited to something recognised as property.

So the Act invokes the distinction, for the purposes of determining what a financial supply is, between property and other personal rights.  We say that is important.  The other point that we will emphasise when we get to the definition of “financial supply” is that the statutory concept of financial supply does not, in fact, incorporate the general concept of supply at all.  It is referred to as a financial supply.  When we come to the definitions it incorporates the terms acquisition, provision and disposal.  So the broad concept of supply at the beginning of the Act that founds the concept of taxable supply is not incorporated into the concept of input tax supply.

Your Honours will see that for there to be a taxable supply there are four tests and your Honours will see that in section 9-5, and there are two defined categories of supply which are expressly excluded from being a taxable supply.  Your Honours will see that they are GST‑free supplies and input tax supplies.  Again, this is significant to understand the statutory scheme because while no GST is payable in respect of either of these two categories, they operate significantly in different ways.

Generally speaking, input tax credits are denied on acquisitions of goods or services to the extent that they relate to making input tax supplies.  But input tax credits are not – and we will see this when we come to Division 11 – denied if the relevant acquisition relates to the making of GST‑free supplies or any other activities concerned with an enterprise.

So, for example, if one is conducting an enterprise and not making any taxable supplies at all – one might be winding down an enterprise or one might be recovering an action for damages – one would still be entitled to input tax credits regardless of whether one is making a taxable supply.  So, for example, someone who processes or provides food which is GST‑free, will still be entitled to input tax credits.  Similarly, to give an example closer to home, if a company pays GST on legal fees incurred in recovering damages, they will still be creditable even though the damages, for example, might not be consideration for any supply.

This stems from our scheme which is different to other jurisdictions such as New Zealand, which we pointed out in our submissions.  In New Zealand, for example, in order to have an input tax credit one requires a direct relationship between the acquisition and the making of the taxable supply.  Our scheme starts from a different premise.  Our scheme starts from the premise in Division 11 that you are entitled to an input tax credit for any acquisitions in connection with your enterprise, even if you do not make any taxable supplies at all, and then there is a specific exclusion where the acquisition relates – or to the extent that the acquisition relates to making an input tax supply.

We then move to section 11 which deals with input tax credits. Section 11‑10 defines “acquisition” very broadly. Again, it is not limited to acquisitions of property. To be a creditable acquisition one has to satisfy the four tests in 11‑5. There are then two express exclusions provided for in 11‑15(2) and we are concerned with the first one, obviously not concerned with the private or domestic exemption. So there is an exclusion from a creditable purpose to the extent that:

(a)      the acquisition relates to making supplies that would be input taxed –

So you start with the proposition that you get an input tax credit for any acquisitions in connection with an enterprise and then there is a specific exclusion.  Now, of course, the words “to the extent” are words which imply apportionment.  This Court in Ronpibon Tin (1949) 78 CLR 47 at pages 59 to 60 made that point in relation to deductions under section 51. We are concerned with apportionment. While I am on this point, we rely upon these words to rebut my learned friend’s argument that it does not matter if the consideration in question relates to both input tax supplies and something else. He says this at paragraph 29 of his submissions. He says if the default fees, the liquidated damages in this case, relate to input tax supplies and some other supply, it does not matter. He says he is home.

GUMMOW J:   This is 29?

MR DE WIJN:   Paragraph 29 of his submissions.  He says it does not matter if something relates to both.  If it simply relates to an input tax supply, that is enough for him to get his hook into it to have it excluded for the purposes of calculating the apportionment.  So we rely on the words “to the extent”.  Now, where a taxpayer makes both input tax supplies and other supplies, or sometimes where he makes one supply that comprises both – so purchase of goods and then a deferral of terms for payment, sometimes that is referred to as a mixed supply, sometimes it is identified as two supplies – or where a taxpayer is carrying on an enterprise and not making any taxable supplies, so recovering damages, for example, and also making input tax supplies, it is necessary to apportion the input tax credits, and section 11‑30(3) provides a method of such apportionment.

Now, for the purpose of determining the phrase “extent of creditable purpose” in section 11‑30(3), which is the statutory apportionment formula, the Commissioner and my client used a formula that has previously been set out.  I want to leave to one side for the moment the Commissioner’s amendment application to change his case from one based on consideration for an input tax supply to revenue – I will deal with that last – because on the primary part of our case all of that is simply irrelevant.  The question for determination – and I want to just explain this before I continue with the statutory scheme – the question for determination is whether the liquidated damages received by American Express from the cardholders is consideration for – or it probably does not matter, revenue from for this purpose, I do not draw the distinction – from an input tax supply, that is the question.

GUMMOW J:   This word “from”, does that appear anywhere?

MR DE WIJN:   The word “from” only appears in the Commissioner’s formula.  I do not want to get into the formula at the moment because, in a sense, it is irrelevant, but the formula has always been interpreted, until the morning before the Full Court appeal, as meaning “consideration for” and we say that makes perfect sense because the words “consideration for” do have a statutory basis, and certainly that is the way the case has proceeded from the moment that the audit was initiated, it was the way the case was run before Justice Emmett and it was the way the case was pleaded and we say it makes perfect sense because “consideration for” has a statutory basis when it comes to apportionment, the words “revenue from” do not, and we say that is the explanation as to why the parties quite sensibly have construed the formula in that way.

FRENCH CJ:   The formula was not, is that right, a Commissioner’s determination under section 11‑30(5)?

MR DE WIJN:   Your Honour, we think not.  The Commissioner says it was not and we are happy to accept that.  It was a formula adopted by – it was initially set out in some rulings.  People who are dealing with these things all the time adopt them and work with them in a practical way.  What we do know from the Commissioner’s papers is that from the outset, from the time the assessments were issued, that the formula was interpreted by both the Commissioner and by my client as meaning that the word “revenue” in the enumerator meant “consideration for”.

FRENCH CJ:   Yes.  The primary argument which you are going to present to us really arises out of the words “input tax supplies” in the formula.  That really is the pathway into the statutory question, is it not?

MR DE WIJN:   It is and that is why I say I wanted to avoid dealing with the formula at this stage because whether it is revenue from or whether it is consideration for does not make, with respect, a scrap of difference if the default fees are not consideration for or revenue from an input tax supply.  So the question is to identify the relevant supply and identify whether it fits within the statutory definition of a financial supply.

FRENCH CJ:   Are we concerned here, bearing in mind this is a referred special leave application, with questions of construction or questions of application or ‑ ‑ ‑

MR DE WIJN:   No, questions of construction because the fundamental question is, is the identified supply, the right to present the card, is that a financial supply?  That is a question of construction, with respect.  It is a question of statutory construction and it is an important question of statutory construction for the administration of this legislative scheme, but we say that is clearly a matter of statutory construction.  We will identify the relevant supply that has been pleaded and the contracts are in evidence and the question is one identifies that supply and then one now asks, is that supply an input tax supply and if the answer is no it is not an input tax supply, we win, regardless of whether it is consideration or regardless of whether it is revenue.

HAYNE J:   Just take me more slowly through those steps by reference to the statute.

MR DE WIJN:   I will.  So we say that the statutory question for determination is whether the liquidated damages received by Amex from cardholders is consideration for or revenue from an input tax supply.  That requires one to identify the supply.  Before doing that I will go to the definition of “input tax supply” and then come to identify the supply.  One starts at section 40‑5, which your Honours will find at page 13 of the Division.  In a very illuminating way it says:

(1)A financial supply is input taxed.

(2)Financial supply has the meaning given by the regulations.

One then needs to turn to the regulations, which commence at page 15 of the bundle which your Honours have been given, and we start with regulation 40‑5.01:

The object of this Subdivision is to identify a supply that is or is not a financial supply.

We say that is important.  It has two objects.  Then the next subregulation 40‑5.02 defines an “interest”:

An interest is anything that is recognised at law or in equity as property in any form.

This raises the property point.  Then there are definitions of “provision”, “disposal” and “acquisition” and your Honours can read those, but each of those definitions are, we say, in contrast to the broad definition of “supply” in 9‑10.  They are definitions that commonly would be used in respect of property interests.

HAYNE J:   Well, Mr De Wijn, I speak only for myself, but you are wandering off the task I would be grateful if you would perform at some point during your argument.  Can you take me step by step through the principal legislative chain that you say has to be followed?

MR DE WIJN:   I will.

HAYNE J:   I understood it to be:  one, what is the supply; two, is it input taxed; three, is it a financial supply and what I would like to know, at some point in your argument, is how those things interact and, in particular, how they interact by reference to the particular provisions of the statute that are engaged.

MR DE WIJN:   I am endeavouring to take your Honour to the definition of “financial supply” and explain how the relevant supply in this case is expressly excluded from being financial supply.  So the next test that has to be satisfied before we have a financial supply is that we have to have a financial supply provider – an entity in relation to the supply of an interest – that is the property that was immediately before the supply the property of the entity or created by the entity in making the supply.  We then turn to regulation 40-5.05 which tells you what is a financial supply but, expressly, in subsection (2) says:

However, if a supply is mentioned in regulations 40-5.09 and
40-5.12, the supply is not a financial supply.

We contend that our supply comes within 40-5 subsection ‑ ‑ ‑

KIEFEL J:   I am sorry, where are you at the moment?

MR DE WIJN:   Regulation 40-5.08.

KIEFEL J:   Regulation 40-5.08.

MR DE WIJN:   So in order to be a financial supply under (1)(a), a financial supply is specified in regulation 40-5.09 - page 17 of the bundle. 

KIEFEL J:   Yes.

MR DE WIJN:   We expressly rely on subregulation (2):

However, if a supply is mentioned in regulations 40-5.09 and
40-5.12, the supply is not a financial supply.

We say that the relevant supply comes within 12 and we say that it does not get within 09 in any event.  So there are two legs to the argument.  Then we come to the definition of what is a “financial supply”- subsection (1).  It is:

The provision, acquisition or disposal of an interest –

So it does not even incorporate the word “supply” picked up from section 9‑5 and this is important because the majority use the broad words of “supply” in 9‑10 to influence the meaning of “financial supply”.  So the concept of supply is not incorporated in this.  So it is a provision, acquisition or disposal of an interest which needs to be property, and the Commissioner contends that what we supply comes within item 2 of subregulation (3).  Can I then ‑ ‑ ‑

GUMMOW J:   Sorry, which item?

MR DE WIJN:   Item 2:

A debt, credit arrangement or right to credit –

So that is the right to present the card.  The Commissioner says the right to present the card is property and the right to present the card is a credit arrangement – a proprietary right that can be defined as a credit arrangement or a right to credit.  We say a number of things.  We say it is not property, it is not a right to credit and it is not for consideration and before we even get to that we say it is expressly excluded because it is in 40‑5.12 which subregulation (2) of 40‑5.08 trumps.

While I am on 40‑5.09 your Honours will see that the “provision, acquisition or disposal” must also be “for consideration”.  That is in (i).  So we now turn to regulation 40‑5.12 at page 19 of the bundle:

For subsection 40-5(2) of the Act –

That is the definition of “financial supply” –

the supply of something –

We rely on the word “something –

or an interest in or under something, that is mentioned in an item . . . is not a financial supply –

and we reply on item 4, “payment system”.  Now, again it is important to understand that this subregulation expressly provides what will not be a financial supply.  That means it will be an ordinary taxable supply.  Once you are into ordinary taxable supply country, it does not have to be a supply of a property interest because you are within the broad concept of supply in section 9‑10.  But for there to be a financial supply there has to be a supply of a property interest and the majority fundamentally misunderstood that distinction, we say, and that is made clear in the regulation by the use of the word “supply” of something. 

We say that what we are supplying is a payment system to the cardholder.  The Commissioner accepts, and we say he is perfectly correct, that what we supply to the merchant is a payment system and on that basis we pay tax – pay GST – on the supplies to the merchants but he says that the flip side of the coin, the relationship with the cardholder, is not part of the payment system.  I will come to that when we look at the definition of “payment system” and the decision in Visa.

The next thing is to identify the relevant supply.  The supply has been identified as the supply of the charge card or the credit card.  Your Honours will see that from the Commissioner’s pleadings at page 23 of volume 1 of the application book at paragraph 25:

The supply by Amex of charge cards and credit cards constituted financial supplies -

Then at 26 and 27 of the pleadings, the Commissioner says:

The payments of fees by holders of the credit cards of Amex, described in the Applicants’ Appeal Statement as “agreed damages” and . . . “late payment fees”, are consideration paid by cardholders for input taxed financial supplies made by Amex in the relevant periods.

The same point is made at paragraph 27 on page 24 of the court book.  It says that the liquidated damages are payment for a consideration for an input tax supply.  The supply, the relevant supply that we are concerned about and we want to know whether it is input tax supply, is the supply of the card.  It has probably been refined a little bit to the right to present the card.

FRENCH CJ:   Was the supply of the cards on the terms and conditions attaching to that supply in each case

MR DE WIJN:   Yes, and so we define the relevant supply as the supply of the card, the right to present the card on the terms and conditions.  We then look at the card system and explain how the card system works.  In the Visa Case ‑ ‑ ‑

FRENCH CJ:   I am sorry, just before we get to the Visa Case, can I just understand the sequence of questions that you are addressing.  The first question, as I understand it, is whether or not Amex supplies cardholders with a property interest answering the description in 40‑5.02(1), I think, and, secondly, whether Amex supplies cardholders with an interest for consideration and, thirdly, whether it is an interest in or under a debt or a credit arrangement and, fourthly, whether it is an interest in something that is a payment system.

MR DE WIJN:   I am actually doing it in a different order which I think is a more logical order.  If your Honour has my outline of oral submissions which ‑ ‑ ‑

FRENCH CJ:   Yes.

MR DE WIJN:   Your Honours will see that we say that as a matter of statute the first question is, is it a payment system, because if you are a payment system you are out no matter what.  So as a matter of the statutory logic you start with the question, is the right to present the card on the terms and conditions of the card is that a payment system?  If the answer to that is yes, then we win.  If the answer to that is no, the next question is, is the supply a supply of property and if it is not a supply of property, as Justice Dowsett held, then we win.

If it is a supply of property, the next question is, is it a supply of credit and is it a supply of credit for consideration or is it free credit, and my learned friend is referring to a fairly nominal period of time.  Then if it is not a supply of credit, we win, we do not go any further.  If it is not a supply of credit for consideration, we do not go any further, and if we lose on all of those points, the next question is to ask, what do the liquidated damages relate to?  Do they relate to the supply of the card or, as Justice Emmett said, do they, relevantly for these apportionment provisions, relate to an intervening event, that is, default?  We say they clearly relate to default because we are not supplying the right to be in default.

FRENCH CJ:   What statutory question does that answer?

MR DE WIJN:   It answers the question, what the consideration is for because we are concerned about the liquidated damages and we are concerned about whether the liquidated damages are consideration for the identified supply.

KIEFEL J:   If all that is against you, where does the amendment point come in?

MR DE WIJN:   If all of that is against us and we lose on the consideration point, we do not get to the amendment point.  We only get to the amendment point because what my learned friend sought to do was broaden the scope of the relationship effectively by arguing that the formula should be interpreted by relation to revenue.  He obviously did that because he wanted to be able to catch a broader relationship.

KIEFEL J:   But your point is that you still need to address the question of consideration.

MR DE WIJN:   Yes.  We say you still need to address the question of consideration and even if you got to revenue, the question is still revenue from what?  We say, for the same reason, it would only be revenue from a default.

FRENCH CJ:   It expands the class of revenue on the basis that if your payment fees derived from input tax supplies are not consideration, then they are in that larger class for which he contends.

MR DE WIJN:   We do not say that the liquidated damages are not revenue.  We do not say that.  We say that they are not revenue from the relevant supply. 

FRENCH CJ:   Yes.

KIEFEL J:   Could I ask you in relation to your question one, what is the payment system that you identify?

MR DE WIJN:   The payment system that we identify is what Justice Tamberlin described as the closed loop system or three‑party system.  It is the system between Amex as the operator, the merchants as a category and the cardholders as a category.  That scheme hinges on what the courts have described as three categories of bilateral contract.  The contract between Amex, in this case in the merchants or the contracts between Amex and the merchants, samples of those were in evidence, contracts between Amex and the cardholders and the contract between the cardholder and the relevant merchant.  Could I just take your Honours to what Justice Charles said about ‑ ‑ ‑

KIEFEL J:   Just before you do, could I just clarify the question?  Is the question simply, is it a payment system and if so, what is it, or can you frame it in terms of the supply question?  Is it a supply within a payment system?  Is it a supply in connection with – what is the full question?

MR DE WIJN:   It has to be a supply of a payment system, but that term ‑ ‑ ‑

KIEFEL J:   Supply of a payment system?

MR DE WIJN: That is defined as including procedures that relate to the system. If I can just take your Honours immediately to the definition of “payment system” and it is in materially the same terms as that considered under the Reserve Bank Regulations. Your Honours will find it at page 27 of the bundle.

HAYNE J:   This is an extract from what?

MR DE WIJN:   This is the dictionary to the regulations because the term “payment system” only appears in the regulations, not the Act:

payment system means a funds transfer system that facilitates the circulation of money, including any procedure that relate to the system.

While on that I need to take your Honours to the definition of “money”, which your Honours will find in the Act at page 14 of the bundle.  In fact, it starts at page 13, and of importance is paragraph (e):

whatever is supplied as payment by way of:

(i)credit card or debit card; or

(ii)crediting or debiting an account; or

(iii)creation or transfer of a debt.

That is significant because when we come to look at Justice Tamberlin’s reasoning in the Visa Card Case, what Visa were arguing was that at the cardholder – and they were unsuccessful – but what Visa were arguing was that at the cardholder merchant level of the transaction there was not a funds transfer system and there was no transfer of money or payment of money. 

Justice Tamberlin interpreted the scheme much more broadly than Visa and MasterCard have contended for, but in the Reserve Bank Act and the Reserve Bank Regulations there was no specific definition of money and so that case proceeded on the ordinary common law meaning of the term “money”. Here that problem has been solved by statute by including a broader definition of “money” into the GST Act. So the argument that was available to these in relation to the payment system under the Reserve Bank Regulations, unsuccessful as it happened, would not even be available to my learned friends under this system because clearly the Act contemplates that the relationship at the cardholder/merchant level would be a transaction involving money by virtue of the expanded definition of “money”.

KIEFEL J:   Just so I am clear about it, the payment system you rely upon is the payment system involving all aspects of the three bilateral contracts?

MR DE WIJN:   Well, that is the whole system.

KIEFEL J:   That is the whole system?

MR DE WIJN:   That is the whole system, but we are not ‑ ‑ ‑

KIEFEL J:   What is the supply in connection with it?

MR DE WIJN:   We are supplying to the cardholder part of that payment system or access to the payment system ‑ ‑ ‑

KIEFEL J:   Well, how do you define the supply then?  The supply is of the card ‑ ‑ ‑

MR DE WIJN:   The right to present the card on the terms and conditions, as the Chief Justice has mentioned, the right to present the card in payment for goods and services from other participants in the system, that is, merchants with an Amex ‑ ‑ ‑

KIEFEL J:   So which aspects of the system are then relevant in relation to the supply of the card?

MR DE WIJN:   It is the supply of the card, the right to use the card, that is the identified supply that we are concerned with and that is the supply of the payment system which includes procedures that relate to the system.

KIEFEL J:   Where was the reference to procedures which relate to the system?

MR DE WIJN:   In the definition of “payment system” at page 27.

KIEFEL J:   In the dictionary definition?

MR DE WIJN:   In the dictionary definition.

KIEFEL J:   I see, yes, “funds transfer system”.

MR DE WIJN:   It means:

a funds transfer system that facilitates the circulation of money, including any procedures that relate to the system.

KIEFEL J:   You say the furnishing of a card is a procedure that relates to the system?

MR DE WIJN:   No, it is not the furnishing of the card.  It is not the cardholder presenting the card.  The relevant supply is the contract between American Express and the cardholder which gives the cardholder the right to present the card on the terms and conditions.  That is the supply.  It is not the cardholder using the card.  We are not concerned about that transaction.  We are concerned about the system that sets up the payment system, that is ‑ ‑ ‑

KIEFEL J:   So the provision of the card to the cardholder is an aspect of the procedures relating to the system?

MR DE WIJN:   Yes.  I mean, if you did not have cardholders you would not have a payment system, with respect, so it is a critical aspect of the system, just as the other critical aspect of the system is the agreements with the merchants.

HAYNE J:   You have lost me, Mr De Wijn.  By reference to 40‑5.12, as amplified by the dictionary, what words in 40‑5.12 do you say are engaged?

MR DE WIJN:   A “payment system”, and we say that that includes procedures that relate to the system and the system is a funds transfer system that facilitates the circulation of money.  So what the Act contemplates, just as when one is dealing with the merchant, the relationship with the merchant is one part of the system, the relationship with the cardholder is the other part of the system.

FRENCH CJ:   Well, just zeroing in on the language of that regulation, you say the supply of the cards on the terms and conditions on which they are supplied is the supply of, is it, an interest in a payment system?

MR DE WIJN:   It is either a payment system or an interest in a payment system.

FRENCH CJ:   What is it?  It is the supply of a payment system or an interest in a payment system?

MR DE WIJN:   It could be either, with respect, but the something does not have the whole payment system.  It cannot supply the whole system because by definition it includes a whole lot of people.  So we say it is the something ‑ ‑ ‑

KIEFEL J:   But if the something is not a payment system, is it not then an interest in or under a payment system as the regulation provides?

MR DE WIJN:   If the something is not a payment system then – if the American card system that we have identified with the merchants and the cardholders is not a payment system, then we lose.  With respect, that is clear. 

KIEFEL J:   If the supply is not of the whole of the payment system, that is the something, is the alternative then that it is a supply of an interest in or under the whole?  Is that how it works?

MR DE WIJN:   We would say yes, but before you get to that, with respect, the supply of something does not have to be the whole of the something because the definition of “payment system” is not limited to the whole, it includes procedures that relate to the payment system.  We would say that that is wide enough to include, as Justice ‑ ‑ ‑

FRENCH CJ:   You cannot supply procedures.

MR DE WIJN:   It has to be given some meaning, with respect.

KIEFEL J:   If it is a supply of an interest in or under a payment system, does the interest then take the – it captures the definition of that which is recognised as law or in equity as property?

MR DE WIJN:   It may do and if it does not – if it is not a property interest, we will win anyway on the credit point because you do not get into this in any event.  It may be that the term ‑ ‑ ‑

KIEFEL J:   I am sorry, the reference to “interests” in section 40‑5.02 does relate to what is said in 40‑5.12?

MR DE WIJN:   We think so.

KIEFEL J:   Is that relevant then to determine whether one is speaking of the whole when we are speaking of the supply of something?

MR DE WIJN:   We think not because by definition one could not be supplying the whole system to any one person.  The definition would not make sense.  If your Honours go to the examples of a payment system, which are at page 25 of the bundle that we have handed up to your Honours, Schedule 8, your Honours will see Part 2 “Examples for item 4 in the table in regulation 40-5.12”.  Do your Honours have that?  So examples of what would fit within the definition of “payment system” include:

1.Supply of services by a payment system operator –

we say that is Amex –

to a participant –

we say that is cardholder –

in the system for which the following fees are charged by the operator:

(a)membership fees –

clearly we would fit within that, and then –

2.Access to a payment system, and supply of other related services by a participant in the system to a third party.

So we say that that clearly indicates that what the legislation is concerned with is not the supply of the whole system.  By definition, you could not supply the whole system to one person because it involves a number of people.

FRENCH CJ:   On your case, what is supplied is a right to participate in the system.

MR DE WIJN:   Yes, yes.  Or, access to the system, perhaps, or right to participate in the system.  It is a facility.  Can I just take your Honours to how Justice Tamberlin dealt with this in the Visa Case 131 FCR 300 and I will only need to go to a few paragraphs. That was a case where Visa and MasterCard sought judicial review of various decisions by the Reserve Bank to designate their systems as payment systems.

The Reserve Bank regulations, the payment system regulations, in effect contemplated two layers of control. One was simply a level of reporting and, for that purpose, all operators of payment systems, including Visa, MasterCard, Amex and Diners, had to report. There was then under section 11 of the Payment Systems (Regulation) Act 1998, a discretion given to the Reserve Bank to designate certain payment systems if it was in the public interest to do so and the issue in this case was the designation of the Visa system and the MasterCard system as a payment system. So if I can take your Honours first to paragraph 1 of Justice Tamberlin’s decision at page 309, where he identifies the ‑ ‑ ‑

GUMMOW J:   This is a completely different sort of legislation.

MR DE WIJN:   It is a completely different sort of legislation – it is an entirely different sort of legislation – but the definition of “payment system” is virtually identical.  Your Honour will see that at page 313 at paragraph 21 in Visa:

The PSR Act –

The Payment Systems (Regulation) Act –

does not define payments system policy ‑ ‑ ‑

GUMMOW J:   What was the outcome of this case?

MR DE WIJN:   Visa lost and the whole part of the system, including the system -Visa’s argument was that their system only – that the payment system as defined only related to the Reserve Bank clearing system – clearing aspect of the system.  The argument was that the relationships between Visa and its merchants and its cardholders were not part of the system, and they lost.  It was held that that was part of the system. 

GUMMOW J:   So that the regulatory scheme applied.

MR DE WIJN:   So the regulatory scheme applied.  It is a very long case because there are a whole lot of issues but I just want to take your Honours to the paragraphs that relate to the identification of the payment system.  In paragraph 1, Justice Tamberlin identifies the decision subject to review.  About five or six lines down he says:

The decisions are part of a regulatory regime imposed by the RBA on what are known as four-party credit card schemes in Australia.  The schemes, the subject of the regulations, include issuers (which are financial institutions such as banks that issue credit cards and extend credit to their customers), cardholders (who are purchasers of goods and services from merchants and customers of the issuers), merchants. . . and acquirers -

Then in paragraph 2 his Honour identifies the relevant decision.  There were a number of decisions but we are just concerned with the decision to designate those payment systems as a payment system.  The consequence of designation was that they could then be regulated.  At paragraph 36 Justice Tamberlin summarises Visa’s Case.

FRENCH CJ:   You have the definition, I think, at paragraph 21, have you not?

MR DE WIJN:   Yes, I am sorry.  I just took your Honours to that.  Paragraph 21, definition of “payment system”:

a funds transfer system that facilitates the circulation of money, and includes any instruments and procedures that relate to the system.

The word “instrument” seems to have dropped out of the GST definition but other than that it is in identical terms.  Paragraph 36 - this is Visa’s Case:

The applicants first contend that the “designations” on 12 April 2001 were outside the RBA’s power to designate conferred by the PSR Act because their credit card schemes or systems and their governing rules and procedures cannot be described as a payment system, ie, a “funds transfer system that facilitates the circulation of money” or procedures that relate to such a system –

Then at paragraph 51 his Honour summarises the RBA’s case:

As to designation, the RBA states that each of the Visa and MasterCard systems are within the description of “payment system” as defined in s 7 of the PSR Act.  This is said to provide for a wide discretion.

We think that must be a reference to section 11 which is the designation provision:

It submits that the definition of “funds transfer system” must be considered having regard to the whole card system in each case as set out in their governing rules and procedures and that there is no basis to segregate out particular parts of either system and contend that only those parts comprise such a system.

That is because what Visa were trying to do was to limit the system – you will see the diagram in a minute – to limit the system to basically the clearing system at the Reserve Bank level.

GUMMOW J:   Is your point that the Commissioner is trying to do the same thing here?

MR DE WIJN:   Yes, exactly.  That is exactly what he is trying to do.  Justice Tamberlin says it is entirely artificial.  What the Commissioner is doing is he says your relationship with the merchant is a supply of the payment system and is taxable and we pay tax on the services we provide to the merchants but he says the flip side of the coin is not a payment system.  The Commissioner does not start from the premise that you have to supply the whole system.  You could never do that, with respect. 

The Commissioner accepts, and we think he is right, that the relationship with the merchant is the provision of a payment system or something – procedures – something under a payment system but that it seems bizarre to include half of the relationship in the system but not that part with the person actually doing the paying comes along.

At paragraphs 71 to 73 – I will just identify those for your Honours and will not read them - his Honour identifies the Visa and MasterCard system at paragraph 71.  It is referred to as a “four‑party card” system.  The only difference between the Visa system and the Amex system which his Honour refers to as a “three‑party” system or a “closed loop” system – he does that at 73 – is that in the Visa and MasterCard systems there will frequently be a different – bank A that issues a card to a cardholder and bank B that has a relationship with a merchant so that there will be two different banks, one issuing a card and one acquiring the fee and one having the relationship with a merchant.

It might happen, of course, that you have the same bank in a particular case, but that is why they are referred to as four‑party systems.  The only difference between the Amex, and for that matter, the Diners Club system, is that Amex is both the issuer of the card to the cardholder and the person has the relationship with the merchant.  As a matter of substance that cannot make any difference.  It might make the relationships a bit more complicated but as to whether it is a payment system that relationship cannot change.  Paragraph 73, Justice Tamberlin says:

By contrast, closed loop card networks, which are also known as three‑party card schemes, such as those provided by American Express and Diners Club, consist of a network under which a single entity performs all issuing and acquiring functions . . . A charge card does not usually provide for the extension of credit facilities.

Then, starting at paragraph 113, Justice Tamberlin summarises the various relationships in the card schemes, and he says:

The illustrations of the scheme processes disclose a number of relationships giving rise to contractual rights and obligations with respect to a variety of services and functions.  Visa contends that none of these relationships below the level of VisaNet were intended by the legislation to be the subject of regulatory control –

Now, to understand that question your Honours have to turn to page 326 and there is a diagram there.  We have copies of it if your Honours do not have the case.  Your Honours will see in the bottom half of the table are the relationships between the issuer and the cardholder and the relationship with the merchant, and above the box VisaNet, which is the third box down, is the Reserve Bank settlement system.  So what Visa were arguing was that the payment system only related to what was above the box and not to the relationships with the cardholder and the merchant, and that argument was rejected.  At paragraph 115 Justice Tamberlin describes:

the relationship between the bank that issues the card and its cardholders.

At paragraph 120 he summarises again Visa’s case.  He says:

The significance attached to the different relationships which exist between participants is in support of a submission that the power of designation power in s 11 of the PSR Act was not intended to reach to all these relationships. Therefore, the expression “payment system” should not be read in such a way as would control these relationships.

That was the argument that was rejected.  Visa’s argument is again set out at 245, and at 246 his Honour says:

As a consequence, it is said that when a credit card is used in a transaction with a merchant there are commensurate promises between issuer and acquirer to pay the price but these precede and are outside any “funds transfer system”.  At those points in the process –

this is the argument –

there is no transfer of money effected.  There are also other promises outside the system, including the promises by the cardholder to pay the issuer and the promises by the acquirer to pay the merchant and the merchant to pay the service fee to the acquirer.

The argument was that when one looked at the common law definition of “money”, which his Honour starts to do at 249, that you do not have a payment system. His Honour comes to the conclusion ultimately that that is too narrow an approach, but we rely on the definition of “money” in the GST Act to say even if you took that approach in the Visa Case, when one looks at the GST context and the broad definition of “money”, including whatever is paid by way of credit card, that argument would not even be open.  His Honour comes to that conclusion at 260.  His Honour says at paragraph 260, page 365:

In my view, the authorities referred to by Visa –

these are essentially the authorities on the meaning of “money” –

are not inconsistent with the conclusion that the Visa card system is a payment system within the definition as outlined below.  This is because both the Visa and MasterCard systems provide payment instruments and procedures which operate from at least the authorisation stage.

We see later that that is understood to mean where the cardholder goes to a merchant and the merchant accepts the card in payment for goods or services –

These instruments and procedures can be said to “relate” to a transfer of funds which facilitates the circulation of money and this circulation takes place at the final stage of settlement at the RBA level.  It is therefore not necessary to decide the question whether there is a transfer of funds at the earlier stages.

So what his Honour says is he accepts that on the common law definition of “money” there is no transfer of money between cardholder and merchant. Of course, that argument is not open under the definition of “money” in the GST Act. But he then says –

In my opinion, there is no transfer of funds at the merchant‑cardholder stage, but the question is not so narrowly confined.  Having regard to the breadth of the definition of payment system, in my view, the “lower level” relationships –

they are the relationships at the bottom of the page, the diagram that I took your Honours to –

are within the broad description of instruments and procedures which relate to a funds transfer system which facilitates the circulation of money.

Then, finally, Visa’s arguments are again rejected at paragraphs 298, starting at 371, 299.  In the second half of that paragraph his Honour says:

On presentation of the card and acceptance by the merchant after authorisation, it can be said that a system involving procedures and instruments comes into operation.  This causal relationship which initiates the whole systemic process is in my view sufficient on its own to extend the definition to the transaction sought to be regulated.

Over the page at the top of 372:

once the initial purchase transaction is made, the rest of the procedures resulting in transfer of funds inexorably follow as a consequence of the rules and regulations from the underlying transaction at the merchant customer level.

Then at 302 he says:

Fourth, the suggested separation of the lower and upper levels of the system has a strong flavour of artificiality –

We say it is even more artificial in this case to include the relationship with the merchant, not the relationship with the cardholder.  Then at 304 he says:

I am not persuaded that the system for the transfer of funds only commences at the clearing level and above.  The expression “transfer  of funds” is broad like the term “system” and is not confined to transfer of “money”. 

Then he rejects 305, rejects the argument.  So we say it is clear the term “payment system” is used in a different Act, but it is used in materially the same form and the majority said you can interpret words differently in different Acts.  You can, but here we have a defined term that one can only think is picked up from the definition of “payment system” in the Reserve Bank legislation and, bearing in mind the examples of access to the system, we would say it is highly artificial to say that the relationship with the merchant is part of the payment system but the relationship with the cardholder is not.  You would not have a system if you only had one half of it.

HAYNE J:   What is the subject of supply?  Is it simply the supply of the card or is it the supply of satisfaction of the particular merchant debt when the card is presented?

MR DE WIJN:   No.  In this case, the relevant supply has not been connected with the use of the card.  So, all that we are focusing on is the supply of the card, that is, the facility to use the card.  So, that is the supply that is identified, not the subsequent use of the card.

HEYDON J:   Supply of the benefit of receipt of services under the contract?

MR DE WIJN:   Yes. 

HEYDON J:   I suppose the card is a physical key to the triggering of ‑ ‑ ‑

MR DE WIJN:   It is a physical good, but as Justice Dowsett said, certainly the case has not proceeded on the basis that it is the supply of the physical.  Under the terms and conditions between the cardholder and Amex, the card remains the property of Amex at all times.  So, at best, there is a bailment arrangement.

GUMMOW J:   The card is just a worthless chattel. 

MR DE WIJN:   Yes, exactly. 

GUMMOW J:   Unless it has all these accompanying legal consequences.

MR DE WIJN:   Justice Dowsett came to the same conclusion.  He looked at the analysis of what would happen if you looked at the physical card and he said it is simply a bailment arrangement and that probably is not property, but even if it was the value of the card as a chattel would be negligible in the context.  As the Chief Justice has said, it is the right and, we say, the correct supply is the right to present the card on the terms and conditions, obviously, on which it ‑ ‑ ‑

FRENCH CJ:   With the conferring of the contractual right, is it not?

MR DE WIJN:   It is a personal contractual right, yes.

KIEFEL J:   In the majority in the Full Court at paragraph 133 application book page 559, it is noted that:

The parties agreed that the relevant thing supplied . . . is the cardholder’s right to present the card as payment to a merchant for goods and services without having to part with money until paying Amex Intl at a later date.

MR DE WIJN:   We would take issue, and it may not matter, that we agreed that part of the supply was the cardholder’s obligation to pay on the due date.  We think a better way of putting it is that ‑ ‑ ‑

KIEFEL J:   The word “obligation” is not used.  It said “until paying Amex Intl at a later date”.

MR DE WIJN:   Obviously, American Express does not supply the obligation to pay.  That is the obligation that the cardholder accepts.  But, we say, the better formulation and the way as I recall it was formulated, was that the relevant supply is the ability to use the card on the terms and conditions on which it was supplied.

GUMMOW J:   Does Justice Dowsett say that?

MR DE WIJN:   Justice Dowsett, I think, says it is the right to present the card.  I will have my junior just check that.  Other than the quibble about whether American Express is supplying the obligation to pay American Express, which we are clearly not, I do not think there is a lot of dispute about what is supplied.  It is the right to use the card in purchase of goods and services on the terms.  We say it is highly artificial to split the payment system into two parts and that is what brings about the incongruity in this case because part of the system is treated as taxable and part of it is not. 

If we are wrong on the payment system point, then we move to the alternative argument.  Of course, for it to be a payment system and to be a taxable supply, it does not necessarily have to be property.  Once you are into taxable supply, you are into the broad concept of supply which includes services.  The carve‑out in relation to financial supplies has been to limit financial supplies to supplies of property.

GUMMOW J:   Where are you in your outline of oral submissions?

MR DE WIJN:   Your Honour, we are at 4, “Property”, so we are going to the alternative argument.  We do not need to deal with the property argument under payment system at all.

FRENCH CJ:   Just before you leave payment system, is it right to say that the focus of Justice Dowsett’s judgment was on characterisation of the system rather than on the question of what was supplied?

MR DE WIJN:   I would not accept that that was the focus.  You had to start with characterising the system.

FRENCH CJ:   I am just wondering where he made a finding about what is supplied by American Express in or under the system.  Perhaps you can come back to that?

MR DE WIJN:   Yes, we can come back to that.  That probably reflects the argument that was put that it was not a payment system in the first place.  That was the argument that was put to the Full Court that it was not a payment system.

FRENCH CJ:   It was a characterisation argument.

KIEFEL J:   His Honour saw the cardholder as able to pledge Amex’s credit as an essential feature of the system, did he not?

MR DE WIJN:   So that is what he really identifies as the supply, the ability to use the card to go to a merchant and say, “Will you accept this in payment?”  It is, I think, as we have all identified, the right to present the card obviously on the terms and conditions that apply to the card.

Now, just before I finish with payment system, if I could just take your Honours back to the examples at page 25 of the regulations, or Schedule 8 to the regulations?  Before I do that, perhaps I should actually take your Honours to the reasoning of the majority on this point because with respect, it is, we would say, unconvincing.  The reasoning on the payment system point is really in two paragraphs at 173 and 174 and then their Honours go to try and justify that reasoning by reference to statutory context. 

Their Honours have started, of course, by looking at whether there was a property interest created for the purpose of credit, so they started at the earlier regulation, that is whether a property interest had been created that could be described as credit, and they said, yes, it was a property interest.  Then they come to 173.  They have looked at the Visa Case, and essentially they have said, well, it might be a payment system for those purposes but here we are looking at the phrase in a different context, and they do that at 170 and make the point that the same words can have a different meaning in different circumstances.  Then they say in 173:

The question here is whether Amex Intl supplies cardholders with a property interest, broadly conceived, in or under a funds transfer system which facilitates the circulation of money, including its related procedures.

Well, we say that is the question they ask, but it is in fact the wrong question because when you are into payment system you are into ordinary taxable supplies, you are not concerned with a property interest; property interest is only relevant for the purpose of financial supply, so that is the wrong system, that is the wrong question.

Then in 174 they say that for the purposes of credit, whether it is in the heading credit, they have already concluded that what is provided to the cardholder is an interest, meaning his property.  So they have concluded it is property for that purpose.  Then they say but it is not property for the purposes of payment system because the last sentence, 174:

The GST scheme does not evidence an intention that such an interest count as an interest in a payment system.

So what their Honours, with respect, have done is looked at the particular contractual relationship between Amex and the cardholder and said it is property for one purpose but it is not property for another purpose.  With respect, that just cannot be right.  Then they seek to support that by reference to the examples which they set out at page 576, and these are the examples at 25 in the bundle of materials that have been handed up, and they make a number of incorrect observations at this point.  They incorrectly assume that the thing that had to be supplied was a property interest.  They ignored the word “something”.  Then they said that the examples in Part 2 supported them and suggested that all of the supplies had to be to participants in the card scheme, or the payment system.

We make two comments about that.  First of all, we would say clearly the cardholders, the participant in the scheme, the rules are set out.  It is a contract between Amex and the cardholder.  They are just as much a participant as the merchant.  But the examples, in fact, demonstrate that the particular relationship or contractual relationship that is created is expressly contemplated:

1Supply of services by a payment system operator to a participant –

that is the cardholder, and then –

2Access to a payment system, and supply of other related services by a participant in the system to a third party –

Well, if for some reason, as the majority said, the cardholders were not participants, clearly a third party that had been given access to the system.  So the majority relied on these examples to say these examples show that you had to be supplying something to someone who was a participant.  Well, the examples show the very opposite and they clearly indicate, we would say, that the relationship between Amex and the cardholder is the supply of something under a payment system or the procedures in relation to the payment system.

Can I then continue with the alternative argument, and we start with property which we deal with in our written outline at paragraph 4.  If we are wrong on payment system, there are a number of steps to be jumped through before the supply can be a financial supply and the first is that it has to be a supply of something that is recognised at law or in equity as property.  It says “property in any form” but it has to be recognised as property in some form.  What we see is the Act has a scheme to actually enliven the distinction between property and personal rights. 

What the majority did was to go back to the definition of “supply” in 9‑10, which is the broad definition that applied to any supply, any taxable supply, and because of the breadth of the word “supply” there, they concluded or effectively obliterated the distinction between property and other personal rights and services, but we say they fundamentally misunderstood the scheme of the Act because the scheme of the Act is to start with supply, which has got a broad concept not based on property, and then the carve out for financial supplies, which is one form of input tax supply, is limited to supplies of property. 

So when one looks at what is supplied here, and we accept that when one looks at the cases it is difficult to find one decisive test that indicates whether something is property as opposed to other personal rights, but what the High Court has not done, with respect, is obliterated the distinction between property and personal rights and, more significantly, in the context of statutory construction what Parliament has done in this case is specifically enliven the distinction between property and other personal rights and incorporated that into the test for there to be a financial supply.  Your Honours see that obviously from the definition of “interest”, the definition of “financial supply provider”, the interest has to be property of the entity or property that was created by the entity in making the supply.

The question then is, look at the relationship between American Express and the cardholder and can one describe that as creating a property interest in the cardholder?  We say that when you look at the card, it carries very few rights whatsoever.  It gives one access to a facility, a payment system, but that is not property, with respect.

HEYDON J:   Is it an interest in a right to credit?

MR DE WIJN:   Pardon?

HEYDON J:   If you buy a book or some handkerchiefs or a meal using a credit card, an Amex card, you get credit in the sense that you do not suffer a diminution in your monetary resources until you sign a cheque when the bill comes in a few weeks later.  So do you got get ‑ ‑ ‑

MR DE WIJN:   You, with respect, incur an obligation to pay on the invoice being presented.

HEYDON J:   Yes, but gained through entering the Amex contract a right to credit, have you not?  What is the flaw in that proposition?

MR DE WIJN:   That, in a sense, begs the question of whether it is credit.  If I were to provide some legal services on the basis that my fees will be paid within 30 days of the invoice, one would hardly say that I am providing credit.  It does not convert the supply of legal services into credit.  Essentially that is what happens in an Amex case in a card.  There is no deferral of an obligation to pay.  The cardholder pays and – leave aside the credit card point, but in an ordinary charge card situation there is no deferral of an obligation to pay at all.  The cardholder pays on the due date.

The concept of credit, leaving aside whether it is property, that is the next question, but the concept of credit we would say involves a deferral of an obligation, not the payment of an obligation, on the due date.  Essentially that is the conclusion that the Court of Appeal in the Amex Case – the Victorian Court of Appeal came to in relation to the Financial Institutions Duty Act.  What they held was there was no deferral of an obligation, it was a payment on the due date. 

The real question is, at the time the card is issued, that is, when the right to present the card is given, does that right involve a proprietary right?  No debt is created at that stage.  If a debt is created there may be property.  At that stage no debt is created, it is merely access to a facility, an access to a right to incur obligations.  So that provision of the card, we would say, is not a proprietary right.  It is not something that can be assigned, it is not something that has any ‑ ‑ ‑

HEYDON J:   There is an express term, is there, in the contract preventing the cardholder from assigning to a third party?

MR DE WIJN:   Yes, there is. 

HEYDON J:   Because?

MR DE WIJN:   It cannot be assigned.  It can be cancelled immediately.  I think we have referred to these provisions in the outline.  It cannot be assigned.  It can be cancelled immediately without notice.  Amex cannot force the merchant to accept the card.  The merchant might be in breach of his agreement with Amex, but the cardholder cannot force the acceptance of the card by the merchant.  So whatever might happen once the card is used, the provision of the card, we say, is not a proprietary right.  It has not got any stability that one would normally associate with property.

So, if we are right on the property point that is the end of the matter and it does not matter whether there is a credit arrangement.  We say on the property point that really the reasoning of Justice Dowsett is compelling.  Justice Dowsett’s reasoning, we say, is compelling and when one compares that to the reasoning of the majority there is, with respect, no real reasoning on the property point.  Ultimately, the conclusion is that because of the broad term “supply” that influences the concept of “property” and as I have already pointed out that, sort of, proceeds on a misunderstanding of the role supply has and the role it does not have when one comes to determine whether something is a financial supplier.

Can I move then to credit and effectively repeat what I said a moment ago.  We say that the term “credit”, Justice Emmett was correct in his decision in relation to credit, that the term “credit”, both the dictionary definition and legal definitions generally involve a deferral of an obligation to pay something.  A contract entered into where the payer agrees to pay in 30 days time or on receipt of an invoice is not traditionally regarded as involving credit.  It may be different if one has a contract that provides for the payment on 30 days with an option or an agreement to defer that payment for interest.  Obviously, in those circumstances, you have a deferral.  You do not have that in the case of the Amex card.  What is paid is the amount due to Amex on the due date. 

That is essentially the decision that Court of Appeal in Victoria came to, albeit in a different statutory context.  It is not sufficient for there simply to be credit.  The credit has to be property and it has to be for consideration.  If, as my learned friend identifies, this small period of time between when one walks into the bookshop and buys the book and when one sends the cheque or gets on the computer and pays Amex, if that is credit, the question has to be, is that for consideration?  Of course, there is no consideration paid for that, all that the cardholder pays Amex is the price of the book.  It is different in a case where one extends the terms under the credit card and everyone has accepted that that is a provision of credit because of the payment of interest.  There is no consideration for that ‑ ‑ ‑

HEYDON J:   But the annual fee.

MR DE WIJN:   But the annual fee predates any usage of the card.

HEYDON J:   But consideration – crisscross consideration need not arise at the identical point in time?

MR DE WIJN:   To make the GST scheme work, consideration is not used in its contractual sense in the Act and we can see that because a supply could be something that is not contractually binding.  Consideration is something that sounds in money.  It can be property but the Act provides that you then have to find the market value of the property that is supplied and you have to find consideration that relates to a particular supply.  So we would say that the annual fee is not consideration for the ‑ ‑ ‑

KIEFEL J:   What about the promise to pay Amex on the due date of the moneys that have been charged? 

MR DE WIJN: That is not consideration - that is consideration in a contractual sense, but that is not consideration for GST purposes because what one has to find is the actual payment. In the context of liquidated damages, for example, where this point is even more stark, everyone makes the promise to pay liquidated damages in the event that they are in default. Hopefully, not everyone is in default. So the promise to pay liquidated damages cannot be the relevant consideration for GST purposes because you simply cannot value that. You have to find something that sounds in money that can be valued. So the whole GST Act focuses on, when one looks at the definition of “payment” – it is payment of an amount of money or an act or forbearance. So, one is focusing on the actual payment.

FRENCH CJ:   In answer to Justice Heydon, I think you talked about the need to look to the particular supplier.  When you use that term “particular supplier”, are you referring to anything other than the supply of the card to the cardholder on the terms and conditions?

MR DE WIJN:   No, your Honour.

FRENCH CJ:   Or, are you talking about a particular transaction, because that would be a shift of ground, would it not?

MR DE WIJN:   No, no, I am not talking about that.  I am sticking with the supplier we have identified.  The supply of the card ‑ ‑ ‑

FRENCH CJ:   Yes.

MR DE WIJN:   ‑ ‑ ‑ from Amex to the cardholder.  So, we then go to the last point in the alternative case, if we are wrong on the payment system point and, that is, to look at what the liquidated damages are for.  My learned friend says we call them liquidated damages.  There was evidence before Justice Emmett about the way the fees were calculated and there was no dispute that they were a genuine pre-estimate of losses that might be incurred by Amex.  So what are referred to as the “liquidated damages and default fees” are, in fact, we would say, liquidated damages. 

The question then, for GST purposes is, are the liquidated damages that are paid, are they consideration for the issue of the card.  This assumes we are wrong on the property point and wrong on the credit point. We say that Justice Emmett was entirely correct on this point.  Justice Emmett said there is no relevant relationship between the issue of the card and the payment of the liquidated damages.  Obviously, if one implies the “but for” test – if the card had not been issued in the first place – you would not be in default because you would not have used it.

The question is, what are the liquidated damages for?  Are they consideration for the supply of the card?  That is, the payment of the liquidated damages, are they consideration for supply of the card?  Clearly they are not.  They are liable to be paid because a default was made by the cardholder.  Justice Emmett deals with this at court book pages 416 to 417.  This is where my learned friend says, well, it does not really matter.  So long as you have got any connection with an input tax supply that makes it consideration for the input tax supply.  American Express, with respect, is not in the business of supplying rights to be in default and that is what the damages are for.  If one would look at a classic claim for damages in a contractual case or a tort case, the damages are not consideration for any supply.

FRENCH CJ:   They arise only in relation to the charge cards, is that correct?

MR DE WIJN:   No, they relate to both, but they are called different things.  Under the charge card the liquidated damages are called liquidated damages.

FRENCH CJ:   Is that what appears in clause 14 of the conditions at 159 in volume 1?

MR DE WIJN:   Yes, your Honour.  So 159 is the liquidated damages in relation to the charge card.  In relation to the credit card, if there is a default, the liquidated damages are referred to as default fees.  It is at application book 150 in relation to the credit cards halfway down the page.  I am indebted to my learned friend.  Late payment fee, $30.  Does your Honour see that?

FRENCH CJ:   Yes.  Does that link into clause 29:

Our rights after default . . . 

require you to pay us immediately all sums outstanding on your Account and any other amounts which become payable by you under these Conditions ‑ ‑ ‑

MR DE WIJN:   Yes, 137, “Financial Table” in the right‑hand column, that brings in the table that I took your Honour to a moment ago.

FRENCH CJ:   I see.

MR DE WIJN:   Then:

Charge means a transaction made with the Credit Card or charged to your Account, including a Cash Advance, purchase, fees and charges, interest, taxes and all other amounts you have agreed to pay us or be liable for under these Conditions.

Then, while we are on it, cancellation of a card is at 139 – at 31, I think.  I think it is 29, which is the default.

KIEFEL J:   Just going back to page 137 for a minute, what is the credit limit?

MR DE WIJN:   Sorry, your Honour?

KIEFEL J:   The credit limit referred to on page 137 that you took us to, in practical terms that would be the extent to which, using Justice Dowsett’s terminology, the cardholder could pledge Amex’s credit to the merchant.

MR DE WIJN:   Your Honour, there was no credit limit under the charge card, there was only a credit limit under the credit card.  So it did not answer your Honour’s question, but it ‑ ‑ ‑

KIEFEL J:   In practical terms, what is the credit limit?  It is the amount beyond which American Express will not pay the merchant or ‑ ‑ ‑

MR DE WIJN:   It would be, in practical terms, the full limit that the merchant would have without getting authority.

KIEFEL J:   I see, it operates to the merchant.

MR DE WIJN:   Yes.

KIEFEL J:   Except it says it is “the credit limit for your Account in the Financial Table”.

MR DE WIJN:   Under a credit card.  The charge card and the credit card operate differently in a couple of respects.  Under the charge card there is no limit and one has to pay immediately on receipt of the invoice.  Under the credit card there is a limit that the cardholder cannot exceed, he can then defer payment over a period of time.  When it comes to use the card with a merchant, the merchant will either accept the card and take the risk that American Express might say that is outside of our arrangements or might independently ring American Express and get authorisation. 

So there are, in effect, two credit limits.  One is what a credit cardholder, only the credit cardholder, who can defer payment, the maximum he can go to and, secondly, what the merchant would acquire.  Your Honours, in addition to paragraph 29 of the credit card terms and conditions it is clause 6 at page 138 of the court book.  That incorporates the table that I took your Honour to.

The ultimate question, if we lose on everything else, is to ask whether these liquidated damages, whether it is the $30 payment in respect of the credit card or the amount calculated and called liquidated damages under the charge card which are only payable in the event of default are consideration for the issue of the card, that is, consideration for the facility and we say they are not.  Clearly, it is part of the terms and conditions of the contract but one is looking for is a rational relationship between the relevant supply, in this case the issue of the card, the right to use the card, and one would expect that the right to use the card is, as the Chief Justice has said, on its terms and conditions, not in default of its terms and conditions.  The liquidated damages cannot be consideration for the issue of the card. 

We say Justice Emmett was perfectly correct there.  The majority said, well, there is really no difference between the payment of the liquidated damages and the contractual promise in the first place in the contract.  We say there is all the difference in the world.  Everyone makes the promise to pay the liquidated damages but we are not concerned about valuing that promise, we are concerned about the characterisation of the payment when it is made.  Is that payment consideration for the issue of the card?  We say it is not.  There is a completely new event that has taken place and that is default.

That leaves the leave to amend point.  We have said what we wanted to say about that in our written submissions.  Obviously, the Commissioner sought to amend his case to rely upon the term “revenue” which does not have any statutory basis, “revenue from” as opposed to “consideration for”.  The first time that was done was before the Full Court and we have set out in our written submissions that the case up until then had proceeded on the express basis that the numerator in the formula was interpreted to mean

“consideration for” and, we say, that makes sense.  There is a statutory basis for that. 

But whether there was or was not a statutory basis for it that is the basis on which the case proceeded.  That is the basis upon which the assessment was issued.  That is the basis upon which the objection was disallowed, as Justice Dowsett says.  It is the basis upon which the case proceeded, the Commissioner - I took your Honours to the Commissioner’s pleadings.  It is the basis on which it was pleaded.  It was the basis upon which each party prepared their written submissions before Justice Emmett.  Before the case started I made an express statement to Justice Emmett that the parties had accepted, and it is set out in our written submissions, that the word “revenue” meant “consideration for” and there was no demur from the other side.

In most circumstances, to permit an amendment in circumstances where obviously they were doing it because they wanted to completely broaden the concept of what went into the numerator was unfair.  We would have run a different case.  The remarkable thing the Commissioner says is, “Well, you couldn’t run a different case because your notice of objection was limited to consideration for.”  With respect, of course it was, because that was the basis on which the Commissioner had issued the assessment in the first place.

It is clear that we could have amended our grounds of objection and it is unimaginable that the court would not have allowed us to amend our grounds of objection in those circumstances and if for some reason we could not amend our grounds of objection it just demonstrates how unfair the amendment is.  If your Honours please.

FRENCH CJ:   Thank you, Mr De Wijn.  Yes, Mr Slater.

MR SLATER:   Your Honours, we divide our oral argument into four parts.  I will just indicate at the outset what they are.  I begin by taking up Justice Hayne’s invitation to direct the Court’s attention to the statutory scheme.  I then deal with our positive case, then with the applicant’s case based on payment system and finally with the amendment point, but before doing any of that can I provide a brief summary of the submissions as we make them.

We first say that American Express provides its cardholders with a charge card or credit card facility and essentially that facility is what might be called a “buy now, pay later” facility.  Justice Heydon put it in terms of “buy now and not suffer a diminution in your monetary resources until later” but it amounts to much the same thing.  It is not to the point that there is a liability for it.  A liability for something for which you have to pay later is the essence of credit.

Secondly, we say that the supply of this facility is a financial supply. The rights under the facility contract are an interest within regulation 40‑5.02. The interest is one in a credit arrangement, the credit element being what I have called the “buy now, pay later” element and the ability to pledge Amex’s credit in the meantime. The consideration includes all that is consideration within the meaning of section 9‑15 of the GST Act and that includes all the promises made by the cardholder and all the fees that are payable to Amex under the terms of the facility.

Third, we say the revenue arising from this financial supply includes all amounts payable by the holders, including in the case of the charge cards, the annual fees, including other fees such as currency conversion fees and of particular present relevance, including amounts which in the terms and conditions are called liquidated damages and late payment fees.  I do not mean, by expressing it in that fashion, to impugn the calculation of the amounts in such a fashion as to qualify them as liquidated damages as the courts have so described that term.

We, therefore, say that these amounts, including the default fees – that is the liquidated damages and late payment fees – should be included in the numerator of the agreed formulae in calculating the input tax credits.  As to the primary case that our friends put, the payment system case, we say first that provision of a “by now, pay later” facility is not provision of the payment system.  Second, in consequence, both the default fees and other, for example, annual fees, are revenue from an input tax supply and not from a taxable supply and, thirdly – and this is a submission developed in the written submissions and I will put it very briefly – Amex cannot ask the Court to rule that the amounts in question are consideration for a taxable supply for the purpose of calculating input tax credits and, at the same time, consideration for an input tax to supply for the purpose of ‑ ‑ ‑

GUMMOW J:   This is your point 10 in your outline?

MR SLATER:   In the oral outline, yes.  Yes, your Honour, and it is in paragraphs 34 to 39 of our written submissions.  Finally, as to the amendment, or new argument point, that revenue in the formula means revenue and does not mean consideration, we say this, firstly, that the argument is solely one of law as to the meaning of contractual term; secondly, that no evidence could have been, or is suggested as having been available, going to the interpretation of the word “revenue”; and, thirdly, that the majority decision was correct in principle and was also a correct exercise of the discretion to allow the argument to be put and it should not be disturbed.

Your Honours, that is a very potted summary of our submissions but may I then move to the first part of them and take up, as I said, the invitation that Justice Hayne extended to my friend and begin with a step of drawing your Honours’ attention to the constitution of the proceedings as briefly as I may.  The proceedings were begun by an application – your Honours will find the application in the two concurrent proceedings at pages 2 and 5 of the application book and in each case the application is one by way of appeal against an appealable objection decision.  So, it is an appeal against an objection decision.  The objection decision, your Honours will find at pages 202 and 348 of the application book.  The objection at page 202 is very succinct at about line 32:

We have disallowed your objection against all the above.

Then there are reasons attached.  At page 348, there is a similar statement.  At page 196 is the notice of objection and I will take your Honours momentarily to that, just to draw attention to a couple of things.  The first is that the essential claim on page 196 at line 28 is that:

The assessments of indirect tax net amounts are incorrect –

The essential ground at page 197, about line 25, paragraph 9:

The net amounts assessed and shown in Column C of the Schedule . . . are excessive and should be reduced by ‑

in that case, $222,000, in the other case, on page 341, about $7.7 million:

on the basis that the payments of liquidated damages . . . were not consideration for any supply –

The objection in the other matter your Honours will find at page 340.  The corresponding grounds are on pages 341 and 342.  I should have drawn your Honours’ attention to paragraph 10 on page 198 at about line 45:

The net amounts shown in the assessments for the relevant periods erroneously exceeds the amount of GST –

Then, finally, the assessments your Honours will find at pages 190 and 327.  Going only to page 190 ‑ ‑ ‑

GUMMOW J:   Just slow down for a minute, Mr Slater.

MR SLATER:   I am sorry, your Honour.  I was putting this on the transcript rather than taking your Honours to it. 

GUMMOW J:   I want to get it in my head, so just go a bit slowly.

MR SLATER:   If your Honour pleases.  I have taken your Honour to the objection.  I now take your Honour to the assessment.  There are two assessments, one at page 190, one at page 327.  On page 190 at line 30:

The net amount assessed for each of the relevant tax periods is set out in Column C in the attached Schedule.

Column C is on page 194.  Your Honours, I have taken you to that because it is significant to the statutory context.  The first part of the statutory context which we have indicated in our outline of oral submissions is that in Part IVC of the Taxation Administration Act.  If your Honours have convenient the bundle of statutory materials, on page 28 of that bundle your Honours will find the provisions of the Administration Act, Part IVC that are relevant, not the entirety.  The source of jurisdiction lies in this:

If the person is dissatisfied with the Commissioner’s objection decision, the person may:

. . . 

(ii)appeal to the Federal Court against the decision –

While there, I also wanted to draw your Honours’ attention to section 14ZZO:

In proceedings on an appeal under section 14ZZ . . . 

(b)the appellant has the burden of proving that:

 . . . the assessment is excessive ‑ ‑ ‑

GUMMOW J:   That is hardly news, Mr Slater.

MR SLATER:   I appreciate that is hardly news, your Honour, and that is why I was proceeding at a rather breakneck pace.  I just wanted to give your Honours this material.  On the next page, paragraph 22 provides for the making of the assessment:

The Commissioner may at any time make an assessment –

That provision has since been repealed and the provisions which are now in force are later in the book at section 105‑5(1)(a) in Schedule 1 to the Taxation Administration Act, but it is sufficient for these purposes to refer to section 22.  Section 62, on the next page, page 30, invokes Part IVC:

If you are dissatisfied with:

. . . 

(c)a reviewable indirect tax decision . . . 

you may object against the decision in the manner set out in Part IVC.

The last line on the page, “making an assessment” under section 22 is a reviewable indirect tax decision.  The assessment is provided for by the GST legislation.  If I could take your Honours to page 10 of the bundle – I am sorry, I said “the assessment”.  I should have said “the net amount assessed”.  The net amount is provided for in section 17‑5 at the foot of the page.  It is the excess of GST over input tax credits and it is for supplies and acquisitions attributable to the period assessed.  The concept of attribution is found in Division 29.  Section 29‑5 is on page 11, at the foot of the page:

The GST payable by you on a taxable supply is attributable to:

(a)the tax period in which any of the consideration is received –

or if it is invoiced –

the tax period in which the invoice is issued.

I draw attention to that because the payment of GST is fixed by reference to when the consideration comes in, although the GST is payable, as my friend pointed out to your Honours, on the supply.  In the written outline we refer to section 33‑5, which is not in the bundle.  It is simply the provision which obliges the taxpayer to pay to the Commissioner.

Your Honours, GST as opposed to input tax credits is provided for in Division 9.  My learned friend has taken your Honours to these provisions so I simply give your Honours the references.  Section 9‑40 imposes a liability.  That is on page 6.  Section 9‑70 fixes the amount as 10 per cent of the value of the taxable supply.  That is also on page 6, at the foot of the page.  The value of the taxable supply is fixed under section 9‑75 on the next page and it is ten‑elevenths of the consideration for the supply.  Strictly speaking, it is ten‑elevenths of the price where price is the sum of consideration in money or property.

There are two essential concepts here which my friend took your Honours to.  One is of a supply, that is in section 9‑10 on page 4 and my friend took your Honours to the width of that provision, “any form of supply whatsoever” including a variety of things including “a creation, grant, transfer, assignment” of rights.  Taxable supply is defined by section 9‑5 immediately above it, and there are four criteria which must be met.  The supply must be “for consideration”, it must be in “furtherance of an enterprise”, it must be “connected with Australia” and you must be “registered”.  It is not taxable “to the extent that it is . . . input taxed”.

Consideration, the first of those elements is defined in section 9‑15, and I will take your Honours to that at a slightly slower pace because it is significant in the debate which occurs in this appeal. Your Honours will see on page 5 at about point 4 of the page:

(1)      Consideration includes:

(a)any payment, or any act or forbearance, in connection with a supply of anything; and

(b)any payment, or any act or forbearance, in response to or for the inducement of a supply of anything.

(2)It does not matter whether the payment, act or forbearance was voluntary, or whether it was by the recipient of the supply.

I draw your Honours’ attention to those provisions to point up that this is not contractual consideration. The debate between my friend and the Bench tended to run along the lines of things are not consideration for something else because plainly they are not, damages are not consideration because they are not contractual consideration. The Act is not concerned with contractual consideration, it is concerned with what falls within section 9‑15, and that includes amounts which are paid only in response to, or only for the inducement of, which are not consideration as the term is generally understood in the law of contract.

Now, two other things to be noted about that, your Honours - there is no liability without a taxable supply, and the liability accrues in the period in which the consideration is received or invoiced.  So it is possible that there be a supply in one period and consideration received in respect of it in another period.  If so, the liability for GST will accrue in the period in which the consideration is received, not in the period in which the supply is made. 

Your Honours, the entitlement to credits mirrors the liability to GST, and again my friend has taken your Honours to this so that I will simply refer to the provisions. Your Honours find them on page 8. The entitlement to an input tax credit is actually on page 9, it is in section 11‑20:

You are entitled to the input tax credit for any creditable acquisitions that you make.

The amount is in section 11‑25, it is:

an amount equal to the GST payable on the supply –

but –

reduced if the acquisition is only partly creditable.

The essential concepts correspond to those concerning supply so that the meaning of “acquisition” is, in language very similar to that in section 9‑10, any form of acquisition whatever and extended by the various matters referred to in subsection (2).  What is a creditable acquisition is then subject to four conditions.  Your Honours see that in section 11‑5.  The first is that it be acquired solely or partly for a creditable purpose, the second is that the supply be a taxable supply, the third is that you provide consideration and the fourth is that you be registered.  Your Honours, the provisions which are central to the argument in this appeal are on page 9, section 11‑15:

You acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise.

I am reading subsection (1).  Subsection (2):

you do not acquire the thing for a creditable purpose to the extent that:

(a)the acquisition relates to making supplies that would be input taxed -

My friend did take your Honours to that.  At the foot of the page, section 11‑30 deals with the concept of something being “partly creditable”.  There are two bases upon which something might be partly creditable, one goes to purpose and one goes to the extent to which the taxpayer paid for it.  We are only concerned with the first of those:

An acquisition that you make is partly creditable if –

…

(a)you make the acquisition only partly for a creditable purpose –

Then, subsection (3), “The amount” is fixed by multiplying the full credit by the extent of creditable purpose and that is defined at the foot of the page.  In answer to a question asked by the Chief Justice of my friend the Commissioner’s position, although it is not in evidence, is that there was no invocation of the power in subsection (5).  Instead of that, the parties agreed on the formula which your Honours will find in various places, perhaps most simply on page 555 in the judgment at paragraph 120.  It is:

I do not need to take your Honours to that page any further than that.  We adopt what was said by the majority on that page and through to page 557, that is, in paragraphs 120 to 128, about the role and purpose of this formula.  I will not reiterate that but we do adopt what their Honours said there, especially in paragraphs 124, 126 and 127. 

Now, your Honours, the final component in the legislative scheme relevant to this matter is the component comprising financial supply and my friend took your Honours to section 40‑5 on page 13 which invokes the regulations like the sales tax which preceded it.  The detail is in the regulations, not in the Act.

The relevant regulations are to be found starting at, effectively, page 16. My friend has taken your Honours to those. I do not think I need to repeat any of that, except perhaps to note this, that the definition of “consideration” in the regulations is to be found in the dictionary on page 27 which is given force by regulation 3 on page 15 and it invokes the definition in the Act. The definition in the dictionary in the Act is on page 13 and relates back to section 9‑15, to which I have already taken your Honours.

Then my friend took your Honours to regulation 40‑5.09 and to the elaboration of the terms used in that in regulations 40‑5.02, 40‑5.03 and 40‑5.04.  Then in section 40‑5.09 the only element that is in contest between the parties is that comprised in the first two lines of subregulation (1) whether there was:

The provision, acquisition or disposal of an interest mentioned in subregulation (3) –

and whether it was –

for consideration –

The remaining elements in (ii) and (iii) of paragraph (a) and in paragraph (b) are not in contest between the parties.  So that what is in issue between the parties is whether there is an interest and whether there is a supply of an interest under and the presently relevant item in subregulation (3) is item 2:

A debt, credit arrangement or right to credit –

Your Honours, as my friend pointed out to your Honours, regulation 40‑5.12 operates as an exception to 40‑5.09.  My friend put it that the words “the supply of something” do not require that the something be an interest.  We would respectfully suggest to your Honours that that is not a correct construction of the legislation.  Regulation 40‑5.12 operates as an exception to regulation 40‑5.09 and that exception is confirmed by 40‑5.08(2).  In order for it to be an exception that which is accepted must be something in the nature of an interest., that is, it must be within 40‑5.09 in the first place for 40‑5.12 to be relevant. 

If we are dealing with something which is not an interest, as defined in regulation 40‑5.02, then there is nothing for the whole of division 40 of the regulations to operate upon and, in particular, nothing for regulation 40‑5.12 to operate upon.  The reference to an interest in or under something, there seems not to be, contrary to what I think was said in answer to your Honour Justice Kiefel, not an evocation of regulation 40‑5.02, but rather the ordinary legal usage of an interest in something as distinct from the entirety of something.  That, it seems to us, is the better way of construing it.

HEYDON J:   Do you say that the word “interest” in 40‑5.12 is not to be read in the light of the definition in 40‑5.02?

MR SLATER:   We say it does not invoke that definition, your Honour.

HEYDON J:   Why so?

MR SLATER:   I may not have put this clearly enough.  Regulation 40‑5.12 takes things out of financial supply.  They cannot be in financial supply unless, going to back to 40‑5.09, they are the acquisition or disposal of an interest.  Something which is not an interest cannot be accepted by 40‑5.12.  It is never there to begin with.

FRENCH CJ:   But you accept the application of a definition of “interest” in 40‑5.02 to the word “interest” in 40‑5.12?

MR SLATER:   No, your Honour, that was the point I was trying to make.  It seems us that the better construction of that is that the words “or an interest in or under something” are intended to convey that the supply of something that is the entirety of something or an interest in or under something that is part of something that is mentioned in the following table is not a financial supply, that is, is not an interest.  So that it seems to us that the word “interest” there, although it is the same word, it conveys a different concept.  It does invoke the definition, it merely says that something which is less than the entirety.

KIEFEL J:   That stands in distinction to the interest provided, acquired or disposed of in 40‑5.09.  That is the property interest.

MR SLATER:   Yes.  It is a disposal of an interest.

KIEFEL J:   Of an interest itself rather than something which is part of something?

MR SLATER:   Yes.  That seems to us to be the better reading of the provisions.  What one has to say that these provisions which were amended three times at least before they came into force are not models of clarity.

GUMMOW J:   What work would 40‑5.02 have to do if you are right?

MR SLATER:   If I am right, your Honour, it informs and defines the definition of “interest” in 40‑5.09 and that was the point I was endeavouring to make, but in order to be financial supply it must be a supply of an interest.  So one sees the first half line in 40‑5.09 uses the words “provision”, “acquisition”, “disposal” and “interest” and when one goes back the previous page, one finds that each of those terms is given a definition.  Something to be a financial supply must be an interest. 

So that what is taken out by 40‑5.12 must be an interest, and then it seems superfluous to be talking about something which is not an interest.  Then when one sees that context, it seems that the words “an interest in or under” are not used in a way to invoke 40‑5.02 but rather to provide for the case where not the entirety but only part is supplied.  I use the words “only part” not in a divisional sense, but in the sense in which the word “interest in or under” are ordinarily used in legal discourse.

HAYNE J:   But, does that argument depend upon reading 40‑5.12 as an exception to what otherwise is a definition in 40‑5.09?

MR SLATER:   Yes, your Honour, because 40‑5.12 has no work to do unless something is an interest and so is a financial supply.  If something is not a financial supply then 40‑5.12 has no work to do.

HAYNE J:   Does the way in which 40‑5.08 is structured suggest that that may not necessarily be so, rather that 40‑5.08 – is it to be taken as suggesting that there is simply a series of steps which you look at, not necessarily assuming that there is complete congruence between what is in and what is out, that is, you ask a series of questions regardless of the answer you get to each of them.

MR SLATER:   I cannot say to your Honour absolutely that that is not so, but it seems to us that that is not the better reading.  Regulation 40‑5.08 seems to be like 40‑5.11 – a reiteration of an obvious point for further emphasis.  I cannot take that any further, your Honours, and it is not the core of this appeal.  It is just a point, more or less, in passing.

There is one other thing I wanted to draw your Honours’ attention to about 40‑5.12 and in particular item 4, “payment system”, and that is the definition which your Honours will find on page 27.  My learned friend took your Honours to this but not again surprisingly did not put emphasis on what seemed to us to be the essential words in the definition.  It is a funds transfer system, so the first essential word is “transfer”, but then it is –

a funds transfer system that facilitates the circulation of money –

It is not a system for making payments.  It is a system for paying your debts.  It is a system for transferring funds, not paying them, but transferring them, that facilitates the circulation of money.

FRENCH CJ:   What does that say that is different from a funds transfer system that facilitates the transfer of funds?

MR SLATER:   Not perhaps a great deal, your Honour, except that the concept that is being adverted to in the definition is one of transfer and circulation of money.  It is a payment system, not a payment, not an ability to make a payment.

FRENCH CJ:   The problem is that it picks up the definition of “money”, of course, and brings in credit cards.

MR SLATER:   Not entirely.  Money does not include payment by way of credit card.  It includes whatever is supplied as payment by way of credit card.  My learned friend’s argument was really that money is what the cardholder gives when he uses the card.  It seems to us that that is not really what that definition is dealing with.  It is dealing with the ‑ ‑ ‑

GUMMOW J:   Where do we see the definition of “money”?

MR SLATER:   Page 14, your Honour, in the bundle.  I apologise for that.  It starts at the foot of page 13.

GUMMOW J:   It is back in the Act.

MR SLATER:   It includes currency, it includes negotiable instruments, it includes whatever is supplied as payment by way of credit card.  That seems to be the consequence of the use of the credit card, not the act of the use of the credit card.  But again it is not by any means the clearest of language.

FRENCH CJ:   It facilitates the circulation of whatever is supplied as payment by way of credit card in Australia.

MR SLATER:   If one looks at the structure that Justice Tamberlin showed in his diagrams in the Visa Case, it is the consequence of the exercise, the obligations arising from the use of the credit card which circulate among the issuing bank, the merchant bank, the merchant and the Reserve Bank.  That seems to be what this is directed to.

HAYNE J:   It includes at least, does it not, the electronic funds transfer system in the sense that what is supplied as payment by way of credit card will include the transactions, will it?

MR SLATER:   It will include the electronic funds transfer system.  That would seem to be so, your Honour.  Because that system operates almost instantaneously and apparently in some fashion it operates among Amex, its bank, the merchant’s bank and the merchant.  One of the difficulties ‑ ‑ ‑

HAYNE J:   Regardless of whether it is instantaneous or delayed to the benefit of the merchant.  The merchant ultimately gets an EFT credit rather than legal tender being handed over by anyone.

MR SLATER:   We do not really know, your Honour, and that is one of the difficulties in the case.  This payment system issue was not the basis of the case as it was run and that is because of the history of the case that my friend adverted to.  We have some quibbles about the way in which the dispute fundamentally originated, but there is no doubt that by the time the matter got to Justice Emmett everybody was focused on the meaning of “consideration” and nothing in the appeal statements, nothing in the objection, nothing in the affidavits and nothing in the material tendered shows how the payment system worked.

My friend’s evidence of the payment system is simply the terms of the merchant agreement, the terms of the cardholder agreement and a bill or statements sent to a cardholder.  Now, the sort of question your Honour asks, how does the EFT system work, is the sort of question that one has to ask in order to determine where the boundaries of the payment system lie.  We accept that there was a payment system, but it seems to us it operated among the merchant, Amex and the banks and did not extend to the cardholders.

GUMMOW J:   Why?  As a matter of common sense, why?

MR SLATER:   As a matter of common sense, because the circulation of money is not something with which the cardholder is concerned.  The cardholder is simply concerned with buying his book or his theatre ticket.

GUMMOW J:   Yes, without having to hand over cash.

MR SLATER:   Without having to hand over cash.  He is not concerned with how the money circulates beyond that point.

KIEFEL J:   Using Amex’s credit.

MR SLATER:   Yes, he just pledges Amex’s credit.  He is no different from somebody who has a savings bank account or a cheque account and writes a cheque.  Is everybody who writes a cheque a participant in a payment system?

GUMMOW J:   He is relieved from circulating his money.

MR SLATER:   We agree with that, your Honour.  That is why we say it is a credit arrangement.

GUMMOW J:   If he did not have a credit card, he would be circulating money.

MR SLATER:   If he did not have a charge card, he would be circulating money too.

GUMMOW J:   Yes.

MR SLATER:   He would be circulating in the sense he would be handing it over.

GUMMOW J:   Yes, well, that is what circulation of money is.

MR SLATER:   Is handing over bank notes part of a payment system?  Is that a supply of a payment system for the purpose of this legislation?  That seems to us to be stretching the concept too far.  It is not the legislative design.  The legislative design when one looks at the other parts of the financial supply provisions say that bank accounts are not funds transfer systems, they are financial supplies.  The things that are done for customers and bank accounts are financial supplies.  The things that are done between banks in connection with bank accounts are funds transfer systems, payment systems and they fall outside financial supply.  That appears to us to be the underlying structure of the legislation.

KIEFEL J:   Is there the possibility that this could be none of the above, neither a financial supply nor a payment system?

MR SLATER:   If it is not a financial supplier, then the question really does not arise.  I think that is the answer to your Honour’s question.  It would still be a supply within section 9‑5.  In the written submissions we have given your Honours a reference to what Justice Hill said in HP Mercantile 143 FCR – I do not have the reference immediately to hand, but in the second section of his Honour’s judgment ‑ ‑ ‑

GUMMOW J: 143 FCR 553.

MR SLATER:   Thank you, your Honour.  The passage that I had in mind is on page 557 through to the top of page 560.  I will not read it to your Honours.  It is long and it is convoluted but there his Honour sets out, in effect, the basic structure of a value added tax and, in particular, at paragraphs 16, 17 and, I think, 21, why financial suppliers are dealt with as they are.  I was not going to take your Honours to that.  I was just going to draw your Honours’ attention to it.  Justice Hill knew perhaps more about GST and VAT than anyone in Australia, with due deference to your Honours.  He lectured on it, he wrote on it extensively and this was his attempt to explain the underlying structure of the provisions and why the financial suppliers are taxed as they are.  It is because you cannot tax the gross flows, you have to deal with the margins.

There is one other thing I wanted to say about those definitions before I depart from them and that is that it seems to us that the cardholders are not properly described as participants in the system.  My friend repeatedly referred to the person actually doing the paying, but the problem is that we do not know who the person actually doing the paying was.  There is no evidence addressed to it.  It is not shown whether the person actually doing the paying when somebody uses a credit card is American Express or is American Express’ bank or whether it all happens in some scintilla of electronic transaction in the way that Justice Hayne suggested or what, but it seems to us that in the context of the regulations, the person who has the use of a facility, whether it be a bank account or a credit card account, is not a participant in the payment system.  He is simply someone who has use of a facility in respect of which the payment system operates for the other parties.

HAYNE J:   Why is that not the supply of other related services by a participant in the system, the payment system, to the third party, the cardholder?

MR SLATER:   It is a matter of defining what the supply is.  May I foreshadow that I will answer your Honour’s question in a moment when I endeavour to outline our positive case?

HAYNE J:   Yes, of course.

MR SLATER:   I will do that as proximately as I can.  The only other thing I wanted to say about these regulations is that the examples that are given in the schedules to the regulations do, in our submission, illuminate – obviously they cannot determine – what is and is not a financial supply and in that regard if I could take your Honours to page 22 of the bundle.  One sees there examples of item 2 in the table in regulation 40‑5.09.  That item your Honours will find earlier on page 17.  It seems that the draftsman who prepared these examples had it fairly clearly in mind that:

Opening, keeping, operating, maintaining and closing charge and credit card facilities –

was a financial supply.  It would be a very odd thing to put that in the examples and say those examples which illuminate the meaning of the regulations are completely foreclosed and, on our friend’s case, utterly foreclosed by being a payment system within item 4 in regulation 40‑5.12.  Then, when one goes to the examples of what is a payment system on page 25, one sees that the examples are all to do not with the consumers, the cardholders or the bank account holders, but with the people among whom money is transferred or circulates, so you have a payment system operator to a participant – supply services by an operator to a participant in return for which the following fees are charged:

(a)      membership fees;

(b)      processing fees;

(c)      service fees

. . . 

(e)      risk management fees;

(f)       multi‑currency fees.

These are all things which are not germane to the holder of a credit card.  They are germane to the dealings between Amex and its bank and counterparties, between MasterCard and Visa and the issuing and acquiring banks, access to a payment system by a participant and supply to a third party.  That is not supply to a cardholder.  It is supply to somebody outside the immediate system who is involved in the overall structure, such as the Reserve Bank.  Then item 4:

Processing, settling, clearing and switching transactions of the following kinds:

(a)      direct credit and debit;

(b)      other debit and credit transactions;

(c)      charge, credit and debit card transactions;

(d)      cheque;

(e)      electronic funds transfer;

(f)       ATM;

(g)      B-pay -

and so forth.  It seems to us, your Honours, that when one reads the regulations as a whole what one has is a funds transfer system, a payment system, which operates among the financial institutions and then the regulations say that the dealings between the consumers opening, keeping, operating and maintaining the facility – and there are similar items in table 1 on page 21 – they are conceived of as financial supplies, not as excluded as part of a payment system.  As my friend says these are examples.  They cannot govern the operation of the regulations.  But what they can do even more strongly than other extrinsic materials is to illuminate the operation of the regulations. 

FRENCH CJ:   Mr Slater, that might be a convenient moment.  The Court will adjourn till 2.15.

AT 12.47 PM LUNCHEON ADJOURNMENT

UPON RESUMING AT 2.21 PM:

FRENCH CJ:   Yes, Mr Slater.

MR SLATER:   Thank you, your Honour.  Your Honour, before lunch Justice Hayne asked me a question about the relationship between the financial supply and the payment system and I asked if I could defer answering to it.  May I respond to it in the second stage of our argument, putting the Commissioner’s positive case?  We take this course rather than, as our friends did, going first to the payment system issue because it seems to us that it is critical to identify the financial supply which is relied upon as attracting the operation of the formula before one can determine whether that financial supply falls within regulation 40‑5.09 or within regulation 40‑5.12, or yields the revenue.  That is, one has to know what supply it is one is talking about before one can determine whether it has the relevant attributes. 

The problem with our friend’s argument, it seems to us, is that although at the outset they identified the financial supply in terms very similar to those which we advance, that is to say the provision of the card on the terms and conditions in the card agreement.  Their argument, thereafter, does not address that supply, but addresses other things so that, for example, there was a discussion in argument between my friend and I think Justice Kiefel about the consequences of using the card to buy a book.  That is not the point.  The point is that the relevant supply is the provision of the facility comprised in furnishing the card on the terms and conditions in the agreement.

Much of the argument was concerned with characterising the use in particular circumstances.  That again is not the issue.  The financial supply upon which we rely is in summary this.  We say that the relevant supply is that of the cardholder’s rights under the agreement comprised in the card terms and conditions.  Those rights include the right to hold the card, the right to present it on purchase and have it accepted or to use it in various telephone and internet transactions and to pay to American Express the price of the goods or services acquired by tender of the card, not immediately upon acquisition of those goods or services but at a later date.

It is the ability to have the benefit of that which is obtained by tendering the card immediately, but not be required to disburse the funds by way of purchase price until the time at which the payment is due under the terms and conditions.  My friend repeatedly said that was an exiguous period but if one looks at the Gold Card statement of account at page 166 of the appeal book one sees, for example, that the first transaction is the use of a taxi on 17 February.  The card statement is forwarded on 20 March 2007.  The date of February 17 is at line 20.  The statement date is at about line 11 on the right hand side and at about line 15 the direction is:

Please pay immediately, but no later than 21 days from statement date printed above.

Now, what is an exiguous period I suppose depends on one’s perspective, but the period here in question runs from 17 February until, on one view, 20 March and, on another view, about the middle of April and that is a period in which the cardholder has, in effect, the use of the credit of American Express, not directly under a single contract but under what the Master of the Rolls in the passage which our friends quote from Customs and Excise v Diners Club, passages referred to in our friend’s submissions – it is actually quoted by the Court of Appeal in Customs and Excise Commissioners v Diners Club [1989] 1 WLR 1196 at pages 1200 to 1201 from the judgment of the Vice‑Chancellor in an earlier Court of Appeal case, In re Charge Card Services.  I do not want to spend any more time on this than to draw your Honours’ attention to these observations.  In the first line of the quote from the Vice‑Chancellor’s judgment it is said:

There is an underlying contractual scheme –

and in the second item on the third last line on the page –

That underlying scheme is established by two separate contracts.

Now, the provision of credit here is not by any one individual of the bilateral contracts.  It is by the underlying scheme that the Vice‑Chancellor referred to.  It is the supply of that facility to have the card, to use it to acquire goods and services and not to have to pay for the goods and services immediately which, we say, is the financial supply.  That supply is for consideration. 

The consideration is to be found in the terms and in the performance by the cardholder of its obligations under the charge card conditions and the credit card conditions.  If I could draw your Honours’ attention just to some of those.  The charge card conditions are at page 155 of the application book.  If I might take this course and draw your Honours’ attention to what we say are the relevant bits of the conditions as briefly as I may.  In the first paragraph it is said that:

This booklet sets out the respective rights and obligations of you and American Express –

There are definitions in the second column on page 155.  I draw your Honours’ attention to the definitions of “access method”:

Account means your Card account with us . . . 

Charge means a transaction made with the Card or charged to your Account, including a purchase, fees and charges, taxes and all other amounts you have agreed to pay us or be liable for –

Then on page 156, clause 3:

If you are the Basic Cardmember, you are liable to us for all Charges on the Basic Cards –

Clause 5 on the same page:

We will send you once a month a statement . . . The statement will, amongst other things:

·identify purchases, fees and all other Charges –

Clause 6:

You must pay us the full amount of closing balance shown in each monthly statement.

Clause 7:

We can cancel your right to use the Card at any time –

Clause 9:

Each card remains our property at all times . . . 

You can use your Card at any Merchant displaying the American Express Cards logo.

You may use your Account number at any Merchant by mail, telephone order or through the internet to pay for goods or services provided by the Merchant.

GUMMOW J:   Mr Slater, can I just interrupt you and take you back to paragraph 8(a) of your outline?

MR SLATER:   Yes, your Honour.  This is the oral outline, your Honour?

GUMMOW J:   Yes, 8(a):

the scope of that system cannot be discerned from the evidence –

Then one looks at paragraph 11 which indicates that your client would hope to get from us, I think, some vindication of the ruling.

MR SLATER:   No, your Honour.  My client simply says this is what I have done and I am not going to deny that I have done it.  I am not going to resile from it.

GUMMOW J:   What I am trying to put to you is if you are right about 8(a) is that not a point in your favour against a grant of special leave?

MR SLATER:   Yes, your Honour.  I am sorry, against a grant of special leave?  Yes, I am sorry, I had forgotten, your Honour, I am not the applicant.  I am sorry, your Honour, my apologies.

GUMMOW J:   If that is so we had better be told about it.

MR SLATER:   I thought I had told you about it at some length on the previous occasion and in our written submissions.  I was not going to reiterate what was said in writing.  I did say this morning we say that this is a case about the boundary of the payment system.  There is no evidence of where those boundaries lie.  Your Honours may well feel that that is a good reason for not granting special leave.  On one view of the matter we have come this far.  I am more than content for your Honours here and now to say to me “We revoke special leave” and we can go home.

HAYNE J:   We have not granted special leave.  There is no grant.

GUMMOW J:   That is the point I am trying to raise with you.

MR SLATER:   Yes.  I am more than happy for your Honours to say to me here and now, “We do not grant special leave”.  My client would be satisfied and I, personally, would be satisfied but I have, I thought in writing and previously, indicated that in our submission this is not a case which is suitable as a means of exploring the boundary of the payment system and it is at the boundary that the dispute falls.  We accept that there is a payment system provided to merchants.  We say that there is no payment system provided to cardholders.

FRENCH CJ:   You premise that on the nature of the agreements.  Is that right?  In other words, the evidentiary material upon which you are basing those submissions are the merchant agreements and the cardholder agreements.  There is nothing else, is there?

MR SLATER:   We do not know, your Honour.  Justice Hayne asked me this.

FRENCH CJ:   No, just on the record?

MR SLATER:   I am sorry, your Honour.  On the record my friend said below that in addition to the charge card agreement, the credit card agreement and the merchant agreement there was also the sample statement to a member which I have just taken your Honours to.

FRENCH CJ:   Yes, you have just taken us to that.

MR SLATER:   Those were the four things which to my recollection he relied upon as comprising ‑ ‑ ‑

FRENCH CJ:   Yes, but that is it.  Somewhere behind all that there is a black box and a whole lot of things whir around in it.

MR SLATER:   Yes, indeed.

KIEFEL J:   In your written submissions, could you please remind me, do you expand upon what elements and structures that you say the nature of which are missing which would not enable us to determine what a payment system is because it is ‑ ‑ ‑

GUMMOW J:   Justice Heydon draws attention to your footnote 54, I think.

MR SLATER:   That, I think, is an answer to the question Justice Kiefel asked.

GUMMOW J:   That may help explain why Justice Emmett treated it as a subsidiary matter, as it were, in his reasons.

MR SLATER:   Not only that, your Honour, it was raised – first, I should say I was not representing anybody at that hearing so I speak only from what I can see in the transcript and in the written submissions but it was raised as an incidental answer to the proposition that – I think that there was no consideration.  I am sorry, I do recall that it was mentioned briefly in two paragraphs of the written submissions and then I read in the transcript that my friend addressed his Honour on the issue of the Visa Case ‑ ‑ ‑

KIEFEL J:   Did it come under coat-tails of that case?

MR SLATER:   At approximately the same length as he did this morning.

KIEFEL J:   I am sorry.  I am just wondering if it came upon the coat‑tails of the reference to Visa, but it is hard to see why Visa was referred to.

MR SLATER:   No.  Visa came on the coat‑tails of the reference to the payment system.

KIEFEL J:   Yes, that is right.

MR SLATER:   But it was not put as the primary case.  It was put as an incidental for saying there was no financial supply.

KIEFEL J:   Yes.

MR SLATER:   But, your Honours, I cannot go further than that except to say that nothing of the operation of the payment system is disclosed in the evidence.  The case was run for the reasons that my friend put to your Honours this morning – on the construction of the consideration issue.  There was not a separate case run about payment system as far as the material in the application book discloses.  Not having been there, I am under some difficulty in telling your Honours how the case at first instance was run.

KIEFEL J:   But you say is that something more than the being able to trace the movement of money between issuer and merchant and with someone else being involved in this loop, so to speak, is not sufficient.

MR SLATER:   Among other things.  It appears from material which is in the application book but was not in evidence that at some stage during this period American Express entered into arrangements with at least two banks for them to issue American Express cards and with at least one professional organisation, the Law Society, to do so.  Whether that is a closed‑loop system or an open‑loop system is not apparent.  That material was not explored.  It appears from the terms that there was some sort of electronic payment facility.  How that worked is not shown.

HAYNE J:   Well, we know that from page 116 and from page 128 that merchants – I think it goes beyond could be paid electronically to would it be paid electronically according to one of two schemes – either three‑day direct credit or next business day direct credit.

MR SLATER:   Yes, your Honour.  What we do not know is how that was done and how, if at all, that involved the cardholders beyond it appearing that the cardholders presented the card and they were put into a terminal in some fashion.  Our case is that insofar as that material goes, that does not show that the cardholders were participating in a funds transfer system.  It simply shows that they were using the card and that, in due course, when they got their statement they paid their debts.  That is all.  That, in our submission, is not part of a funds transfer system or a payment system.

KIEFEL J:   Well, I suppose then it is put against you that item 2, regardless of what the payment system is, item 2 in Part 2 of Schedule 8 might be sufficient for Amex’s purpose if ‑ ‑ ‑

MR SLATER:   That is the reference to ‑ ‑ ‑

KIEFEL J:   Amex as a participant is providing them with a service - access to the system.

MR SLATER:   We would say, your Honour, that the third party to whom that is provided – we would have said before the judgment of the Full Court that the third party was the merchant.  That was the view which was taken at the time the Commissioner issued his rulings.  The judgment of the Full Court perhaps throws some doubt upon that.  The third party might be the Law Society, we do not know.

KIEFEL J:   So it is access to a payment system of which the third party derives a benefit?  There is some notion of benefit there.

MR SLATER:   Justice Tamberlin’s judgment, I think, refers – maybe it is the Reserve Board’s report – refers to the arrangement as being one which involves some sort of commission being paid to or by the co‑branded body on the card, so the Law Society or Westpac, we do not know.  Again, we do not know how that worked. 

KIEFEL J:   But do we know here that the merchants obtained the commission?  I mean, everyone assumes that.

MR SLATER:   No, your Honour.

KIEFEL J:   We do not know that as a matter of fact?

HAYNE J:   Do we not know that?  Do we not know that from 116?

MR SLATER:   What we know from 116 is that the merchants received payment under one of two payment plans. 

HAYNE J:   We know also we shall pay you the face amount of all charges less the merchant service fee, the commission, I would thought.

MR SLATER:   I am sorry, Justice Kiefel was asking me about the commission payable to the person whose brand appeared on the card, I thought.

KIEFEL J:   No, actually, I have not conveyed myself to you.  I went on to ask about merchant commission as a separate distinct item.

MR SLATER:   The merchant service fee is deducted from the payment made to the merchant.  That much, at least, appears from here.  It is difficult to see how one can leap from that to say that the cardholder is a participant in the system.  If there is something about the individual facts of the operation of the system which shows that there is a percolation of the relationship between the merchant and the bank and Amex beyond those three and over to the cardholder, if the way the whole thing operates in practice would support that.  Maybe the result is that the payment system extends that far.  We say that that is not so on the proper construction of legislation for the reasons I endeavoured to put to the Court this morning which I will not reiterate.  If those reasons are rejected, and one has to explore this issue on a factual basis, then, in our submission, the factual material is not there to explore it.

FRENCH CJ:   How do you describe the rationale for the payment system exception?

MR SLATER:   The rationale, your Honour, is not entirely clear.  Some indication can be discerned from attachment E to the explanatory statement to the original regulations.  That is in pages 53 and 54 of the bundle of statutory materials.  I hesitate to put this to the Court with any degree of force for two reasons.  First, I am conscious of the Court’s repeated comments about the utility of such extrinsic materials and, second, this is actually extrinsic materials to a version of the regulations which was replaced by that before the Court, but it may give some guide to why its services are input taxed and what the decision‑makers who formulated the original draft of the regulations were attempting to achieve.  I do not think it directly responds to the question your Honour asked me.

GUMMOW J:   Looking at the affidavit evidence provided by Mr Rayner, Mr Porter and Mr Horikawa, the focus, if I can put it that way, of that evidence on affidavit is the significance of the default rather than explaining any payment system?

MR SLATER:   Indeed, your Honour.  It is entirely directed to the question whether the default fees were properly characterised as consideration.

GUMMOW J:   Yes, it seems so.

MR SLATER:   That was the primary issue.  It is not in any respect directed towards this question of payment system.

HAYNE J:   There is, I think, no reference to payment system, is there, in any of the appeal statements, or is there?

MR SLATER:   No, not in the objection, not in the appeal statements, not in the evidence.  There was what I would characterise as a passing reference, my friend may cavil with that characterisation, in my friend’s written submissions before the hearing at first instance and it was addressed by him in the course of his oral submissions and it was responded to by Mr Robertson, but more in terms of the interpretation of a statute than in terms of any factual question.  I cannot take it beyond that, your Honour, except to say as we said on the original special leave application, this is not the case in which to explore where the boundaries of a payment system fall.

I am informed, your Honour, that the underlying rationale for the way in which payment systems are dealt with is this, that payment systems generally involve a fee or a commission which is a direct payment for the intermediary services which are referred to, for example, in the table on the bottom half of page 25 of the statutory materials and that in consequence there was no reason to treat them as a financial supply but rather it was appropriate to treat them as a taxable supply.  I should say, your Honour, there is no evidence to support that.  That is simply what I am told.  Is it convenient to your Honours for me to resume dealing with the primary case?

FRENCH CJ:   Yes.

MR SLATER:   I was in the course of just drawing your Honours’ attention to some of the terms of the charge card terms and conditions.  My friend took your Honours to clause 14, which includes the provision that we may charge you liquidated damages.  Clause 15 is a promise to pay reasonable costs in recovering charges from you.  Clause 16 deals with foreign currency charges.  In the fifth line from the bottom one sees that in addition to the rates at which conversions are to be made there is a provision for:

a single conversion commission as specified on your Schedule.

I can tell your Honours that on page 164 that commission is set at 2 per cent of the amount.  Clause 17:

Payments may be made by any of the methods set out in your statement.

Clause 21, page 161:

You must pay any applicable Card fees when we bill you, until you notify us not to issue a renewal Card.

That is fees for a renewal card.  Clause 22 is interesting just in terms of the semantic debate:

A new credit contract is not formed on the issue of a replacement or renewal Card.  The credit contract between you and us for the Card and the Account remains in force.

That is a term of the charge card, not the credit card contract.  The other provisions that I should draw your Honours’ attention to are on page 164, the Schedule.  There is a base cardmembership and there are three of those for different levels.  The supplementary cardmembership fee, these are the fees paid for having the use of the card, the annual fee for being the holder of a card.  In addition to that there is the liquidated damages amount which is to be paid in the event specified.  There is the currency conversion fee, there is a dishonour fee and there is a record of charge fee.  Now, the promise to pay all of those, in our submission, is consideration for the rights which are obtained under the terms of the charge card conditions. 

I have not taken your Honours through the credit card conditions.  They are similar.  I think we have referred to them in our outline.  So that having regard to that the requirement of consideration in subparagraph (i) of paragraph (a) of subregulation (1) of regulation 40‑5.09 is, in our submission, met and it is met in relation to the supply of the credit card facility.  We are not talking about any supply which is made when the card is used.  We are not talking about any supply which is made when a member defaults.  We are talking about the supply of the facility.  That is the financial supply from which, in our submission, the amounts which go into the calculation of the extent of creditable purpose by being included in the numerator are revenue arising.  They are revenue derived from the financial supplier comprised in the provision of the facility.

There are two remaining questions.  One is whether there is an interest within the meaning of regulation 40-5.02 and the other is whether it is within item 2 in subregulation (3) of regulation 40-5.09.  In relation to the interest point, we draw your Honours’ attention to the circumstance that the definition is very broad.  It is anything recognised at law or in equity as property in any form.  We submit that the contractual rights satisfy that description.  They are something which is recognised as law equity and they are property in our submission. 

We have given your Honours extensive written submissions on that question.  In our submission, in the context of this legislation, the circumstance that the rights are not assignable, that they are terminable without notice, does not make them not rights which are property in the sense used in the regulations.  Assignability is not always a condition to qualification as property.  It all depends on the context in which the word “property” is used. 

We have given your Honours references to what was said both in National Trustees (1954) 91 CLR 540 at 583. May I add to that a reference to about the middle of page 586. I will not read those to your Honours unless any one of your Honours is assisted by my doing so. We have given your Honours also a reference to the previous extensive consideration of this issue by the Court in Yanner v Eaton (1999) 201 CLR 351 in the passages in the joint judgment at page 365, paragraphs 17 to 20 and in a judgment of your Honour Justice Gummow at page 388, paragraphs 85 to 86. Some of those passages are set out in the majority judgment at pages 562 to 563 of the application book.

In our submission, having regard to what is said there, these rights qualify as property for the purpose of legislation which is concerned with bringing to tax in one way or another all supplies.  I grant that this is an exception.  Financial supplies are an exception to the broad conception of supplies in Division 9 but the fact that they are an exception does not mean that they should be read in any particularly restrictive or expansive sense.  Your Honours said something to that effect in Alcan NT Alumina Ltd v Commissioner of Territory Revenue (2009) 239 CLR 27 at page 49, paragraph 57.

In the context of this legislation and for the reasons in our written submissions, in our submission, the rights under this contract are property.  We have also set out in our written submissions the reasons why we say that the various authorities to which our friends refer in their written submissions are not in point.  This is not a case concerned with conveyances where the ability to be conveyed is at the fundament of the statutory issue.  Nor is it a case about acquisition where ability to acquire or the act of acquisition is the crux of the statutory question.

In both of those cases, it is manifest that conveyance or acquisition must be an attribute of the property in question, but this is not such a case.  This is more a case analogous to the death duty cases where one is considering what of value is in an estate and should be brought to account.  In our submission, the rights under this contract are of value and should be brought to account.  They are brought to account to the extent that they yield an amount which is consideration received and feeds into a net amount and they are brought to account in the calculation of extended creditable purpose to the extent that they yield revenue which feeds into the numerator of the agreed fraction.

For those reasons, in our submission, there is here a financial supply and the financial supply is that comprised in the card conditions.  The amounts with which we are presently concerned – that is the amounts called “liquidated damages and late payment fees” are amounts which are paid in accordance with the terms of those conditions.  They are called and properly called “liquidated damages” but the appellation “liquidated damages” does not make them into a judicial award.  What they are is an amount payable under a contractual stipulation. 

In that regard, we have given your Honours a reference to an authority not in our full written submissions, so can I just take your Honours to it very briefly?  It is the decision of this Court in Ringrow Pty Ltd v BP Australia Pty Ltd (2005) 224 CLR 656. It was concerned with whether a stipulation in a contract should be struck down as being penal. The paragraphs which we have referred to, which I will take your Honours to very briefly, are paragraphs 1 on page 660 which simply makes the point that these appeals concern the effect of contracts; paragraph 11 on page 662, which endorses the statements of Lord Dunedin in Dunlop Pneumatic Tyre Co and, again, there one sees in the paragraph numbered 2 as part of the quote:

The essence of a penalty is a payment of money stipulated as in terrorem of the offending party –

It is a contractual obligation:

the essence of liquidated damages is a genuine covenanted pre‑estimate of damage . . . 

3.        The question whether a sum stipulated is penalty or liquidated damages is a question of construction . . . 

4.        To assist this task of construction various tests have been suggested –

So that what one is dealing with is construing the contract.  At paragraphs 31 and 32, the Court, in summarising the purpose of the law of penalties observed that:

The law of contract normally upholds the freedom of parties, with no relevant disability, to agree upon the terms of their future relationships.

Then in the following paragraphs:

Exceptions from that freedom of contract require good reason to attract judicial intervention –

The point of taking your Honours to those passages is that the obligation to pay what is called “liquidated damages” is an obligation which arises out of the contract in which they are provided for.  In the present case, the significance of that is that the derivation of the amount of the default fees – the liquidated damages and late payment fees – is to be found in the contract under the terms of which they are paid, that is to say, those fees are revenue which is derived from the agreement which comprises the financial supply upon which we rest our case.  For that reason, in our submission, it is accurate to say that they are revenue derived from a financial supply for the purpose of applying the agreed formula which is found on page 555 of the application book. 

There was a reference in my friend’s argument to the question of mixed supplies and, in particular, he put as an example illustrating what was propounded as the four in our argument the example of his rendering a fee invoice for, for example, his fees on this matter payable in 30 days.  We say about that two things; first, that is not what American Express does.  American Express does not provide legal services or, indeed, any other services.  All it does is provide this facility, that by using the card you can have the goods and services now and pay for them later.

There is no analogy between a 30‑day term on the supply of goods or services.  The reason why there is no liability or no relevant financial supply in that context is twofold; first, there is really there just a single supply and it is a supply of legal services or of goods or services.  If there had been a term that you will pay us $1,000 if you pay within two days and you will pay us $1,200 if you pay in 60 days, then the additional $200 would be consideration for a credit accommodation over the 60 days, but that is not the case.  The other reason why there is no issue here is that there is no separate consideration for the 30‑day term.  The only consideration is the consideration for the legal services and it is brought to account as consideration for legal services. 

Your Honours, in summary in our primary case, the default fees are revenue which are amounts received in the ordinary course of business.  There appears from what my friend said this morning to be no contest that they are revenue.  They are derived from the provision of the facility comprised in the card contract.  They are therefore revenue derived from a financial supply and properly brought to account in the formula.

Your Honours, there is one other matter that I should briefly mention only because it is brought up in two of the judgments below and that is the question of an acquisition supply.  I do not want to take this any further than simply to draw your Honours’ attention to it.  Justice Emmett, at page 412 of the application book in paragraph 42, notes that there had been a submission before him that there was an acquisition supply.  I possibly shortcut things slightly by referring to an acquisition supply and I should have reminded your Honours ‑ ‑ ‑

KIEFEL J:   That is the point to which Justice Dowsett referred in his judgment, was it?

MR SLATER:   Yes, it is, your Honour.  I should have reminded your Honours that somewhat counterintuitively a supply is defined in regulation 40‑5.09 as the provision, acquisition or disposal, and there is a regime in the legislation which says that if you acquire a financial asset you are deemed to make a financial supply. That is to do with things like acquiring a bill of exchange, discounting a bill.  Justice Emmett noted that there had been such a submission at paragraph 42 of his judgment but did not deal with it.  You can see that at paragraph 43.

Justice Dowsett referred to it on page 529 at paragraph 46.  He expressed an inclination to the view that there was a financial supply but did not deal with.  The majority did not deal with it at all.  It is not our principal submission.  It is not our principal case.  We have put in the written submissions as an alternative, because it is raised there, the view we would take of the acquisition supply question.  Your Honours will find that at paragraph 24 of our written submissions.  We also say that if the default fees are derived both from the acquisition supply and from the supply of the facility, it does not mean they are supplied twice over, or it does not mean they are consideration twice over.  More than one source can generate an amount of revenue from a financial supply.

Now, your Honours, may I then turn to the third point, the payment system.  In large part, what we have to say about that has already been said.  There is one further aspect to our written submissions in that regard and it is a problem of the nature adverted to by Justice Hill in the HP Mercantile Case.  If the cardholders are supplied with a payment system, then, in our submission, the legislative scheme simply does not work.  Our principal case is that the relevant supply is the supply of the facility comprised in the charge card conditions.  What is paid in accordance with those terms is consideration and does not enter into the calculation of any net amount.

If our friends were correct and the supply of the charge card facility is a supply of or of an interest in or under a payment system, then it would not be a financial supply and it would be a taxable supply and in that event it seems to us that the scheme of the legislation would break down.  The outcome would be what might be said to be curious, aberrant or absurd.  If our friends were right, then the supply of the facility comprised in the charge card conditions is a taxable supply.  Those amounts which fall within the consideration for that supply are included in taxable value under section 9‑70, are attributable to the month in which they are received under section 29‑5 and are included in the net amount for the period in which they are received under section 17‑5.  Your Honours will find the text of those three sections at pages 6, 11 and 10 of the bundle respectively.

The consequence is that all amounts received in connection with or in response to the supply are section 9‑15 consideration, notwithstanding that they are voluntary, notwithstanding that they come from a third party. It is not confined to contractual consideration and so what would be included in the value of taxable supplies and ultimately included in the net amount would be, among other things, the annual fees for the year, the monthly payments on account and the default and other charges set out in the schedule. Now, Justice Hill made the point that the scheme of a value added tax does not bring those amounts to account because it distorts the operation.

GUMMOW J:   Which paragraph is this?

MR SLATER:   Which paragraph of our written submissions?

GUMMOW J:   In HP Mercantile, which paragraph?

MR SLATER:   It was paragraphs 16 and 17, your Honour, although I was not quoting from them directly.  In the second sentence:

The most important example is said to be financial transactions of financial institutions such as, but not confined to, banks, because they constantly borrow and lend and turn over money in a way that amounts, such as interest charged, will not represent the real value added by the financial institutions.

If our friends are right and the charge card conditions are a payment system and any consideration under them is taxable supply, then the monthly statement amounts will be received pursuant to them. They will be consideration within section 9‑15. They will generate a liability to GST and it will have precisely the result that Justice Hill is talking about there. It is not the turnover that is the value added by American Express, it is the service. It is the facility for which it receives consideration. So the right amount to be brought to account is the margin made and that is what is done with the merchants, but with the cardholders the right amount is the margin made from the cardholders. That is the fees they pay, but, in our submission, those amounts are within the definition of a financial supply and they are not within the definition of a payment system. So they fall outside the net and that seems to us to be the way the scheme should work.

The argument for which our friends contend is one which would disrupt that scheme and for the reasons we have put in our written submissions in paragraphs 37 through to 39, the argument involves a logical incoherence; we have ruled that that logical incoherence is not correct, it does not apply and we therefore rule that amounts recovered from merchants are taxable but amounts recoverable from cardholders are not and the monthly turnover is not.  The Commissioner does not intend to resile from that ruling unless and until this Court tells him to. 

If this Court delivers judgment saying that that construction is wrong, then the Commissioner will have to withdraw the ruling and act according to the judgment of the Court.  But the argument which the companies are putting to your Honours is one which, in effect, for the reasons we have said there, invites the Court to conclude for the purpose of input tax credits that the provision of the facility is a payment system, but invites your Honours to conclude for the purpose of liability to GST that the provision of the facility is not a payment system and we say your Honours cannot be asked properly to give such a judgment.  That is the burden of what we say in those paragraphs.

Your Honours, could I then, finally, come to the amendment point.  It was at least open to argument that the grounds of appeal before the Full Court were adequate to allow the argument that revenue was not confined to consideration to be run but in order to ensure that that argument was fairly and properly addressed, we put it as an amendment or an application for amendment to the grounds.  As I said earlier, there has been a degree of squabbling between us about where the origin of this particular canard that consideration was the sole content of revenue arose. 

The context in which it arose can be seen this, that the formula was originally published by the Commissioner as a ruling.  The terms of that ruling are in the application book at page 555 in paragraph 122.  I do not want to spend too much time on this because it really does not matter very much.  It really starts at  121 at about line 28 on page 555.  Your Honours can see that the Commissioner published some rulings setting out a formula which used the expression “revenue”, et cetera.  In our friends’ appeal statement, and this is the only material in the application book which really goes to this point, at page 12 it is recorded:

Prior to April 2004 Amex and Amex Wholesale used the following revenue based formula . . . 

[Revenue (in relation to taxable and GST‑free supplies)/Total revenue (including revenue related to input taxed supplies]*100

Then in paragraph 19 it is recorded that the applicants in 2004 revised the formula and applied the revised formula on a retrospective basis from 1 July 2000 and that is the formula which now appears.  As a result of that, the lower amount, the amount which is in dispute, was said to be payable.  So there was an amount of about $7.9 million in dispute as a result of that alteration.  That amount which is in dispute is the difference between treating the default fees as revenue and treating them as not consideration.  That is where the debate arose. 

The Commissioner undertook a review of American Express’ affairs.  That matured into an audit.  That matured into a compliance report which was not in evidence but it is in the application book and that led in the end to the debate between the parties which was all about whether that revision by Amex to change revenue to consideration was correct.  That is where it arose.  It is not something that was sprung on the company on the first day of the hearing except in this sense, that up until – not actually the first day, a couple of days before the hearing – it was reasonable for Amex to suppose that the appeal was going to be about the meaning of “consideration” and on the appeal we propounded that that was not the question posed by the formula. 

It is not truly a question of statutory construction.  It is a formula adopted as a proxy for the statutory question.  It is nonetheless, in our submission, a question of construction of the formula, no more, no less.  No evidence could be led which would affect the interpretation of the word “revenue”.  No evidence could be led which would have been different if from the outset the word “revenue” had been construed as “revenue” and not as “consideration”.

What our friends do is to say if we had known that you were going to take that point against us then we would not have run a contract case, we would have run a torts case, that is to say, they say we would not have maintained or relied solely upon the argument that revenue means only consideration.  We would, in the alternative, have tried to run an entirely different case which took each item of acquisition and set out to apportion or allocate that item individually.

Now, there is no evidence about what might have been done there.  It is true and it is a fair statement on my friend’s part that there is no evidence because there was no anticipation of it.  But it is difficult to see how there could be any argument based on an entirely different approach which was, in the first place, not merely a variation on the construction point or, in the second place, not so different from the whole premise upon which the company had returned and been audited and been assessed that there would be a real issue as to whether or not it should be allowed to amend its ground of objection. 

We have put all of that in our written submissions.  There is nothing particularly that I can say beyond what is in our written submissions.  We do rely upon the written submissions in that regard, but the primary point we advance to your Honours in this regard is simply that this is just a question of construction.  We have given your Honours a reference to a recent decision of this Court in Spriggs v Commissioner (2009) 239 CLR 1. The context in which the case arose is not particularly immaterial to this point. It is simply on page 15, in paragraph 43 at about point 3 of the page, the Court in a joint judgment said, speaking of the contract, the:

Contract also contained terms and conditions referable to promotional activities, including those carried out independently of his club.  It was, therefore, a contract of employment, as the primary judge concluded, but it was not solely a contract of employment.  Even if this point was not raised by the appellants in the Full Court below, as a matter concerning the legal construction of a document, it was open to the appellants to raise that construction for the first time in this Court.

We respectfully submit that the same can be said of the Commissioner’s argument for the first time in the Federal Court that “revenue” means revenue and does not mean consideration.  For that reason, it was open to the Full Court to allow us to present that argument and the Full Court did not err in principle and its decision should not be set aside and, moreover, that its decision was right. 

GUMMOW J:   If you are right about the availability of this point, the consideration issue involving the construction of the legislation in the regulations disappears, does it not?

MR SLATER:   As to the meaning of consideration only, yes, your Honour. 

GUMMOW J:   It becomes a question of construing this particular formula and the word “revenue”.

MR SLATER:   Yes, it does.  That does not dispose of my friend’s argument about payment systems.

GUMMOW J:   No. 

MR SLATER:   It does not dispose of his argument about property.

GUMMOW J:   No.

MR SLATER:   Only the consideration argument.  We have also said in our written submissions, for reasons which I will not elaborate upon, that in any event, these fees were consideration as defined because they followed on from the provision of the relevant facility.  Your Honours, unless there is anything further I can assist your Honours with, those are our submissions.

FRENCH CJ:   Thank you, Mr Slater.  Yes, Mr De Wijn.

MR DE WIJN:   If your Honours please, I will deal with these points in the order my learned friend made them.  He took your Honours to regulation 40‑5.12 and there was some debate about the meaning of the word “interest” in 40‑5.12.  We say 40‑5.12 is simply a provision that one looks at in the way Justice Hayne said, you go through the list of things, and if you are in the list of things in 40‑5.12, then you are out of financial supply. 

The Act proceeds on the assumption that you could be in both, you could be in a financial supply or you could be in 40‑5.12 and make some express statutory or has an express statutory regime that if you are in both – so it contemplates the possibility of being in both – it then contemplates that if you are in both, then you are expressly not treated as being a financial supply.  That is essentially the important point of construction, we say.  The Act sets out a tie breaker provision and if we are correct on the payment system point and we provide access to a payment system to cardholders, then the Act specifically provides that that is the tie breaker.

My learned friend then took your Honours to the definition of “consideration” and sought to argue that it was a wide definition and it is not a contractual definition.  We were not putting the point that it was a contractual consideration, I think we said the opposite.  Now, what my learned friend skipped or bypassed was the requirement that the supply had to be for consideration.  It is not sufficient to go to the definition of “consideration”.  If your Honours go to section 9‑5 in the definition of “taxable supply”, and the same is found in “financial supply”, we will take them one at a time, 9‑5:

You make a taxable supply if:

(a)you make the supply for consideration –

Some meaning has to be given to the words “for”.  It is not sufficient if there is some “but for” linkage between a payment of money and a contract.  The particular supply has to be for consideration.  So in the case of the damages, for example, it matters not that the damages are for breach of contract.  My learned friend would have it that if there is a contract and there is breach of damages and it was a judicial determination of damages that that would still flow from the contract.  He sought to draw a distinction between liquidated damages and judicially determined damages, and strictly on his definition of consideration that is not correct.  One has to give some meaning to the word “for”.  That same requirement appears in the definition of “financial supply” at 40‑5.09.  Of course, we note it does not incorporate the concept of supply:

The provision, acquisition or disposal of an interest mentioned in subregulation (3) or (4) is a financial supply if:

(a)the provision, acquisition or disposal is:

(i)for consideration ‑

So when one identifies the relevant supply here, that is the facility, the right to use the card, the right to use the card is given for the annual fee.  None of the other amounts are in respect of the right to use the card.  They might flow from using the card, but the dollar amounts that follow are not for the right to use the card.  The meaning has to be given, in our submission, to the word “for”.  My learned friend no doubt, as he did below, relied heavily on the examples in Part 2 which is at page 22 of the bundle of documents, Schedule 7, examples of input tax supplies, the:

Opening, keeping, operating, maintaining and closing charge and credit card facilities –

be relied upon.  We say two things about that.  We say it is true that they are examples, but that is all they are, and the Act expressly provides that the examples might be wrong and if they are wrong, they are to be ignored, but, secondly, the Act provides a specific tie breaker provision between 09 and 12 and if you are in 12, the Act specifically says if you are in 12 you are not in a financial supply.  So the Act contemplates, to start with, the possibility that you could be in both and then has an express tie breaker and that is what we rely upon.

Your Honours, Justice Dowsett dealt with that in some detail, the argument my learned friend has made about the examples, at paragraphs 47 to 50 and we rely upon what was said there.  Can I just go back to a question earlier on about how Justice Dowsett defined the supply and we think, although he used the words “pledge the credit of American Express”, they were probably meaning no more than the way I think my learned friend and I have defined the supply, that is, the right to use the card upon the terms and conditions of the card.  In strict terms, the cardholder does not pledge the credit of American Express because the card system is based upon two separate contracts, entirely separate contracts; the contract between American Express and the cardholder and the contract between American Express and the merchant.

So the cardholder in no way can bind American Express to pay a merchant.  Whether a merchant is entitled to be paid by American Express depends entirely upon the contract between the merchant and American Express.  When we look at the contract between American Express and the merchant, it depends upon complying with certain conditions and submitting a record of charge and then payment will be made within three days or two days.  So it is not strictly pledging credit.  As we say, the merchant’s rights derive solely under the merchant agreement.  So what the facility is, is really the right to use the card.

Can I just take your Honours to what the Court of Appeal in Victoria said about the way the card system worked.  It is in American Express v Commissioner of State Revenue (2004) 10 VR 145 and I want to take your Honours to paragraph 14 at 153. Justice Charles described the operation of the card system. His Honour said:

I accept at once that, as Sir Nicolas Browne‑Wilkinson said in Charge Card Services, there is an underlying contractual scheme upon which the charge card as a mechanism for paying for goods or services depends.  Both appellate courts in the English cases already cited concluded, first, that, upon acceptance by the merchant of the card as a method of payment, the cardholder is unconditionally discharged from any liability to the merchant to pay the amount of the costs of goods or services; secondly, the cardholder, in lieu, assumes direct liability to the card company, to the exclusion of liability to the merchant; and thirdly, the card company assumes direct liability to the merchant.

So it is not strictly a pledging of credit, or that might be a shorthand way of describing it.  My learned friend’s argument at paragraph 7(a) of his written submissions about the acquisition supply, and he says he does not put it at the forefront of the case, we have dealt with in our written submissions but, essentially, and this is the acquisition supply point, there are two points to make about this.  The first is, it was not argued before the Full Court.  Secondly, even if there was an acquisition of a debt once the cardholder pays he incurs a liability on use of the card, and that is looking at a different supplier because in order to come to that argument or use that argument, my learned friend has to rely on the use of a card, not the relevant supplier which is the provision of the facility. 

My learned friend has raised this further argument and he says when the cardholder goes to the bookshop and buys a book, he incurs a debt to American Express and American Express acquires a debt and that might be an acquisition of a – that might be financial supply because it is an acquisition.  The answer to that in the context of this case is, first, the consideration is going the wrong way.  American Express pays no consideration to a cardholder for that debt and if one adopts the broad view of consideration, the consideration is going to the merchant. 

What happens when a cardholder goes and buys the book is that American Express’ cardholder becomes indebted to American Express and American Express becomes indebted to the cardholder, and that just demonstrates how silly it is, with respect, to isolate the payment system into the merchant side and not treat the cardholder side of the equation as being part of the payment system.  It just demonstrates, with respect, that the two are so closely interrelated. 

My learned friend again complained about the lack of evidence in relation to the payment system.  The fact of the matter is in our pleadings and in our objection we argued that the relevant supply of the card was not a financial supply.  We say we were entitled to raise the payment system point on that basis. 

HAYNE J:   Was there any express reference anywhere in the affidavit evidence or the appeal statement to payment system?

MR DE WIJN:   Not in the appeal statement but there was in the written submissions to Justice Emmett.

HAYNE J:   Or in the affidavits was my question, Mr de Wijn.

MR DE WIJN:   In the affidavits, we say there was because what we put into evidence was the contracts between American Express and the merchants, we put into evidence the contracts between American Express and the cardholders, samples of the contracts, obviously not all of them.  We put into evidence samples of invoices and we had a great deal of evidence about the way in which the cards were marketed to cardholders, to companies and we had a great deal of evidence about the purpose of the cards, what the facility was, why they were marketed and a great deal of evidence about how the amounts due by cardholders were recovered. 

So we say that all went to two things.  It went to consideration and it went to payment system.  It is obvious, with respect, that we focused on the cardholder side of the payment system because the relevant supply that was identified – and we are not really in disagreement about that – was the supply of the card or the right to use the card to the cardholder.  So while it is true that the words “payment system” does not appear expressly in the appeal statement, as the Court of Appeal said and Justice Dowsett said, the case before Justice Emmett was clearly run in opening and in the written submissions on the basis that an alternative argument, or perhaps the primary argument because logically it comes first, but that does not matter which, was the payment system point.  It was run and it was argued.

Now, my learned friend says there is not enough evidence about payment system.  We say the payment system is a relatively simple system.  There is no magic black box.  The payment system in this case consists of American Express as the operator and it has, essentially, two sets of contracts, one contract with merchants and one contract with cardholders, a number of types of cardholder contracts, but samples of those were all put into evidence and unlike the Visa system where you have interchange fees and relationships between an issuer bank and acquirer bank, you do not have that in our system, which is a lot more simple. 

All that happens is that American Express signs up a merchant.  American Express signs up a cardholder.  There is evidence of those two contracts.  When a cardholder uses the card we know what happens by looking at the contract.  The cardholder becomes indebted to American Express, pays American Express.  The payment terms are set out in the agreement and we say that is sufficient.

FRENCH CJ:   Do you say that the funds transfer system which is an element of the definition of “payment system” is defined by the contractual documents?

MR DE WIJN:   It is defined by the contractual documents and the use of the card.

FRENCH CJ:   What do you mean by the use of the card as something distinct from the contractual documents?  I am looking to a definition of a funds transfer system.

MR DE WIJN:   I think your Honour is right.  It is the contracts and the system is put into effect, probably, by the use of the card.  But the system is provided by the two contracts – or the two sets of contracts. 

FRENCH CJ:   It is a particular kind of funds transfer system.  It has to be one that facilitates the circulation of money.

MR DE WIJN:   Yes, and we say it does because it facilitates the circulation of money because what it contemplates is that the cardholder will use the card and not stick it on a shelf and not use it, but the cardholder will use the card to pay for goods and services.  So that is the whole object of the card.  There is evidence that the card was designed as an alternative, originally, to travellers’ cheques.  There is a lot of evidence about how the card is marketed to corporates and people like that.  So, we say, it facilitates the transfer of funds by the cardholder.

FRENCH CJ:   That is that question I asked, not entirely facetiously, earlier.  In a sense, you are saying that it is enough that it is a funds transfer system.  The rest is tautologous. 

MR DE WIJN:   That is probably correct.  Sorry, your Honour is drawing the distinction between procedures, yes.  That is why we took your Honours to the definition of “money” which expressly includes payment by credit cards.  So what this system facilitates is a payment by credit card.  We would have thought that in a statutory context where we have this broad definition of payment systems, been dealt with by Justice Tamberlin, no doubt your Honours could reconsider that but, we say, the reasoning of Justice Tamberlin is perfectly apposite. 

Here, it is used for a different purpose, but to all intents and purposes, the same meaning and our argument, we say, is bolstered compared to the argument before Justice Tamberlin by the definition of “money” which includes payment by credit card.  That is precisely what we have.  The Commissioner might not like it, but that is precisely what we have and we have a statutory regime which contemplates that if you have something that fits into financial supply or fits into subregulation 12 – point 12 – then the payment system trumps it. 

My learned friend then says, “Well, look, that’s all terribly, terribly silly because the administration falls into a heap”.  With respect, the consideration for the facility is simply the annual fee.  It may or may not be that the annual fee would be taxable - I will come to that in a moment - but the consideration for the facility is simply the annual fee.  The consideration for the facility is not the actual money passing day in, day out.  One has to look at the supply.  The supply that is identified is the grant of the card, the right to use the card, and that is the annual fee.

If I might now deal with my learned friend’s inconsistency point.  He says we cannot have it both ways.  What we say is that we are entitled, and it is appropriate for this issue to be determined properly to determine whether or not this is a payment system.  We are not trying to have it both ways.  What has happened is that in this case, as the Commissioner said in his outline, the Commissioner has issued a ruling to the effect that the annual fee is a binding ruling to the effect that the annual fees are not taxable.

Consistent with that, my client has not passed on the tax to its clients but we would in fact, in monetary terms, be better off.  That does not make any difference as to how the Act is interpreted but we would be better off if they were taxable and they were passed on but in the light of a ruling from the Commissioner saying – and this is a consumption tax – saying that the annual fees are not taxable - my learned friend concedes that that the ruling has been given – it would have been entirely inappropriate for us to pass them on to customers and say, “Well, you should pay an extra 10 per cent”.

We are entitled, we say, to rely upon the ruling but that deals with a completely separate question.  That deals with the question of whether the Commissioner will need to change the ruling and things might need to change in the future but that does not govern - the Commissioner’s ruling and his past administration does not govern whether this is a supply of a payment system or a funds transfer system.  If it is then the Act ought to be administered properly in accordance with law.  It is not a case, with respect, where the interpretation of the legislation should be driven by the way in which the Commissioner has administered the Act in the past.

Your Honours, I just want to go back and deal with the amendment point because I think my learned friend really cannot have it both ways.  He has to concede – perhaps he can have it both ways, he has had it both ways so far – but my learned friend really says we did not need the amendment.  Well, he applied for the amendment and he got the amendment. 

Can I take your Honours to court book 2 at page 491.  In a sense, it does not matter where this construction started, but at 491 – this is the Commissioner’s audit report which was given to the Full Court but subsequently with further submissions leave was granted for the further submissions to be filed on this basis.  At 491 your Honours will see “Decision/recommendation” at about line 15.  This is the audit report:

By classifying revenue derived from late payment and delinquency fees as consideration for an ‘out of scope supply’ AEII has increased its own input tax credit claims . . . The Tax Office believes that these fees –

that is the default fees –

represent consideration for an input taxed financial supply made by AEII and should be treated accordingly –

Then at the top of 494:

The Tax Office, for reasons outlined immediately above, disagrees with the classification of late payment fee and delinquency fee revenue as consideration for a supply that is outside the scope of the GST Act.

That document came with the assessment.  We then objected to the assessments and the objection was then disallowed and these documents are in evidence.  Justice Dowsett referred to the disallowance and again the disallowance document referred by the Commissioner was based upon the liquidated damages being consideration for an input tax supply.  Then when the matter gets to court, the Commissioner’s appeal statement – and I took your Honours to this a little while ago – at page 23, paragraph 26:

The payments of fees by holders of the credit cards of Amex, described in the Applicants’ Appeal Statement as “agreed damages” and in the Credit Card Terms and Conditions as “late payment fees”, are consideration paid by cardholders for input taxed financial supplies made by Amex in the relevant periods.

Over the page at 27 he says the same.  So that deals with the pleadings.  Then, as we have outlined in our submissions, the written submissions of both parties before Justice Emmett focused on consideration for input tax supply.  No reference to revenue.  It was expressly made clear before Justice Emmett that that was the basis on which the case was being run and what my learned friend says is, well, it is just a matter of construing a formula.  With respect, it is a matter of construing a formula upon a common understanding.  The understanding of the parties was that the formula worked in a particular way.  We say that makes perfect sense because consideration for are words of the Act, not revenue from.

Leaving that to one side, we were not limited to the formula, we used the formula initially based upon a particular understanding of it which was a common understanding.  The Commissioner then comes along and wants to adopt a much broader view of the numerator so that he does not have this consideration problem.  We say to the Full Court, well, if he would have done that we would have run an alternative argument and we have outlined the sort of evidence we would have called.  We are not limited to the formula, we could have argued for apportionment on a number of different ways, and we gave an explanation to the Court of Appeal – and it is in Justice Dowsett’s reasons – of the four categories of evidence we would have called.

Now, with respect, that is a classic state of prejudice where we would have run a different case, or an alternative case, and the Commissioner then says remarkably before the Full Court, well, we are bound by our grounds in our objection.  Well, Lighthouse or Telex says you are not bound any more.  You can have leave of the court to change your grounds.  It is clear why we had the grounds we did; it was in response to the Commissioner’s assessment.  So with respect the amendment is simply improper.

FRENCH CJ:   Well, see, what we know about the agreement in relation to the formula is all we know that the formula was agreed between the Commissioner and the taxpayer as appropriate.

MR DE WIJN:   All we know is that there was a formula which derived from a ruling.

FRENCH CJ:   That was one adopted by Amex internally initially, was it?

MR DE WIJN:   Yes, and what we know is that then Amex used the formula.  In using the formula to recalculate its input tax credits it treated the liquidated damages as being amounts that were not consideration for any supply.  That is the primary case.  We say the damages are not consideration for any supply, but certainly not consideration for an input tax supply.

FRENCH CJ:   Not derived from?

MR DE WIJN:   Yes.  So that is the way in which American Express recalculated its input tax credits.  The Commissioner investigated that and it was all in the open, but the Commissioner looked at that.  The Commissioner took a contrary view.  I have shown your Honours the audit report, and then the objection was lodged and then the reasons for decision disallowing the objections are at 359 of the court book, volume 1, and point 2 at the top of page 359, the question is:

Do the late payment fees paid by holders of credit cards form part of the consideration for a supply other than the provision of an interest in or under a debt, a credit arrangement . . . 

No.

So again consideration is what is being focused on.  This whole matter was argued before the Full Court and Justice Dowsett said it was patently incorrect that this error was one that was attributable to us.  We say it is not an error at all, but the use of the phrase “consideration for” in substitute for “revenue from” was something that both parties accepted.  The Commissioner expressly based his audit report and assessment on that concept of “consideration from” and that is the basis upon which the case proceeded and the basis upon which it was argued. 

The only reason the Commissioner wanted to changed to change his grounds of appeal was because he thought “revenue for” would give him a better opportunity to get the dollars into the enumerator.  Well, I mean, that is obvious and in those circumstances we say we were well entitled to say that is not the way the case was run, we would have run an alternative case and called further evidence.  If your Honours please.

FRENCH CJ:   Yes, thank you, Mr De Wijn.  The Court will adjourn briefly to consider what course it should take in this matter.

AT 3.48 PM SHORT ADJOURNMENT

UPON RESUMING AT 4.03 PM:

FRENCH CJ:   The issues that arise in these applications arise from the proper construction of a formula agreed between the applicants and the Commissioner as a means for determining the relevant operation of A New Tax System (Goods and Services Tax) Act 1999 (Cth). Having regard to the way in which the applicants chose to conduct their cases at trial this case, in our opinion, is not a suitable vehicle in which to explore questions about the proper construction and application of regulation 40‑5.12 made under the Act.

What is a payment system, what constitutes access to a payment system and what constitutes the supply of other related services by a participant in a payment system to a third party were matters about which the applicants raised no issue in the appeal statement they filed before trial in the Federal Court of Australia.  They were not matters addressed directly in the affidavit evidence filed on behalf of the applicants.

Such argument as was addressed at trial to these questions was subsidiary to the chief focus of the applicant’s arguments that the assessments in issue were excessive because amounts paid by cardholders as liquidated damages or late payment fees were not paid as consideration for a “supply” within the meaning of section 9‑10 or a “financial supply” within the meaning of section 40‑5 of the Act.

In respect of those issues that were the chief focus of argument at trial and the challenge to the exercise by the Full Court of its power to permit an amendment, we are not persuaded that an appeal would enjoy prospects of success sufficient to warrant the grant of special leave.  We are not to be taken as endorsing the correctness of what was said by the Full Court of the Federal Court in relation to any of the issues of construction that were agitated in that court.

In each application special leave will be refused with costs.

The Court will adjourn until 2.15 tomorrow afternoon.

AT 4.05 PM THE MATTER WAS ADJOURNED