ATS Pacific Pty Ltd v Commissioner of Taxation; Stella Travel Services (Australia) Pty Ltd v Deputy Commissioner of Taxation

[2014] HCATrans 237

[2014] HCATrans 237

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney  No S95 of 2014

B e t w e e n -

ATS PACIFIC PTY LTD

Applicant

and

COMMISSIONER OF TAXATION

Respondent

Office of the Registry
  Sydney  No S96 of 2014

B e t w e e n -

STELLA TRAVEL SERVICES (AUSTRALIA) PTY LTD ACN 003 237 296

Applicant

and

DEPUTY COMMISSIONER OF TAXATION

Respondent

Applications for special leave to appeal

GAGELER J
KEANE J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 17 OCTOBER 2014, AT 12.33 PM

Copyright in the High Court of Australia

____________________

MS R.L.SEIDEN, SC:   May it please the Court, I appear with my learned friend, MS C.J. CONWAY, for the applicant.  (instructed by Mills Oakley Lawyers)

MR A.H. SLATER, QC:   If the Court pleases, I appear with my friend, MS M.M. BRENNAN, for the respondent in both matters.  (instructed by Australian Government Solicitor)

GAGELER J:   Ms Seiden.

MS SEIDEN:   Thank you, your Honours.  Your Honours, the applicants contend that there are five reasons why this Court should grant special leave.  The first contention is that the decision of the Full Court of the Federal Court was unorthodox and the questions are novel. 

GAGELER J:   Well, you accept the reasoning in Saga Holidays, I take it.

MS SEIDEN:   Well, Saga Holidays, your Honour, was determined on the basis of an agreed fact that Saga had in fact provided the supplies of the products.  So in terms of the underlying fact in Saga Holidays then the reasoning follows.  However, what is at issue here is an anterior question and what, in fact, is the supply.  With respect, Saga Holidays – that question had been agreed by the parties and the question was really, does that particular supply have the requisite connection to Australia and it is accepted that that supply has the requisite connection to Australia.  So to that extent, that reasoning is accepted by the applicants, your Honour.  However, we say that the questions here arise at an earlier stage and require a different analysis.

The starting point for the applicants’ contention is the statutory question which is found in section 940 which is what is the taxable supply that you make, you the taxpayer?  It is submitted that the Full Court of the Federal Court erred in focusing on what the tourists received, particularly in the context of this multiparty chain of contracts.  Focusing on what the tourists ultimately receive draws attention away from the supply that the applicants actually made.

KEANE J:   So why is this not just a case about deciding as a matter of fact what it is that is supplied?

MS SEIDEN:   Primarily, your Honour, for the reason that the methodology that was adopted by the Full Federal Court is challenged by the applicants and that methodology, in effect, it is contended, was that the Full Federal Court focused entirely on the practical business test and what it is that the tourists received.  Whilst the Act is colloquially referred to as a “consumption tax” it is, in fact, a tax on supplies and the question is when you have a multiparty chain of contracts, how does one determine what the supply is. 

When you have a contract between the applicants and the non‑resident tourists, it is important to at least start with the contractual terms then it might be relevant to look at the wider business purpose but it is submitted that the Full Court went straight to that second step and, particularly, when one has regard to the critical supply that was identified in this case that was a contractual promise that the applicants would use their best endeavours to ensure that the tourists receive the product. 

Arriving at that critical supply or being satisfied that there was no error by the primary judge in identifying the critical supply as a contractual promise their Honours erred in not undertaking a contractual analysis. Their Honours, with respect, did so on the basis that, generally speaking, the GST Act is considered as a consumer tax, it is a businessman’s tax and it is a tax on business transactions and, with respect, their Honours went straight to that question and identified the critical supply being a contractual promise without having regard to the terms of the contract and was that conclusion inconsistent – did it vitiate the terms of the contract. There was certainly no allegation of sham.

It is submitted that that raises the question of the utility of the business test, particularly in the context of a chain of contracts when the Act requires one to focus on the supply that you, the taxpayer, makes.  Therefore, it is the methodology that the applicants are really putting under microscope, your Honour, and not simply a question of a wrong finding of fact.  I apologise, it was a longwinded answer.

GAGELER J:   Was there a mischaracterisation of the contractual arrangements?  Was there a misunderstanding of them in some way?

MS SEIDEN:   Well, your Honour, they simply did not look at the contract.

GAGELER J:   But, if they had, what would they have found that is critical to your argument?

MS SEIDEN:   Well, that that particular supply, the supply of a promise to ensure the products would be delivered to the tourists was simply not there.  That is simply not a supply that the applicants make.  By identifying the critical supply as a contractual promise and not having regard to the contractual provisions – and it was accepted that the written terms of the contract were thin and did not encapsulate the four corners of the agreement, but, nevertheless, their Honours entirely shunned the necessity to look at how the practical arrangements actually affected the contract between the parties.

The applicants contend that there is another very important reason why it is was important that the contractual – whether there was a contractual right was looked at and that comes from section 38‑190.  That is the provision that says if you have a – what would otherwise be a taxable supply but it falls into section 38‑190 then it is deemed to be GST free.

There are a couple of important exclusions in that provision and, relevantly, the exclusions are when you have a contractual right over land or you have an enforceable right in relation to something that is connected with Australia, yet again, another reason why the terms of the contract really needed to be scrutinised, your Honour.

Could I take your Honours to those two important key provisions?  They are both in the joint book of authorities.  At page 141, your Honours will find section 9‑40:

You must pay the GST payable on any taxable supply that you make.

It is submitted that that is a novel question when one is dealing with a chain of contracts.  It is not a question that this honourable Court as yet considered.  “Taxable supply” is then defined at section 9‑5 which appears at page 137:

You make a taxable supply if: 

amongst other things:

(a)       you make the supply for consideration; and -

at the foot of that section -

the supply is not a taxable supply to the extent that it is GST‑free –

That brings in section 38‑190 which appears in this book at page 145.  It is headed “Supplies of things, other than goods or real property, for consumption outside Australia”.  Subsection (1) exempts from its reach supplies that are supplies of “real property”.  Now, section 195‑1 defines real property – it is not included in the book as a section but it does appear in the extract in Saga.  So your Honours will find it at page 58.

GAGELER J:   It is also in the application book at page 95.

MS SEIDEN:   Thank you, your Honour.  Importantly, it defines “real property” to include any “contractual right exercisable over or in relation to land”.  This is one of the reasons that the applicants contend the Full Court of the Federal Court was really required to determine whether the supply in question was the supply of a contractual right and, therefore, applying an amorphous test of the business purpose just simply did not go far enough.

GAGELER J:   The Full Court summarised the contractual relationships in the words of the trial judge at page 91, paragraph 7.  Is there something wrong or incomplete with that?

MS SEIDEN:   The applicants do not cavil with the way that the Full Court described what the primary judge had done and what the critical supply was.  If I could really just draw your Honour’s attention to 32 of the Full Court decision at page 99.  This is really where the applicants contend the error is.  Their Honours were considering whether it was necessary for her Honour to have undertaken an analysis of whether there was an implied term in order to determine that there was this critical supply of a contractual right.  At paragraph 32, Justice Edmonds notes that:

I do not think it is necessary for me to decide this particular issue –

that is, the issue of whether there is an implied term -

for two reasons.  First because, in my view, it was not necessary to the primary judge’s conclusion on the characterisation issue; in my view, it was open to the primary judge to come to the characterisation conclusion her Honour did without recourse to an analysis of whether the contract between ATS and the NR Travel Agents contained a term, express or implied, that ATS promised the NR Travel Agents that the Australian Providers would provide the Products to the NR Tourists.

Then the second reason is in paragraph 33:

Secondly, I do not think it is desirable, in the interests of certainty of application of a revenue statute, for the characterisation of a supply made by performance of an executory contract, to depend upon whether or not a term can be implied into the contract –

Your Honours, for the reason that here the critical supply was defined as a contractual promise it was imperative that their Honours turn their minds to the contract and that simply saying the definition of “supply” in the GST Act is wider than things supplied under a contract. The applicants would, of course, accept that and that is why the practical business test has application within the context of the GST statute.

But here where the supply in order to be taxable had to be a contractual right and the critical supply was defined by their Honours as a contractual promise, to shun the contractual analysis and say we can get there on a practical business test is, with respect, unorthodox and particularly in the context of a chain of contracts does not pay due regard to the statute.

It is also submitted that that type of analysis is inconsistent with Reliance Carpets and Qantas.  In Qantas it was held that distilling the essence of the transaction was a process of abstraction that was simply not justified.  Their Honours there analysed the contractual terms to determine what was supplied and noted that the bargain could not be divorced from the terms of the contract.  In Reliance, the “all or nothing” approach was also not justified and their Honours entered into a detailed consideration of the bargain between the parties.  Unless there is an allegation of sham or the contract requires rectification, there appears to the applicants to be no warrant for ignoring the contract.  That is, with respect what the Full Court has done.

The second basis upon which the applicants contend that the decision below was unorthodox is the one that is raised by section 9‑40.  The question is what is the taxable supply of the applicant?  In a chain of contracts, one must focus on what the applicant provides and not what the ultimate consumer receives.  The question of what the applicant supplied is, with respect, not answered by asking what did the consumers receive and working backwards.

GAGELER J:   So what did the applicant supply, in your submission?

MS SEIDEN:   The applicant supplied an arranging and a booking service.  The primary contention is that that was the critical supply and everything else was ancillary to that.  The other supply was, perhaps, a promise to pass on the money that it received from the non‑resident travel agents - to pass that on to the Australian providers.  The actual passing on of the money is not a supply because it is expressly excluded from being so under the definition of “supply”.  But the promise to the non‑resident travel agents of “We will pass this money on to the providers” could well be a supply.

Therefore, it is submitted, that the critical supply is simply the arranging and the booking service and everything flowed from that.  The applicants were not in a position to provide a promise to supply the products or to even ensure that the products were supplied.  They booked them.  They negotiated with the providers.  They promised to pay the money and they paid the money. 

The applicants’ second contention, which is another reason why the applicants contend that special leave ought to be granted, is that this question – and it was raised on the Commissioner’s cross‑appeal – really brings up the question of whether there are two supplies, two distinct supplies for consideration or whether there is only one critical supply, whether it be the supply of the arranging and booking services or, as the Commissioner contends, a promise to ensure that the products are supplied.

Whether ultimately the applicants are correct that they did not supply this contractual promise, that second question is, in any event, raised. So, the question of how one determines, under the GST Act, whether there are two distinct supplies for consideration or one critical supply in various ancillary supplies is an important question that has not been the subject of scrutiny yet.

GAGELER J:   One contract, I take it.

MS SEIDEN:   There was a chain of contracts.  There were contracts between the ‑ ‑ ‑

GAGELER J:   One contract within a chain is what we are concerned with.

MS SEIDEN:   Indeed, indeed, but, a part of that, your Honour.

GAGELER J:   Effectively, a wholesale contract.

MS SEIDEN:   Well, that is how it has been described, your Honour.  With respect, perhaps, that again focuses on what the tourists received.  But, certainly, a part of the chain and we cannot step away from that, your Honour.  Your Honour, the second reason why it is submitted that this is a suitable vehicle for the grant of special leave is that it involves this chain of contracts which is a new novel concept that has not yet received scrutiny in this Court.

GAGELER J:   What is novel about it?

MS SEIDEN:   Well, your Honour, because it asks – the statutory question is what is the supply that you make?  When one is looking at – in the past the practical business test, or business efficacy, has been used to work out what it is that you supply.  But when you are only part of a chain and you are looking at the business efficacy of the entire transaction it puts a different perspective on it and that is a perspective that has not been yet considered – the effect of that on that business test, your Honour.

The third reason that the applicants contend for the grant of special leave is the one already averted to about the two distinct supplies and that is a novel question.  The fourth reason, your Honours, is that because the transaction crosses international boundaries, it is submitted that it has international reach and it is relevant how other jurisdictions deal with this. 

The applicants have highlighted the decision of Secret Hotels and it is accepted.  It is different legislation, different facts.  The question there was whether the travel agents were acting in their own name or as agent, but the methodology ‑ ‑ ‑

GAGELER J:   Well, it is not going to help you much in your last minute or so, is it, to take us to different facts and different legislation?

MS SEIDEN: Thank you, your Honour. Your Honour, the fifth reason for the grant of special leave is that it is a multi‑billion dollar industry. There are several cases that have already been filed in the Tribunal and the courts that are being held up and that is referred to in the affidavit of Mr Cliff. It is a suitable vehicle. There are no primary facts in dispute. There was a statement of agreed facts of very short compass and it is the legal significance of the interplay of those facts and how they should be approached under the GST Act that is the question.

Finally, your Honours, the respondent has, in his submissions, raised a novel assertion which is that section 38‑190 does not apply to supplies being made from Australia.  The applicants contend that that submission is wholly inconsistent with Travelex which was a case decided about 38‑190 about a supply made of foreign currency at an Australian airport.  So if that contention is to be ventilated it is certainly inconsistent with Travelex and unsupported by the context for the reasons that have been articulated in the reply. 

GAGELER J:   Thank you, Ms Seiden.  We do not need to hear from you, Mr Slater.

This case turns on the characterisation, for GST purposes, of particular commercial arrangements.  We are not persuaded that it raises any issue of general importance sufficient to warrant a grant of special leave to appeal.  Special leave is refused with costs.

AT 12.54 PM THE MATTER WAS CONCLUDED