Commissioner of Taxation v Reliance Carpet Co Pty Limited

[2007] HCATrans 809

[2007] HCATrans 809

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Melbourne  No M83 of 2007

B e t w e e n -

THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

Applicant

and

RELIANCE CARPET CO PTY LIMITED

Respondent

Application for special leave to appeal

KIRBY J
HAYNE J
CRENNAN J

TRANSCRIPT OF PROCEEDINGS

AT MELBOURNE ON FRIDAY, 14 DECEMBER 2007, AT 10.48 AM

Copyright in the High Court of Australia

MR A. ROBERTSON, SC:   May it please the Court, I appear with my learned friend, MR J.O. HMELNITSKY, for the applicant.  (instructed by Australian Government Solicitor)

MS J.J. BATROUNEY, SC:   If the Court pleases, I appear with my learned junior, MR C.M. SIEVERS, for the respondent.  (instructed by Ambry Legal)

KIRBY J:   Is this the first time that the GST legislation would be visiting the Court?

MR ROBERTSON:   Yes, in substance, your Honours.  There have been at least one, maybe two, unsuccessful applications for special leave but not on a topic we would submit at the heart of the operation of the Act, that is the notion of supply to which we have drawn attention in our submissions.

KIRBY J:   Yes.

MR ROBERTSON:   Your Honours, the application concerns, as Presidential Member Olney held in the Administrative Appeals Tribunal ‑ ‑ ‑

KIRBY J:   He was in your favour, was he not, on this point?

MR ROBERTSON:   Yes, on the first and major point.

KIRBY J:   Yes.

HAYNE J:   You are very quick to tell us that “supply” is a very wide definition and that there are lots of ample words there.  Which words are engaged in this case?

MR ROBERTSON:   In my submission, your Honour, on the primary argument the opening words are sufficiently engaged.  Your Honours would have seen the definition of “supply”, that is, 9‑10(1):

A supply is any form of supply whatsoever.

That is a definition section in 9‑10(1), as one can see from section 195(1) and then subsection (2) starts by saying:

Without limiting subsection (1) –

and then includes ‑ ‑ ‑

HAYNE J:   So do you depend wholly on subsection (1)?  Do you say any of subsection (2) is engaged?

MR ROBERTSON:   If it were necessary to go to it, but we would not see or say that the paragraphs of subsection (2), to which we draw attention in the submissions, that is (e), (g) and (h), we do not submit that it is necessary to go that far.

HAYNE J:   I understand that.  Which words in (e), (g) and (h) are engaged, do you say?  Leave out (h) because that is combinations.  Which words in (e) and (g) are engaged?

MR ROBERTSON:   There was a creation of a right.  We are looking here at this question, if I can put it this way in answer to your Honour Justice Hayne, the Full Court of the Federal Court said, as a matter of business approach - as the court said more than once – as a matter of practical and business point of view the vendor gave nothing for the payment of $297,500 deposit by the purchaser.  In my respectful submission, that is not consistent with the breadth of the word “supply”.  It is not consistent with the place of the specific provisions in Division 99 that deal with security deposits.

KIRBY J:   I was trying in my own mind to answer the sorts of questions Justice Hayne was asking and to see how the statute would actually bite and if you were to look at this issue from the point of view of economics what the vendor supplies - whether it falls within the Act or not is another question – is the agreement during the period of the – in accordance with the agreement for the payment of the deposit to keep the subject of the deposit off the market.

MR ROBERTSON:   Yes, it does that, amongst other things.  In other words, the vendor is under obligations, as Presidential Member Olney found.  What we submit, your Honours, is this ‑ ‑ ‑

KIRBY J:   What is that a supply of?  Is it a supply of a service or a supply of a benefit or a supply of what, within the statute?

MR ROBERTSON:   It is an entry into at the very least, by the vendor of “an obligation”.  I am looking, now, at the words of paragraph (g).

KIRBY J:   I see:

an entry into, or release from, an obligation:

(i)       to do –

something, namely, to keep the subject of the contract on the market.

MR ROBERTSON:   It is an obligation not to deal with the property in a matter inconsistent with the contract.

KIRBY J:   And to hold it open for sale during that period.

MR ROBERTSON:   So there is an entry into a contract, there is a payment of $297,500 and ‑ ‑ ‑

KIRBY J:   What was the contract in this case?  What exactly was it?

MR ROBERTSON:   It was a contract for the sale of land.

KIRBY J:   So it is just an ordinary sale of land?

MR ROBERTSON:   Yes.

KIRBY J:   That is the sort of thing that is going to come up, one would think, all the time.

MR ROBERTSON:   Exactly.  So particularly where, as Presidential Member Olney says at page 6:

There is nothing out of the ordinary about the contract . . . It can properly be described as a standard contract for the sale of real estate.

HAYNE J:   Let me just understand it.  Does it follow that part of your contention which you say you do not need to get to because 9‑10(1) is engaged, but part of your contention is that when you enter a contract for the sale of land you enter into obligations as vendor to do something, namely, complete the contract in accordance with its tenor.  The supply is made in return, in this case, for the earnest of good faith constituted by the deposit, GST is payable on the deposit, the amount of the deposit.  Is that right?

MR ROBERTSON:   It would be payable then and there but for Division 99, which I will come to in a moment.

HAYNE J:   Ordinarily payable then and there and it bites later in events on forfeiture through, what is it, Division 99, is that it?

MR ROBERTSON:   Yes, which delays.  We would say Division 99 assumes the correctness of what your Honour just put to me but delays the payment because one does not know, until the point of forfeiture, how the deposit is going to be treated and that has been of course the law ever since Howe v Smith in 1884.

KIRBY J:   Now, out of the munificence of the Commissioner, you are offering to pay the respondent’s costs, including of this application I see.

MR ROBERTSON:   Yes, that is so.

KIRBY J:   Yes.

CRENNAN J:   The Full Court identified three alternative ways in which the Commissioner put the argument about supply - application book 29 and 30, and I take it they are repeated here?

MR ROBERTSON:   No, subject to one matter, your Honour.  We do not put, because on reflection we think it is perhaps confusing, what was described below as the deemed supply argument.  What we do put about Division 99 is what I have put in answer to Justice Hayne, that is that it proceeds on an assumption, you do not need to go, as I would put it, an unnecessary step further and to say from that one could see a deemed supply.  It fits better with ordinary principles of statutory construction, in my respectful submission, that you say – you look at the words of Division 99, you probably do not have to look at the explanatory memorandum but the assumption is, as I was discussing with your Honour Justice Hayne, that is that there is a supply but the GST is delayed until you know whether the deposit is to be treated as part payment of not.

HAYNE J:   That follows from 99‑5:

not treated as consideration for a supply, unless the deposit:

(a)      is forfeited –

and then 99‑10 follows out the consequences of that, is that the way it works?

MR ROBERTSON:   That is the way it works and if I could say this, your Honours, that this is one of the very few cases where the explanatory memorandum actually deals expressly with the issue.  We set that out at the foot of page 48 and the top of page 49 of the application book, that is, a part not referred to by the Full Court but which we have set out:

“if the deposit is forfeited . . . GST is paid on the amount of the deposit”.

KIRBY J:   One of your arguments was that that scheme of the Act does not work on the basis of the decision of the Full Court.

MR ROBERTSON:   That is so, but really what the Full Court ‑ ‑ ‑

KIRBY J:   That it actually contemplates the sort of situation that has arisen in this case, expressly.

MR ROBERTSON:   We would submit it does and the Full Court has said Division 99 is not engaged because there is no supply, but if I could make, perhaps, this last point, your Honours, that really what has happened is that the Full Court perhaps at an early point approached the matter in a way that we submit is inconsistent with the general law, never mind supply, and that is at 22.  This goes back to the point I was discussing with Justice Hayne.  At 22, the Full Court’s paragraph 10(1) says:

Absent Division 99, the payment by the purchaser of a deposit . . . would trigger the vendor’s GST liability under the general attribution rules as a part payment –

but that is of course to ignore that a deposit has a dual function. You do not know that it is a part payment until the time for completion has arisen and until it is part payment, to adopt the words that Justice Hayne was putting to me, it is an earnest performance and of course it cannot be said that the vendor is supplying nothing, which is really what the Full Court is saying.

KIRBY J:   It is a rather short point but you say an important one for the scheme of the GST legislation and is likely to arise many, many times.

MR ROBERTSON:   We do so submit.  Indeed we do, your Honours.

HAYNE J:   One further point, Mr Robertson, if the contract is performed according to its terms and completed, what is GST payable on, the whole of the consideration payable under the contract, including the deposit that is prepaid?  Yes, I understand that.

MR ROBERTSON:   Yes, because that has now become part payment.

HAYNE J:   Yes.

MR ROBERTSON:   Dealing, of course, as we are here, with a commercial transaction, not a ‑ ‑ ‑

CRENNAN J:   Yes, a taxable supply.

HAYNE J:   Yes.

MR ROBERTSON:   A taxable supply.  We are not dealing with what people call homes.  Could I go back one step to your Honour Justice Crennan’s question.  We have put an alternative which is that if we are wrong about the supply at the time of entry into the contract then the second of the three alternatives that we put in the Full Court we would wish to agitate as well.

KIRBY J:   Yes, anything else?

MR ROBERTSON:   I do not think so, thank you, your Honour.

KIRBY J:   Yes, very well.  Ms Batrouney, your client has got caught up in a very big case, unfortunately, but they do offer to pay the costs both on this application and in the Full Court, so why should we not bring it up?  It does have the ring of an important case.

MS BATROUNEY:   They do, but, your Honour, we submit very briefly that there are two reasons why special leave ought not to be granted in this case:  firstly, that there are insufficient differences of opinion in the courts below and, secondly, that the case raises no question of law of sufficient public importance.  Turning to the first one, in each situation where the application of the GST has been considered by the courts, the courts have taken a single line that the characterisation is to be performed by reference to a practical and business point of view and not by dissecting a contract into a myriad of different rights and obligations, which is what we say the Commissioner is seeking to do in this case.

KIRBY J:   The difficulty that I have at the moment on that is that the dissection appears to be contemplated by the provision of the Act to which reference is made but, more importantly, from a business point of view, there is an economic interest in taking deposits and they do give an economic advantage to the purchaser and, therefore, it does have an economic interest, therefore, one would think it attracts, prima facie, the tax if it falls within the word “supply”, as defined.

MS BATROUNEY:   Your Honour, this very situation has been considered by the European Court of Justice in the Société thermale Case, which I apologise was handed to your Honours late yesterday afternoon.  That case considered whether or not a deposit for hotel accommodation would be subject to very similar, if not identical, legislation.  There the European Court of Justice said that what the deposit is paid for is not some sort of reservation service.  They looked at what the essential character of the payment was for.  The payment was for accommodation.  The accommodation was not provided.  There was no supply.  Therefore, there was no taxation event.

HAYNE J:   Did that legislation have the idea of supply as an entry into an obligation to do something?

MS BATROUNEY:   Yes, if I could just look at the ‑ ‑ ‑

HAYNE J:   It is the first time I think the Tax Act has taken itself into the European Court of Justice, but there you go.

MS BATROUNEY:   If I could take you to – the decision is at tab 12 of our book of authorities.  You will see at paragraph 4 that the European Court of Justice refers to Article 2(1) of the Sixth Directive, that is:

‘the supply of goods of services effected for consideration within the territory of the country by a taxable person acting as such’ is subject to VAT.

More importantly, from Justice Hayne’s point of view, Article 6.1 says:

“Supply of services” shall mean any transaction which does not constitute a supply of goods within the meaning of Article 5.

Such transactions may include inter alia:

…

‑obligations to refrain from an act or to tolerate an act or situation.

KIRBY J:   So there is an analogy between them.

MS BATROUNEY:   There is an analogy, your Honour.

KIRBY J:   You are making the case sound more interesting, now, referring to the European Court of Justice.

MS BATROUNEY:   We simply make the point that every court that has dealt with this issue has dealt with it in the same way and that is to not dissect the contract into 52 obligations going one way and 52 obligations going the other way, it has looked at the essential character of the transaction.  The Commissioner has not been able to point to any division of opinion in the superior courts at all on this matter.

Secondly, we say that now that the Commissioner has dropped his deeming case this is no longer a case about statutory construction.  In each case the issue will be the proper characterisation of the particular transaction in issue.  If I could take your Honours to one last passage and that is to the House of Lords decision in Dr Beynon which is at tab 11 in our authorities.  We say this in a nutshell puts down why this Court ought not to be troubled by this case.

Tab 11, if I could take you to page 1097, the decision of the House of Lords - while you are getting there, this was a decision about when a doctor injected a drug into a patient whether it was a separate service of injecting the drug and a separate medical service or it was just one whole service of providing a medical service.  In this case at paragraph [20], which is at about point 5 on the page, your Honours, the House of Lords referred to an earlier case and they said:

The Court of Justice observed . . . that the diversity of commercial operations made it impossible to give exhaustive guidance as to how to approach the problem correctly in all cases.  Regard should always be had to the circumstances in which the transaction took place.  Every supply of ‘a service’ is by definition distinct and independent but a supply which ‘from an economic point of view’ comprises a single service should not be artificially split into separate ‘services’.  What matters is ‘the essential features of the transaction’.

KIRBY J:   I would agree with that if we were talking about 52 split services, but the service of giving a deposit and taking the economic advantages that flow from a deposit which are distinct, separate if the contract goes off is not 52, it is one, and it is a very common one and it is therefore one that is going to arise many, many times and from a point of view of principle if the word “supply” does not apply in that case then what the High Court would be saying to Parliament is you have to have one those awful, horrible express little provisions if that is what you want to do, instead of dealing with it conceptually within the general extended meaning of supply.

MS BATROUNEY:   Yes.

CRENNAN J:   None of the cases to which you have taken us really deal with Mr Robertson’s point which is it cannot be said, he submits, that the vendor is supplying nothing, in these circumstances, as by reference to the debate he had with Justice Hayne about how a deposit operates, what it is.

MS BATROUNEY:   Yes.  As I say, that was the – in the Dr Beynon Case they said that – I am sorry, the Société thermale Case where they said that where a service does not eventuate and the deposit is forfeited there is nothing supplied.  So the European Court of Justice has dealt with this issue.

CRENNAN J:   That is the point I am making, you have vendor obligations.

MS BATROUNEY:   In this case the hotelier has an obligation not to resell the room but to hold the room for you in the same way as the vendor of land has an obligation not to resell the land.  The hotelier has an obligation not to resell the room and it was argued that that obligation not to resell the room was what is called a reservation service and the European Court of Justice said, no, you look at the essential character and the essential character of the transaction was that there was nothing supplied at the end of the day.

KIRBY J:   If the matter is granted special leave we would certainly have to look at these decisions of the European Court of Justice because they must have some principle that has led them to this view that you do not split up supply, because on the face of things supply does apply to every time you supply.

MS BATROUNEY:   Yes.

KIRBY J:   From my ignorant point of view I would have said the supplying of the service of holding a room for you is a supply, so I would want to understand why they have said it is not.

MS BATROUNEY:   That is what we say is the courts have unanimously taken a view that you take a practical and business point of view and that you do not indulge in a juristic dissection of the contract.

KIRBY J:   Yes, but it is very practical, if you turn up and the room is not there.

HAYNE J:   That is the point, Ms Batrouney.  That is the point, that the contract you have with the hotelier is that the hotelier will supply you with a room.  The contract you have on sale of land is that the contract will be completed according to its terms.  If you do not seek supply of the room from the hotelier there is nothing supplied, but the imposition of the obligations under the contract of the sale of land is radically different.  There there is the supply by the undertaking of the obligations, mutually.

MS BATROUNEY:   Yes.

HAYNE J:   It is like the airline ticket, they promise you nothing, see the Court’s decision in, I think it is MacRobertson Miller Airlines.

MS BATROUNEY:   Yes.  If your Honours were minded to grant special leave in this case we would submit that the special leave question drawn by the Commissioner is too broad.

KIRBY J:   Has this been discussed between counsel, the breadth of the ‑ ‑ ‑

MS BATROUNEY:   No, your Honour.  It is a simple point, simply that ‑ ‑ ‑

KIRBY J:   Try it on us.  Tell us what you would like.

MS BATROUNEY:   The issue in this case is obviously whether deposits forfeited under contracts for the sale of land are to be subject to taxation whereas the Commissioner’s question is not confined to contracts for the sale of land.

HAYNE J:   Be it so, the question then would become the notice of appeal.  Is the notice of appeal deficient, the draft notice at pages 42, 43?  Assume that their stated question in their application for leave is too broad, be it so, so what?  Is there a deficiency in the draft notice?

MS BATROUNEY:   No, your Honour, there is no deficiency in the draft notice.

HAYNE J:   There you are.

MS BATROUNEY:   The final matter I would raise, your Honours, is that if leave were to be granted, the respondent will file a notice of contention raising that the two alternate contentions not considered by the Full Court be considered by this Court, those being that the forfeiture of deposit is in the nature of damages and that damages are not a supply.  It has been held in various cases that damages are not a supply unless there is an underlying supply for which the damages are paid.  Secondly, we would argue that the mere extinguishment ‑ ‑ ‑

KIRBY J:   That was not argued before Mr Olney, was it?

MS BATROUNEY:   I think it was, your Honour.

KIRBY J:   Was it?  I see.

MS BATROUNEY:   Yes, I think it was.  We have not changed our arguments.

HAYNE J:   It is not immediately apparent to me why these would be notice of contention points.  If they are, so be it, put on a notice of contention, but it is not immediately apparent to me that they are.

MS BATROUNEY:   Yes, and, secondly, that the mere extinguishment of existing rights ‑ ‑ ‑

KIRBY J:   You might consider whether they are cross‑appeal points.

HAYNE J:   You are not seeking some different order, are you?

MS BATROUNEY:   No, we are not, your Honour.

HAYNE J:   You seek to support the order in the Full Court?

MS BATROUNEY:   Yes, your Honour.

KIRBY J:   So, if they are anything, they are notice of contention points?

MS BATROUNEY:   Yes, your Honour.

KIRBY J:   Yes.  If we are going to bring it up we had better have it all.

MS BATROUNEY:   Yes, your Honour

KIRBY J:   Yes, thank you very much.

MS BATROUNEY:   If your Honour pleases.

KIRBY J:   Do you want to put anything on the record, briefly, Mr Robertson?

MR ROBERTSON:   I would like to say just two things about the European decision.  First of all, I embrace what your Honour the presiding judge has put that that makes it more interesting rather than less interesting, but if your Honours were to look at paragraph 17 of that judgment, it is clear from paragraph 17 that it turns on the particular state’s concept of a deposit as being French law and I would refer to our law about the lease deposits.

KIRBY J:   I think we will not delay you on that now, today.

MR ROBERTSON:   Of course not.  The other thing, your Honours, is that it talks about the exercise of the cancellation option, which is not an approach to contract law, at least at that level of generality, that our law has adopted.  You do not carry with you a cancellation option as an adequate description of a breach of contract.

KIRBY J:   Yes, thank you.

MR ROBERTSON:   If the Court pleases.

KIRBY J:   There will be a grant of special leave in this application and we note that there may be a notice of contention and I assume that the matter would be less than a day in argument?

MR ROBERTSON:   That is my assumption, your Honours.

MS BATROUNEY:   Yes, your Honour.

KIRBY J:   Justice Crennan reminds me to put on the record, as we should prudently do, that we note that the Commissioner in seeking special leave has agreed that he will pay the costs of the respondent, both of this application and of the hearing in the Full Court, and not disturb earlier costs orders.

MR ROBERTSON:   Yes, and not to disturb the costs order.  There was a test case funding agreement.

KIRBY J:   We do not have to refer to that.  That is just between you and your fund.

MR ROBERTSON:   No, I am just telling your Honours that there was one.

KIRBY J:   We are not concerned in the internal machinations of the Australian Taxation Office.

MR ROBERTSON:   If the Court pleases.

AT 11.16 PM THE MATTER WAS CONCLUDED