SVYR and Commissioner of Taxation (Taxation)
[2022] AATA 3994
•24 November 2022
SVYR and Commissioner of Taxation (Taxation) [2022] AATA 3994 (24 November 2022)
Division:TAXATION AND COMMERCIAL DIVISION
File Number:2020/8488
Re:SVYR
APPLICANT
AndCommissioner of Taxation
RESPONDENT
Decision
Tribunal:Deputy President Bernard J McCabe
Senior Member R Olding
Member D MitchellDate:24 November 2022
Place:Brisbane
The decision under review is affirmed.
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Deputy President Bernard J McCabe
Catchwords
TAXATION – GOODS AND SERVICES TAX – mobile telephone and tablet accessories – where telecommunications provider granted credit to customer of its licensed retail mobile telephone and accessories outlet for purchase of accessories – where amount paid by telecommunications provider to retail outlet less than financed price repaid by customer – whether creditable acquisition by retail outlet – whether retail outlet has decreasing adjustment – significance of contractual terms – no taxable supply by telecommunications provider to retail outlet – no creditable acquisition – no decreasing adjustment – decision affirmed
Legislation
A New Tax System (Goods and Services Tax) Act 1999, ss 9-5, 9-10, 9-15, 11-5(b), 19-10(1)(b), 19-55
A New Tax System (Goods and Services Tax) Regulations 1999, ss 40-5.03, 40-5.09A New Tax System (Goods and Services Tax) Regulations 2019, s 197-1.02
Cases
AP Group Ltd v Federal Commissioner of Taxation (2013) 214 FCR 301
Archibald Howie Pty Ltd v Commissioner of Stamp Duties (NSW) (1948) 77 CLR 143
ATS Pacific Pty Ltd v Commissioner of Taxation [2014[ FCAFC 33Commissioner of Taxation v MBI Properties Pty Ltd (2014) 254 CLR 376
Commissioner of Taxation v Qantas Airways Ltd (2012) 247 CLR 286
REASONS FOR DECISION
Deputy President Bernard J McCabe, Senior Member R Olding and Member D Mitchell
24 November 2022
what is this case about?
The applicant is a retailer selling, amongst other items, mobile telephone and tablet accessories.
Under arrangements with a telecommunications provider (“Telco”):
(a)The applicant is licensed to carry on business as a branded agent for Telco’s products and services.
(b)The applicant invoices its customer for the total price of the accessories (the “Price”) it sells.
(c)Telco provides credit to the customer at one of several specified levels (the “Accessory Repayment Amount” or “ARA”). One such level of credit is an amount of $240, which we adopt for illustration purposes in these reasons. The ARA is listed on the applicant’s invoice to the customer as a credit against the cost of the accessories.
(d)In the contract between Telco and the customer, Telco promises to pay the ARA ($240 in the selected example) to the applicant on behalf of the customer.
(e)However, in accordance with its contract with the applicant, Telco pays a lesser amount (the “ARO Payment”), to the applicant. For example, where the ARA is $240, the ARO Payment is $196.80.
The GST treatment of the difference between the ARA ($240 in the example) and the ARO Payment ($196.80) - $43.20 in the example (the “Shortfall”) – is at the heart of this proceeding.
The applicant accepts it is liable for GST on the Price even though the applicant receives less than that amount due to the Shortfall. However, the applicant says without more this would be wrong as a matter of GST policy as it would result in the applicant paying GST on more than it receives for the accessories. In other words, the applicant says, it would pay an effective GST rate of more than the statutory rate of 10% of the GST-exclusive amount it receives for its supplies of accessories under this arrangement.
The applicant’s primary argument to overcome this perceived issue is that the applicant makes a creditable acquisition from Telco for which the Shortfall is consideration, and it is therefore entitled to an input tax credit (“ITC”).[1] Alternatively, the applicant says it is entitled to a decreasing adjustment.[2]
[1] A New Tax System (Goods and Services Tax) Act 1999, Division 11. All legislative references are to this Act unless otherwise indicated.
[2][2] Section 195-1 “decreasing adjustment”; s 19-55.
The Commissioner of Taxation denies the applicant is entitled to an ITC or decreasing adjustment in relation to the Shortfall. In particular, the Commissioner says there is no taxable supply by Telco to the applicant that could give rise to ITCs for the applicant[3] and no change in the consideration for the applicant’s supply to the customer giving rise to decreasing adjustments.[4]
[3] Section 11-5(b).
[4] Section 19-10(1)(b).
Even if the applicant’s submissions on these substantive issues are accepted, the Commissioner says there are other issues which would disqualify the applicant from being entitled to ITCs or decreasing adjustments attributable to the tax period under review. Those issues relate to whether the applicant has established:
(a)that any relevant ITCs were attributed to the May 2016 tax period;[5] and in that regard whether:
(b)each Shortfall should be considered separately for the purposes of the exception to the requirement to hold a tax invoice as a condition of an ITC being attributed to a tax period for low value transactions;[6] and, if not, whether:
(c)the Tribunal should exercise the statutory discretion to treat records identified by the applicant as a tax invoice for each relevant supply;[7]
(d)that, for the purposes of s 29-10(4), the applicant had, by claiming decreasing adjustments, taken the ITCs into account in its May 2016 GST return;
(e)the four-year time limit under s 93-15 for claiming ITCs does not apply.
[5] Section 29-10.
[6] Section 29-80.
[7] Section 29-70(1B).
decision under review
Prior to May 2016, the applicant accounted for GST on the Price for the accessories. The Shortfall was treated as a negative line in the applicant’s profit and loss account.
From May 2016, the applicant’s returns included GST effectively calculated only on the ARO Amount and not on the full price by claiming a decreasing adjustment of 1/11th of the Shortfall. In its May 2016 return, the applicant claimed decreasing adjustments totalling $998,568 covering the period from 1 November 2012 to 31 May 2016 said to flow from this change in GST treatment of relevant sales of accessories.
The Commissioner issued an amended assessment for May 2016 reversing the $998,568 decreasing adjustment claim and disallowed the applicant’s objection to the amended assessment. It is that objection decision which is before the Tribunal for review.
key contractual provisions
The essential facts, as summarised above and detailed further below, are not in dispute.[8]
[8] The applicant’s director and chief executive officer provided two witness statements. The Commissioner did not cross examine the CEO or challenge her witness statements. This description of the arrangements is drawn from the CEO’s witness statements and the contractual documents mentioned.
The applicant’s relationship with Telco is governed by a dealership agreement under which Telco grants the applicant a licence to promote Telco’s products and services and authorises the applicant to participate in various promotions and programs operated by Telco. The dealership agreement expressly states the applicant’s participation in a promotion is optional and at its sole discretion.
One such arrangement, which is the subject of this proceeding, is “the Accessory Repayment Option” (“ARO”). A schedule to the dealership agreement describes the ARO as follows:
Accessory Repayment Option (“ARO”) is a Mobile/Tablet Accessory purchasing option available for eligible customers on the terms of this Promotion Schedule. Customers take up an ARO in conjunction with their Eligible Plan. Under ARO, we [Telco] may offer eligible customers credit (known as a “Accessory Repayment Amount”) to cover the upfront purchase price of a bundle of eligible Mobile/Tablet Accessories, and allow customers to repay that credit by monthly repayments over a 12 or 24 month ARO term.[9]
[9] The monthly repayments are simply 1/12th or 1/24th of the Price. There is no additional interest or other charge for the credit.
The ARO is only available to eligible customers who acquire accessories from the applicant at a total price equal to or greater than the Accessory Repayment Amount. If the total price is greater than the ARA, the customer must pay the difference directly to the applicant upfront.
Unlike other Telco promotions available to the applicant, under the ARO the applicant may source the accessories from other suppliers. The applicant was therefore able to use the ARO to drive sales of its own brand of accessories. Telco would not directly enjoy any margin on these sales because it was not the supplier of the accessories. However, by paying the applicant less than the amount it received from the customer, Telco was able to enjoy a profit in relation to these accessory transactions even though it was not the supplier of the accessories. The respective amounts of profit enjoyed by the applicant and Telco were obviously tied to the amount of the Shortfall which was negotiated when the dealer agreement was entered into.
As between Telco and the customer, Telco’s customer terms describe the ARO in this way:
You can choose an Accessory Payment Option (ARO) to buy mobile accessories. You’ll be charged for your accessories in interest-free monthly payments. If you cancel your ARO, you’ll have to pay the remaining cost of the accessories.
Telco’s customer terms go on to state that “[w]e will pay the Accessory Repayment Amount directly to the relevant [Telco participating dealer ie the applicant in this case] on your behalf”.
Notwithstanding this statement, however, the terms of the dealer agreement make it clear that Telco will only pay a lesser amount, the ARO Payment, to the applicant.
Telco pays the ARO Payment to the applicant within approximately two weeks of the sale of the accessory. A clause in the relevant schedule to the dealership agreement specifically states that the ARO Payment does not constitute a fee or charge by Telco to the applicant for its participation in the promotion. Telco did not account for GST in respect of the Shortfall.
preliminary observations
The “correct” result?
The applicant’s submissions begin by submitting the “correct result” is that the net GST position of the applicant should reflect the actual amounts it receives for the sale of accessories to its customers. At a high level, the underlying policy of value added taxes such as GST is to impose tax on the price of final domestic consumption of those goods and services that form the legislated tax base. That much may be gleaned from the terms of the legislation itself with its imposition of GST on the price of supplies.[10] But to state the policy at that level of generality does not assist in this case. It merely begs the question – is the ‘price’ that is intended to bear GST intended to be the amount invoiced by the supplier and payable by the customer or limited to the amount received by the supplier?
[10] Sections 9-70, 9-75.
The terms of the relevant contract may include in the price for a supply an amount that is not required to be paid to the supplier. That might occur when the contract anticipates all or part of the consideration is directed to a third party as a condition of the supplier making the supply. In those circumstances, the amount paid to the third party would plainly fall within the statutory definition of the “consideration”[11] for a supply on which GST is required to be calculated notwithstanding that it is not received by the supplier. That suggests there is no principle of universal application that the effective rate of GST on a supply cannot exceed 10% of the amount (excluding GST) received by the supplier for the supply.
[11] Section 9-15.
Additionally, there is clearly a provision of credit by Telco to the customer. The applicant does not suggest otherwise. It is also clear the policy of the GST legislation is to input tax a supply of credit. The Shortfall is plainly connected with the provision of that credit. Whether that connection is sufficient for the Shortfall to be properly regarded as consideration for a supply of credit is a matter to be considered.
The real question before us is whether, properly characterised, the transactions fall within the relevant legislative provisions identified by the applicant as supporting its claim to be entitled to ITCs or decreasing adjustments. If that question is answered in the affirmative, we must consider whether any other provisions apply which the Commissioner says disqualify any entitlement to an ITC that would otherwise arise.
Merchant fee analogy
The applicant submitted the Shortfall is akin to a credit card merchant fee charged by a financial institution to a merchant for the provision of credit card facilities. The Commissioner treats such a fee as consideration for a taxable supply by the financial institution to the merchant and a creditable acquisition by the merchant.
We do not, with respect, find argument by analogy to be helpful to our task when the analogue itself has not been the subject of judicial or tribunal consideration. That is especially so where there may be material differences between credit card facilities and the arrangements between Telco and the applicant.
We do not have details of credit card arrangements before us, but the description provided by the applicant suggests the merchant fee is acknowledged to be for use of a credit card facility and the right to set off the merchant fee against the amount payable to the merchant is specified. Here, there is no such facility nor any agreed commission or fee capable of being set off, as the applicant asserts, against an amount otherwise payable by Telco to the applicant.
Is the applicant entitled to ITC’s?
The statutory framework
Only a recipient of a “taxable supply” may make a “creditable acquisition” and thus be entitled to an ITC.[12] For there to be a taxable supply to an entity, there must be a “supply” made to the entity and it must not be an input taxed supply,[13] such as a “financial supply” which includes the creation or grant of an interest in a credit arrangement.[14]
[12] Section 11-5(b).
[13] Section 9-5.
[14] Section 40-5. A New Tax System (Goods and Services Tax) Regulations 1999 (continued by the A New Tax System (Goods and Services Tax) Regulations 2019, s 197-1.02 in relation to working out net amounts for tax periods starting before 1 April 2019), ss 40-5.03 40-5.09.
It follows that, in deciding whether the applicant is entitled to ITCs, we must consider if (a) Telco made a supply to the applicant for which the Shortfall is consideration and (b) the Shortfall is consideration for an input taxed supply of an interest in a credit arrangement. If there is no supply by Telco to the applicant for which the Shortfall is consideration, the applicant is not entitled to the claimed ITCs. If there is a supply made by Telco, but the Shortfall is properly characterised as consideration for a supply of an interest in a credit arrangement, that supply is not a taxable supply and the applicant does not make a creditable acquisition for which it is entitled to an ITC.
The definition of “supply” is extremely broad. It includes “any form of supply whatsoever”.[15] It has been held that a supply occurs whenever one entity provides something of value to another entity. That something can be anything, and it can be provided by any means.[16]
[15] Section 9-10.
[16] Commissioner of Taxation v MBI Properties Pty Ltd (2014) 254 CLR 376, [34].
“Consideration” is relevantly defined in s 9-15(1) as follows:
(1) Consideration includes:
(a) any payment, or any act or forbearance, in connection with the supply of anything; and
(b) any payment, or any act or forbearance, in response to or for the inducement of a supply of anything.
Consideration is what is given “in order to obtain” a supply.[17] In another context, it has been said the consideration for real property is the thing that “moves” the conveyance or transaction.[18] Both formulations are consistent with “consideration” being defined, not as a stand-alone concept, but as consideration “for” a supply or acquisition.[19]
[17] AP Group Ltd v Federal Commissioner of Taxation (2013) 214 FCR 301, 310 [33].
[18] Archibald Howie Pty Ltd v Commissioner of Stamp Duties (NSW) (1948) 77 CLR 143, 152.
[19] Section 195-1, “consideration”.
Accordingly, we must decide whether the Shortfall is a payment, act or forbearance for a supply by Telco to the applicant and whether the Shortfall is consideration for an input taxed supply of credit.
Significance of contractual terms
Consideration of contractual terms is the logical starting point to determine whether a supply has occurred and, if so, the nature of a supply. The central role of contractual terms is highlighted in cases of the highest authority.[20]
[20] For example, Commissioner of Taxation v Qantas Airways Ltd (2012) 247 CLR 286.
However, we accept the applicant’s submission that the analysis is not confined to the terms of the contract and must be approached by reference to all relevant circumstances. In the context of the characterisation of a supply, the Full Federal Court observed in ATS Pacific Pty Ltd v Commissioner of Taxation:
In determining the character of a supply – what was really supplied? – pursuant to performance of an executory contract, a court is not to be “handcuffed” by the terms embodied in the four corners of the contract, the more so if the terms and conditions do not represent all the terms and conditions of the contract; or where the contract is but one link in a chain of contracts, the performance of each being related to, if not dependent on, performance of the immediately preceding contract; or where, be reference to the factual matrix of the entirety of the arrangements, the commercial and practical reality points to the conferral or provision of a supply which goes beyond the conclusion that might otherwise be drawn from a confined analysis of the terms and conditions of one contract in that chain.[21]
[21] [2014] FCAFC 33, [39].
We see no reason why those principles should not apply in respect of identification of whether a supply has been made as well as the character of a supply.
Further, the importance of not being “handcuffed” to the contractual terms is underlined in this case where there is inconsistency between the contracts relating to the very payment in issue in the case. As noted above, the contractual terms between Telco and the customer have Telco promising to pay the ARA to the applicant, but contrary to that undertaking the dealership agreement provides for Telco to pay only the lesser ARO Payment to the applicant.
Is there a taxable supply by Telco to the applicant?
The applicant emphasised the broad ambit of the definition of supply as discussed above. Pressed to identify the supply said to have been made by Telco to the applicant in return for the Shortfall, Mr Sievers, who appeared by the applicant, said the applicant’s position is that, because participation in a promotion is at the applicant’s discretion, there is not a single supply of an ongoing right to participate in a promotion. Mr Sievers went on to submit:
So, the applicant does not contend it’s an ongoing right [of the applicant to participate in an ARO promotion]. It’s, if you like, an ongoing discretionary ability to seek permission to enter into the ARO arrangement.[22]
[22] Transcript, P-23, Lines 17-32.
It is plain to see why the applicant would seek to establish that there is no ongoing supply of a right to participate in a promotion but rather a separate supply of permission to enter into each individual arrangement with a customer. The difficulty with that submission, however, is that there is no suggestion in the contractual architecture for the ARO arrangement contained in the dealership agreement of any such separate granting of permission. We note the applicant did not point to any evidence of the applicant seeking or being granted such permission.
We have already indicated we accept the applicant’s submission that we should have regard to the commercial and practical reality of the ARO arrangements. However, that is not a licence to artificially identify a supply that is not evident from the evidence in order to achieve a perceived notion of the “correct” result.
Nor do we think it is permissible to simply take the view that “something” must have been supplied in return for Telco enjoying the benefit of the Shortfall. The GST Act is premised on the character of a supply being identified. For example, it is necessary to determine the character of a supply to determine whether the necessary connection with the “indirect tax zone”, for a taxable supply to be made, is present, and also whether any exemption applies.[23]
[23] Section 9-25, Divisions 38, 40.
On the other hand, to conclude the applicant gave up a substantial proportion of the Price in return for nothing at all, on the basis that no benefit is expressly identified in the documents or dealings between the applicant and Telco, may be regarded as a victory of substance over form. In our view, the practical and commercial reality of the arrangements is that Shortfall is the cost the applicant bears if Telco provides credit to the customer.
If that analysis is correct, the applicant’s acceptance of the Shortfall may be regarded as an “act or forbearance” in connection with a supply of credit to the customer which is the price the applicant pays “for” Telco to make a supply of credit to the customer. That analysis strikes us as more closely aligned to the commercial reality of the ARO arrangements than, as the applicant urges, a supply of “permission” being made on each occasion a customer takes advantage of the ARO promotion.
Strictly speaking, it is not necessary for us to decide whether (a) there is no supply by Telco to the applicant for which the Shortfall is consideration or (b) the Shortfall is consideration for an input taxed financial supply. Either conclusion would mean there could be no taxable supply to, and therefore no creditable acquisition by, the applicant and no ITC entitlement.
If it were necessary for us to decide, we would favour the view that the Shortfall is consideration for a financial supply of credit. The inconsistency between the customer terms and the dealer agreement makes it clear the contractual documents do not fully or accurately describe the whole of the ARO arrangements between applicant, the customer and Telco. Those circumstances weigh against a conclusion based primarily on the absence of any identified supply in the contractual documents. Commercial reality favours the view that the Shortfall is simply the price the applicant pays for Telco extending credit to the customer. At the least, in our view the applicant has not discharged the burden of proving the Shortfall is not consideration for a financial supply.
Conclusion: there is no taxable supply by Telco to the applicant
As the applicant has not proved there is a taxable supply made by Telco to the applicant for which the Shortfall is consideration, the applicant has not established that it is entitled to ITCs in respect of the Shortfall amounts.
Is the applicant entitled to decreasing adjustments?
The applicant’s submission that it was entitled to decreasing adjustments was expressly described as a “fall back” position in the event the Tribunal did not accept the applicant’s primary submission that it is entitled to ITCs. Mr Sievers acknowledged the submission entailed a degree of artificiality.[24]
[24] Transcript, P-31, Lines 38-47.
As noted above, an entitlement to a decreasing adjustment may arise upon the occurrence of an “adjustment event” which includes an event which “has the effect of . . .changing the consideration for a supply or acquisition”.[25]
[25] Section 195-1 “adjustment event”.
The arrangements for Telco’s provision of credit to the customer do not involve any event that changes the consideration for the applicant’s supply of accessories to the customer. The consideration is the Price as agreed with the customer. That price never varies. Nor is there anything in the setting or execution of the bargain between the applicant and the customer that could be described as having “the effect of” changing that Price. The customer agrees to pay the full amount of the Price and pays that amount by instalments to Telco. In any case, on the view that we favour, the Shortfall would be consideration for Telco’s supply of credit to the customer; as such, it would not have the effect of changing the consideration for a different supply, the applicant’s supply of accessories to the customer.
As we are unable to identify any event that has the effect of changing the Price, we must reject the applicant’s alternative submission that it is entitled to decreasing adjustments.
disposition of the application for review
We are not satisfied the applicant is entitled to ITCs or decreasing adjustments. It is therefore not necessary for us to consider the various other submissions regarding matters that would only arise if the applicant’s substantive submissions were accepted.[26]
[26] We have considered whether we should nevertheless record our views on these various matters. However, those matters give rise to complex legal and evidentiary issues. There are also controversies regarding whether procedural fairness would be denied to the applicant by permitting the Commissioner to contest the quantum of the claims and whether the applicants should be permitted to rely upon materials filed after the close of the hearing. Having regard to the objects of the Tribunal, we consider it is not appropriate to further engage the Tribunal’s limited resources, and delay finalisation of the review, by considering and recording our reasons in respect of those matters which would not affect the outcome of the review.
In view of our conclusions set out above, the decision under review must be affirmed.
I certify that the preceding 51 (fifty-one) paragraphs are a true copy of the reasons for the decision herein of Deputy President Bernard J McCabe, Senior Member R Olding and Member D Mitchell
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Associate
Dated: 24 November 2022
Date of hearing: 31 May 2022 Date final submissions received: 16 September 2022 Counsel for the Applicant: C Sievers Representatives of the Applicant: Grant Thornton Australia Limited Counsel for the Respondent: M Ballans Solicitors for the Respondent: Australian Taxation Office Litigation and Legal Services
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