Canterbury Jockey Club Incorporated v Commissioner of Inland Revenue
[2018] NZHC 2569
•1 October 2018
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
I TE KŌTI MATUA O AOTEAROA TE WHANGANUI-Ā-TARA ROHE
CIV-2016-485-383
[2018] NZHC 2569
BETWEEN CANTERBURY JOCKEY CLUB INCORPORATED
PlaintiffAND
COMMISSIONER OF INLAND REVENUE
Defendant
Hearing: 2 October 2017 and 20 July 2018 Appearances:
M G Colson and A Y Ronald for the Plaintiff
P H Courtney and D M Consedine for the Defendant
Judgment:
1 October 2018
JUDGMENT OF CULL J
TABLE OF CONTENTS
Factual background 5
Racing governance 8
Races 14
Clubs 15
Canterbury Jockey Club and the current dispute 22
Relevant law 28
What is “supply”? 37
The Rules of Racing 41
Question 1: Do trainers and riders supply services to the Club? 46
(a) What is the legal arrangement among the Canterbury Club, trainers and riders? 47
Parties’ positions 47
Legal principles on contract for supply 51Discussion 57
Conclusion 71
(b) What services do trainers and riders provide on race day and to whom? 73
Parties’ positions 73
Discussion 76
The Club’s business 79
CANTERBURY JOCKEY CLUB INCORPORATED v COMMISSIONER OF INLAND REVENUE [2018] NZHC 2569 [1 October 2018]
The Rules on stakes payments 80
GST on stake money is not neutral 86
Conclusion 94
(c) Is the contribution of trainers and riders to the Club on race day a “benefit” rather than a “supply”? 93
Conclusion 106
Question 2: Are stakes payments to trainers and riders consideration for the services provided? 107
(a) Is there the necessary nexus or reciprocity in the payment of stakes to qualify as consideration? 108
Parties’ positions 108
Legal principles on consideration and nexus 112
Discussion 123
Conclusion 132
(b)Are stakes payments “prize money”? 133
Legal principles 135
Discussion 140
Conclusion 156
Summary of conclusions 157
Result 159
[1] This is a Goods and Services Tax (GST) test case involving stakes payments1 in the racing industry. The issue to determine is whether Canterbury Jockey Club Inc (the Club) is entitled to GST input tax deductions, for stakes payments paid to GST registered trainers and jockeys in horse races conducted by the Club. The stakes payments made to horse owners and riding fees paid to riders are not in dispute.
[2] Whether the Club is entitled to GST input tax deductions for stakes payments depends on two key factual issues:
(a)whether horse riders and trainers “supply” any services to the Club; and
(b)whether the stakes payments paid by the Club to horse riders and trainers are “consideration” for any services provided.
1 Stakes payments are prize money derived as a result of a horse finishing a race in a stake-bearing position at a race meeting.
[3] The Club’s position is that trainers and riders provide services to it on race days for consideration, in the form of stakes payments. Therefore, it says, it is entitled to GST input deductions, for stakes payments made to trainers and riders who win.
[4] The Commissioner of Inland Revenue (the Commissioner) denies the Club is entitled to an input tax deduction, because there is no supply of services for stakes payments by trainers and riders to the Club for the purposes of the Goods and Services Tax Act 1985 (the GST Act). The Commissioner says trainers and riders supply services only to the horse owners.
Factual background
[5] The evidence at the hearing was adduced by an agreed statement of facts, together with the evidence of a court-appointed industry expert, Mr Fenwick.2
[6] Following the initial hearing, the parties filed further submissions and the Club filed an affidavit from New Zealand Thoroughbred Racing’s (NZTR) financial officer, with examples of NZTR’s invoicing in relation to payments made to trainers, riders, owners and clubs following a race meeting.
[7]The following are the agreed facts on the racing industry’s structure.
Racing governance
[8] The New Zealand Racing Board (NZRB) oversees the racing industry and conducts betting on races for all three racing codes, the relevant one here being the thoroughbred horse racing code.3 Betting may occur only at race meetings conducted by registered racing clubs. As a result of the conduct of betting by NZRB, profits are distributed to the three racing codes.
2 Under r 9.57 of the High Court Rules 2016.
3 The other two codes are harness and greyhounds.
[9] NZTR is the governing body overseeing the thoroughbred racing code throughout New Zealand. Importantly, it distributes, among its registered racing clubs, NZTR’s share of NZRB’s surpluses.
[10] NZTR establishes, enforces and amends the Rules of Racing 2013 (the Rules),4 which govern the various relationships and interactions between parties who choose to be subject to the rules. These include:
(a)registered thoroughbred racing clubs (clubs), including Canterbury;
(b)owners or lessees of horses (owners);
(c)horse trainers (trainers); and
(d)jockeys, including apprentices (riders).
[11] Those four groups must consent to being subject to the Rules, if they wish to participate in thoroughbred racing.
[12] The Racing Act 2003 gives NZTR the sole authority to make and administer the Rules and to provide for “prize money and other stakes”.5 NZTR has broad powers to regulate what stakes are paid for, to whom and in how many pools. Stake money is payable under the rules, regardless of the arrangements that may have been reached between owners, trainers and riders for the provision of services and their payment. From 1 June 2013, the Rules came into effect, by which NZTR (on behalf of clubs) must pay to the owners, trainers and riders their share of their stake money.
[13] When a horse finishes a race in a stake-bearing place, the Rules require NZTR, on behalf of a club, to pay stakes payments to the owners, trainers and riders in the following proportions:
4 These rules have subsequently been amended, effective from 9 July 2018. The previous amendment applies and is what was argued before me for the purposes of this case.
5 Racing Act 2003, s 29(2)(e).
(a)80 to 85 per cent of the gross stakes payments to the owner;6
(b)10 per cent of the gross stakes payments to the trainer;7 and
(c)5 to 10 per cent of the gross stakes to the rider.8
Races
[14] NZRB has a dates committee, which allocates race dates to clubs. The allocation of a date entitles a club to a betting licence, although in practical terms, NZRB conducts race betting.
Clubs
[15] Clubs organise and manage race meetings, including the advertising and promotion to the industry and the wider public. Horses compete in races for prize money, which is known as stakes or stake money. On behalf of clubs, NZTR collects the entry fees payable when a horse is nominated and accepted for a race, and disburses the prize or stake money.
[16] Clubs receive revenue or funds for race day activities, from one or more of the following sources:
(a)nomination and acceptance fees;
(b)spectator/gate entry fees;
(c)food and beverage sales;
(d)hospitality packages;
(e)commission on bets placed on the races at that meeting;
(f)sponsorship; and
(g)membership fees.
6 Rules of Racing 2013, r 505(2).
7 Rule 326(4).
8 Rule 332(1).
[17] Clubs compete to attract horses, trainers and riders to participate in their race meetings. Stakes payments are paid to attract owners and trainers to enter the horses into the club races, to attract riders to attend race meetings and to reward the connections of a horse that finishes in a stake-bearing place. The size of the stakes offered is a relevant factor. Higher stakes at a race meeting generally attract higher quality horses and more people engaging with the race meeting, whether attending the course or through off-course betting.
[18] Registration for GST varies within the industry. Owners may be registered for GST, if they operate a business involving race horses, but many will not be, if horse racing is a hobby or recreational pursuit. Trainers, who are usually paid a monthly fee by owners to cover the services they provide, are in the business of providing the services of training horses, so will usually be GST registered. The Rules require that a trainer notifies NZTR whether they are GST registered. Riders are required to be licensed by NZTR in order to participate in race meetings.
[19] Riders are paid a set fee by owners to ride horses at races, regardless of the outcome of the race. These are rider fees and are separate arrangements to which clubs are not a party. A trainer normally engages a rider for a race, although owners may also be involved. The majority of riders are GST registered and, again, the Rules require that a rider notifies NZTR whether they are GST registered.
[20] The Rules provide that an owner or trainer may enter a horse for a race. However, Mr Fenwick, the industry expert, told the Court that it is almost always the trainer who makes the decision about which horse is suitable for a specific race. He said:
Normally it would be the trainer that would firstly determine the race or races that the horse would compete in and it would normally be the trainer who would give the instructions to the rider. They may do that in consultation with the owner but I think most owners would really leave it to the trainer.
[21] Although it is the owner’s horse that is entered into a race, the trainer is described as “the agent for the owner” and Mr Fenwick added that it would be very
rare for an owner to ring and nominate their horse. It is normally done by the trainer. The trainer also oversees the weight restrictions and selects the rider for the race.
Canterbury Jockey Club and the current dispute
[22] Canterbury is a racing club located in Canterbury. It is an incorporated society,9 and a “racing club” as defined in s 5 of the Racing Act, which is registered for GST with a taxable activity of horse racing.
[23] The Club is also registered with NZTR and, like other clubs, is subject to the Rules, which are enforced by NZTR.10
[24] The Club filed its GST return for the return period ended 30 September 2013, which excluded a claim for input tax credits for $102,428.82 worth of stakes payments made by the Club to GST registered trainers and riders. This followed an agreement between the parties that the Club would adopt “a conservative approach in self-assessing its tax position”, with the intention of proposing an adjustment increasing the Club’s total purchases and expenses (including GST) by the amount of the relevant stakes. The Club would then dispute and challenge the adjustment claimed, by way of this test case, as a representative club for the racing industry.
[25] On 18 December 2013, the Club issued a Notice of Proposed Adjustment to the Commissioner under s 89DA of the Tax Administration Act 1994. It proposed to adjust its return by increasing the total purchases and expenses (including GST) by
$102,428.82, to reflect the GST component on stakes payments made to trainers and riders that year. This proposed adjustment would increase the GST refund due to the Club by $13,360.28 for the relevant period.
[26] On 13 February 2014, the Commissioner rejected the Club’s Notice of Proposed Adjustment and issued a Notice of Response the next day. In the Notice of Response, the Commissioner stated its position that trainers and riders do not supply services to the Club but supply services to owners. Thus, the Club was not entitled to GST input tax deductions.
9 Under the Incorporated Societies Act 1908.
10 Rules of Racing 2013, r 101(1).
[27] As the Rules prescribe, those that receive stake payments and who are GST registered, must pay GST on the stakes payments. NZTR, on behalf of the clubs, pays the stakes to trainers and riders directly, deducts GST from the stakes payments to trainers and riders, and issues the necessary tax invoice on the club’s behalf.11 The clubs collect the GST on the payments for payment to the IRD. The clubs file their own GST returns and make any required GST payments to Inland Revenue directly. The Rules are discussed further under the first issue.
Relevant law
[28] The relevant legal principles to be applied to this case have their foundation in the statutory provisions of the GST Act, the Rules of Racing and the applicable case law and authorities.
[29] In this section, the relevant provisions of the GST Act and the principles applicable to the statutory requirements are canvassed in broad overview. The Rules and the authorities relevant to the two principal issues in this case are discussed further under the respective issues.
[30]“Goods” and “services” are defined widely under s 2(1) of the GST Act:
goods means all kinds of personal or real property; but does not include choses in action, money or a product that is transmitted by means of a wire, cable, radio, optical or other electromagnetic system or by means of a similar technical system.
…
services means anything which is not goods or money.
[31]Section 8(1) of the GST Act is the core provision imposing GST:
8 Imposition of goods and services tax on supply
(1)Subject to this Act, a tax, to be known as goods and services tax, shall be charged in accordance with the provisions of this Act at the rate of 15% on the supply (but not including an exempt supply) in New Zealand of goods and services, on or after 1 October 1986, by a registered person in the course or furtherance of a taxable activity carried on by that person, by reference to the value of that supply.
11 Rules of Racing 2013, rr 326(4) and (6), 331(3) and 332(1).
[32] Taxable activity under the GST Act includes any activity that involves the supply of goods and services to any other person for consideration.12 Consideration must be provided in relation to the supply of any goods and services.
[33]The GST Act distinguishes between output tax and input tax.
[34] Output tax under s 2(1) means tax charged under s 8(1) for the supply of goods and services made by a registered person. Thus, a GST registered person must charge GST on goods and services they supply to others.
[35] Input tax under s 3A means tax charged under s 8(1) on a supply of goods or services acquired by a registered person. Thus, GST must be charged on a supply of goods and services acquired by a registered person.
[36] So in completing a GST return, the registered person must deduct from the output tax charged in the taxable period, the amount of the input tax in relation to the supply of goods and services acquired by the registered person. The difference between the two results in either a payment by the registered person to the Commissioner or a payment by the Commissioner to the registered person.
What is “supply”?
[37] Under s 8(1) of the GST Act, GST is imposed on the supply of goods or services. “Supply” is defined in s 5(1) as including “all forms of supply”.
[38] In Databank Systems Ltd v Commissioner of Inland Revenue, Davison CJ interpreted “supply” as follows:13
In its ordinary every day usage the word “supply” is given the following meaning in the Shorter Oxford English Dictionary:
1. To help, aid, assist; to succour, relieve; to support, maintain;
2. To furnish with:
3. To add:
12 Goods and Services Tax Act 1985, s 6(1)(a).
13 Databank Systems Ltd v Commissioner of Inland Revenue [1987] 2 NZLR 312 (HC) at 323.
4. To make up for:
5. To fulfil, satisfy:
6. To furnish, provide:
7. To furnish with what is necessary:
8. To furnish or provide with something.
In the context of s 5(1) “supply” simply means “to furnish with or provide”.
[39] A supply must involve the transfer of something to someone else, as emphasised by Tipping J in Chatham Islands Enterprises Trust v Commissioner of Inland Revenue:14
[28] While it is clear that the services do not have to be supplied to the person providing the consideration (as defined) for them; it is still necessary for there to be a supply of services within the proper meaning of that phrase. Although services are defined as meaning anything which is not goods, it is still necessary for there to have been a supply of something…
[40] There must also be a nexus or connection between the payment and the supply of services, with reciprocity in the legal relationship between the supplier and the person providing the consideration.15
The Rules of Racing
[41] The Rules changed the way in which stake money is paid. Previously, owners were responsible for paying the share of stake money due to trainers or riders. As a matter of practice, as the Commissioner submits, NZTR deducted the payments due to trainers and riders, before paying the net amount to owners. This was confirmed by Mr Fenwick. In the mid-1990s, NZTR centralised the drawing-up of the fields for race days, the taking of nominations and acceptances, and a payment system, where NZTR paid the trainers and riders directly “and the owners got paid direct less any deductions.” NZTR, in practice was making those payments on behalf of clubs.
14 Chatham Islands Enterprises Trust v Commissioner of Inland Revenue [1999] 2 NZLR 388 (CA).
15 At [17] and [31]; and Commissioner of Inland Revenue v New Zealand Refining Co Ltd (1997) 18 NZTC 13,187 (CA) at 13,193.
[42] Following amendments in 2013, rr 326(4), 332(1) and 505(2) of the Rules now provide that NZTR, on behalf of a club, shall pay to each of the owner, trainer and rider, a specified percentage sum of the gross stakes as prescribed under r 503(2). These are set out at [13] above.
[43] As illustrated by r 327(4), NZTR, on behalf of a club, shall pay to a horse’s trainer a fixed percentage of the “gross stakes … credited to a horse for a particular race …”, and subject to rule 506, NZTR:16
on behalf of a club, shall pay to a trainer such a sum of money, being … 10 percent of the gross stakes … less any amount which NZTR, on behalf of a club, is legally obliged to deduct therefrom for tax …
[44] Similarly, in respect of riders, rule 332(1) provides that NZTR, on behalf of a club, shall (in addition to the riding fees earned by that rider) pay them 5 or 10 per cent of the “gross stakes … credited to a horse for a particular Race …” the rider has ridden.
[45] The Rules also prescribe that NZTR, on behalf of, and in the name of a club, shall issue any tax invoice required under the Act.17
Question 1: Do trainers and riders supply services to the Club?
[46] I will deal with this issue by considering the following three questions. They are:
(a)What is the legal arrangement among the Club, trainers and riders?
(b)What services do trainers and riders provide on race day and to whom?
(c)Is the contribution of trainers and riders to the Club on race day a “benefit” rather than a “supply”?
16 Emphasis added.
17 Rules of Racing 2013, r 326(6).
(a) What is the legal arrangement among the Canterbury Club, trainers and riders?
Parties’ positions
[47] The Club argues there is a “supply of services” by trainers and riders to the Club, because the core of the relationship among clubs, owners, trainers and riders is a contractual relationship. The Club relies on the Commissioner’s 2010 interpretation statement about the supply rule under s 9(1) of the GST Act, which states:18
… the legal arrangements between the parties must be considered in determining whether a supply exists. Where a binding contract exists and a payment is made pursuant to that contract, there is an automatic assumption that a supply exists.
[48] The Club submits that all clubs, owners, trainers and riders, who wish to participate in thoroughbred racing, must consent to be subject to the Rules and undertake certain obligations under them. The Club says that a contract consists of a series of mandatory rules governing the relationship between its parties, who are bound by such rules, and this relationship is contractual. In the alternative, the Club contends that if the Rules are not contractual, they are still in express legal form and are enforceable, giving rise to a supply for GST purposes.
[49] On the other hand, the Commissioner contends that trainers and riders do not supply services to the Club, and nor is there a relationship of “supply” to the Club under the GST Act. The legal relationship between clubs like the Canterbury Club and trainers and riders is governed by the Rules, which provide an administrative framework for the thoroughbred racing industry. It is mandatory for participants in the industry to comply with those Rules. However, the Commissioner submits that compliance with the Rules does not create a relationship by way of contract, agreement or understanding that could amount to a “supply” of services within the scope of the GST Act.
18 Commissioner of Inland Revenue “IS 10/03: GST: Time of Supply – Payments of Deposits, including to a stakeholder” (2010) 22(6) Tax Information Bulletin 7 at [65].
[50] Further, the Commissioner disputes that any change to the Rules in 2013, regarding payment of stake money to the trainers and riders directly, establishes that trainers and riders provide services to clubs such as the Canterbury Club.
Legal principles on contract for supply
[51] In Turakina Maori Girls College Board of Trustees v Commissioner of Inland Revenue, the Court of Appeal determined that it was not necessary for there to be a contract between the supplier and the person providing consideration, in order for there to be services provided, which attracted GST.19
[52] The issue before the Court was whether payments made by parents for “attendance dues” to the proprietors of integrated schools ought to attract GST. The dues related to the proprietors’ obligations for payment of debt, capital works and improvements and other charges associated with land and buildings. The operation of the schools, including teacher’s salaries and educational materials, was funded by the State and was free of charge to students. The proprietors’ obligations were not conditional upon the payment or non-payment of attendance dues. The Commissioner argued GST was payable on the attendance dues.
[53] The Court held that the proprietors were liable to pay GST on dues, as the payments were made to secure the enrolment of a student in a school, for which the proprietors provided the buildings and ensured its special character. The supply of these things was a taxable service.
[54] The Court also held the GST Act did not require that the “supply” must be to the person who pays the consideration. It was clear from the statutory definition that the supply of any service for consideration was part of a taxable activity under the Act, even though it was to a person other than the person who provided the consideration. The Court noted it is not necessary that there should be a contract between the supplier and the person providing the consideration, so long as the consideration is “in respect of, in response to, or for the inducement of, the
19 Turakina Maori Girls College Board of Trustees v Commissioner of Inland Revenue (1993) 15 NZTC 10,032 (CA) at 10,036.
supply”.20 There must be a connection between the consideration and the supply of services. Although the proprietors did not provide the education, they supplied the buildings, ensured the maintenance of the special character and were able to require attendance dues to be paid as a condition of enrolment. Parents agreed to pay dues in respect of, in response to, or for the inducement of enrolment in the school, which was itself the supply of a service.
[55] In Chatham Islands, the Court of Appeal considered the relevance of the legal arrangements between parties in establishing the nexus:21
Although the linkage or nexus between a payment and the activity to which it gives rise may be very broad, it is still necessary to have regard to the legal form which is being employed:
“. . . in taxation disputes the Court is concerned with the legal arrangements actually entered into . . . not with the economic or other consequences of the arrangements.”
(Commissioner of Inland Revenue v New Zealand Refining Co Ltd (1997) 18 NZTC 13,187 at p 13,192 citing Marac Life Assurance Ltd v Commissioner of Inland Revenue [1986] 1 NZLR 694 at p 706.) The tax being one on transactions, it is necessary to pay close attention to the legal nature of what has been done.
[56] In Wilson & Horton Ltd v Commissioner of Inland Revenue, the Court of Appeal considered whether advertisements placed by overseas clients in the New Zealand Herald should be charged GST or be zero rated.22 The focus of the Court of Appeal differed from that of the High Court. Their focus was on the nature of the contractual arrangements between Wilson & Horton and their overseas clients, for whom they published advertisements in the New Zealand Herald, not on who benefitted from the advertisements. The Court of Appeal found in favour of Wilson & Horton, holding that the publication of advertisements attracted GST at the rate of zero per cent. Even where the supply was to an overseas person, zero-rating was not excluded, merely because another person in New Zealand may derive a benefit. Richardson J said:23
20 Goods and Services Tax Act 1985, s 2(1) definition of “consideration”.
21 Chatham Islands, above n 14, at [17].
22 Wilson & Horton Ltd v Commissioner of Inland Revenue [1996] 1 NZLR 26 (CA).
23 At 33.
… the obvious commercial inference is that the contracting party paying the bill expects to benefit from the services supplied.
…
The statutory focus under s 11(2)(e) [of the GST Act] is on the contractual supply of services, not on non-contractual benefits …
Discussion
[57] In this part of the judgment, I will deal with “supply” in the context of the legal relationship of the parties. It is considered further in the context of reciprocity at paragraph [108] to [132] below.
[58] It is accepted by the parties that owners pay trainers monthly and there is a separate contractual arrangement between owners and trainers in relation to the day- to-day training of race horses. Clubs, such as the Canterbury Club, are not a party to these separate arrangements. It is also accepted that riders are paid a set fee by owners to ride horses at races, regardless of the outcome of the race. These are known as rider fees and do not form part of the stake money share.
[59] The Club argues, however, that there is a contractual relationship between the Club and the trainer/rider participants, because of the series of mandatory racing rules governing the relationship, which is enforceable and reciprocal as a result.
[60] The Club points to the obligations placed on trainers and riders, as well as the percentage of gross stakes payments credited to each person under the Rules, which ensure NZTR retains oversight of their activities. It says the Rules are legally enforceable and can be enforced through a range of mechanisms, including:
(a)the Judicial Control Authority (a racing judicial body) and Judicial Committees appointed by that Authority for each race day;
(b)the arrears list kept by NZTR, which lists money payable by any person or body to NZTR or a racing club under the Rules and is used to enforce debts; and
(c)the Rules contain a right of set-off for NZTR and clubs against trainers and riders.
[61] In making these submissions, the Club relies on Tucker v Auckland Racing Club to support the proposition that the Rules are capable of giving rise to a contractual relationship.24 In Tucker, Shorland J considered whether the Court had jurisdiction to examine a decision of a domestic tribunal created by the New Zealand Rules of Racing, in force at the time, by which the parties had agreed to be bound. Shorland J held the Court did have the necessary jurisdiction; the rules were procedural and could not oust the Court’s jurisdiction. The case concerned a potential breach of the rules by a trainer and lessee of a horse that had been entered for a race, because the horse had drugs administered to it. No GST or other tax issues arose in Tucker.
[62] At the outset of the judgment, Shorland J observed that the plaintiff, as a licensed trainer, was bound by contract with the New Zealand Racing Conference by virtue of his registration with that body and his entry into the particular race. The Judge then treated both parties as bound by the New Zealand Rules of Racing.
[63] I accept the Commissioner’s submission that Tucker was concerned with issues in administrative law and the Court was not required to and did not address the key issues in the present case. However, the question of whether the current Rules create a contractual relationship among the parties is not critical to a determination of the issues in this case, in light of the Court of Appeal’s approach in Turakina and Wilson & Horton.25
[64] A contractual relationship between the Club and each of the riders and trainers is not a pre-requisite for the provision of services. The Club is part of a statutory framework, in which it has obligations to all the participants in the industry. The legal relationship among the Club, trainers and riders is one that is regulated by the Rules, which are enforceable and reciprocal. Those Rules apply to and are binding on NZTR, the clubs, owners, trainers and riders.
24 Tucker v Auckland Racing Club [1956] NZLR 1 (SC).
25 Turakina, above n 19; and Wilson & Horton, above n 22.
[65] In Turakina, the Court held that a contract between the supplier and the person providing the consideration is not necessary, so long as the consideration is in respect of, in response to, or for the inducement of the supply.26
[66] Under r 326(6), NZTR, on behalf of a club, is “deemed to agree” that a trainer shall not issue a tax invoice under the Act in circumstances prescribed under the rule. Such language may suggest an obligation in the nature of a contractual relationship. However, this is not the case to determine whether the Rules impose contractual obligations on the industry participants, in circumstances wider than the focus of this GST test case.
[67] It is clear the Rules are enforceable and are capable of giving rise to a supply for GST purposes, as the wording of the Rules indicates. This is supported by the Commissioner’s interpretation statement, in which the Commissioner considered the GST implications of a payment that is made when no contract exists.27 In confirming that legal arrangements between parties must be considered to determine whether a supply exists, the Commissioner said:
However, a supply need not necessarily be made under a contract. The crucial question is not whether there is a contract, but whether there is a supply.
[68] The Commissioner has also had occasion to consider the regulatory force of formal rules. In a 2013 issues paper, the Commissioner considered the rules governing GST registration of bodies corporate and summarised the principles from relevant cases including:28
When an entity has a set of formal rules that regulate the conduct of the entity, it is most likely that the entity will be found to be making supplies to its members … even where the members formally employ staff …
[69] The Commissioner made a further reference in the issues paper to the fulfilment of statutory functions and whether that can give rise to a supply. The
26 Turakina, above n 19.
27 Commissioner “GST: Time of Supply”, above n 18, at [65].
28 Commissioner of Inland Revenue Bodies Corporate – GST Registration (Issues Paper 7, May 2013) at [3.149].
Commissioner considered that a body corporate makes supplies to its owners when it fulfils its statutory functions under the Unit Titles Act 1972, by stating:29
The statutory nature of the mutual obligations of the body corporate and the owners does not mean that they are not making supplies for a consideration. That the duties are statutorily imposed does not alter the fact that the body corporate actually furnishes or supplies certain goods or services to the owners, it only affects why the supplies are being made.
[70] I accept the Club’s submission that the Commissioner’s statements support the proposition that rules or duties statutorily imposed are capable of giving rise to a supply for GST purposes, even in the absence of a contract. By entering a race, trainers and riders have agreed to be bound by the Rules, which impose obligations on them and gives them entitlements to certain rights, such as stakes.
Conclusion
[71] The legal arrangement among the Club, trainers and riders is governed by the Rules, which impose enforceable and reciprocal obligations on each of the Club, trainers and riders. Those obligations are capable of giving rise to a supply for GST purposes, even in the absence of a contract.
[72] I make no determination on whether the Rules of Racing create a contractual relationship among the Club, trainers and riders, because a contractual relationship is not critical to determining the issues in this case.
(b) What services do trainers and riders provide on race day and to whom?
Parties’ positions
[73]
The Club contends that trainers and riders provide services to it on race day. The Club maintains that the relevant services provided by trainers and riders includes entering a Club race, participating in accordance with the Rules and providing a stake-winning performance. Trainers and riders must provide a horse that has every chance of being competitive on race day. Their skills are important to how a horse performs. The method by which trainers and riders are remunerated is said to incentivise the required performance or service, in other words only winning29 Bodies Corporate, above n 28, at [1.13].
performances are paid stakes payments. The Club says that another way of phrasing this is that the stakes payments are an inducement to trainers and riders to supply services to the Club.
[74] The Commissioner submits that trainers and riders do not provide services to the Club on race day. They provide services to the owner. While on a race day a horse needs to be ridden and the training it has received will contribute to how it performs, the Commissioner says those factors are in the nature of a benefit to the Club, rather than a service provided to the Club.30 The Commissioner relies on the following features about trainers in support:
(a)trainers do not contract with the Club to provide training services;
(b)trainers do not train race horses on behalf of the Club;
(c)trainers provide training services to the owner, for which the trainer is paid by the owner;
(d)the trainer may enter the horse to race on behalf of the owner;31 and
(e)even if a horse is nominated and accepted for a race, whether it races is not a decision made by the Club. There is no redress if the horse is scratched for any reason.
[75] The Commissioner submits the following supports her position that riders do not directly supply services to the Club:
(a)riders ride the horses after being declared to the NZTR by trainers or owners;32
30 This submission on “benefit” is addressed at [93]–[106].
31 Rules of Racing 2013, rr 518 and 519.
32 Rule 537.
(b)riders do not enter themselves to race, but are declared by whoever enters the horse;
(c)a rider’s involvement is linked to the actions of the owner and trainer; and
(d)riders do not contract to provide riding services to the Club.33
Discussion
[76] It is correct, as the Commissioner submits, that trainers and riders do not contract with the Club to provide services and that they provide training and riding services to the owners, for which they are paid. It is also correct that the trainer may enter the horse to race on behalf of the owner and may also select the appropriate rider.
[77] However, a contract between the parties is not necessary, for the supply of services.34 I accept the Club’s submission that the trainers and riders provide services to the Club on race day by entering a Club race, participating in accordance with the Rules and providing a stake-winning performance.
[78] There are three reasons why I consider the trainers and riders’ services are provided to the Club on race day, not just to the owners alone. Those reasons are:
(a)the Club’s business of conducting competitive racing;
(b)the Rules require NZTR to pay stakes money, plus GST, on behalf of the Club, and to render tax invoices for the Club to pay GST; and
(c)GST on stake money is not neutral.
33 Unlike the rodeo rider in the case of McCarthy v Australian Rough Riders Assoc Inc [1987] FCA 391, (1988) ATPR 49,017.
34 Turakina, above n 19, at 10,036.
The Club’s business
[79] The Club carries on a business aimed at promoting competitive horse racing and competitive betting. The Club provides stakes paid from the betting profit, to induce trainers and riders to provide their services to the Club on race day. Competitive horse racing provides a more competitive betting pool, by attracting spectators and encouraging betting, which in turn enables stakes to be paid from the betting profit. It is the Clubs which manage or organise racing meetings, promoting them to the industry and the wider public. Clubs compete to attract horses, trainers and riders to participate in their race meetings. The Clubs’ income is largely from betting profit.
The Rules on stakes payments
[80] The Rules changed the way in which stake money was paid. Under the previous rules, owners were responsible for paying the share of stake money due to trainers and riders, although, as a matter of practice, NZTR had deducted the proportion due to trainers and riders before paying the net amount to owners.
[81] The position was formalised under the Rules, to the extent that after 1 June 2013, NZTR, as the Club’s agent, pays to trainers and riders the proportion of the stake money due to them directly, as was the prior practice.35
[82] As the Rules exemplify, NZTR, on behalf of clubs, is statutorily obliged to deduct any tax liability from the sums of money paid to owners, trainers and employers/riders (where registered). Mr Fenwick gave evidence that the GST component is advanced to the trainers and riders for them to make the necessary payments. The Rules prescribed that clubs (through NZTR) must ensure GST is charged and deducted from the stake money paid.
[83] I consider it problematic for the Commissioner to deny input tax deductions, when a club (through NZTR) must ensure the GST component is paid for the trainers’ and riders’ services on race day.
35 Rules of Racing 2013, rr 326(4), 332(1) and 505(2).
[84] Although the Commissioner is correct that the new aspects of the Rules regarding stake money by themselves are not solely determinative of the issue of supply of services, the Rules expressly provide that NZTR pays stakes to a trainer/rider or owner, “on behalf of a Club”.36 NZTR issues tax invoices under the Act in the name of the Club.37
[85] Thus, the Club is providing stakes money plus GST to the trainers and riders, not paying the owners on their behalf, as happened formerly. NZTR makes the payment in the name of the Club and issues the tax invoices, on behalf of the Club. Importantly, the Club retains responsibility for paying the GST components of the stakes money.
GST on stake money is not neutral
[86] The third reason to support my finding that services are provided to the Club is that, without the input deductions being claimed by the Club, the GST payment on stake money is not neutral. GST was intended to be broad-based and neutral. This was confirmed by the Supreme Court in Glenharrow Holdings Ltd v Commissioner of Inland Revenue where the Court described GST as a type of value- added or turnover tax.38 The Court said:39
[41] Broadly speaking, GST is a type of value-added tax. It is fundamentally an indirect tax levied on transactions with consumers. The legislation envisages that, for a business, over time the net impact will be an impost of GST on the value which the business adds to the goods and services it supplies. GST has been likened to a turnover tax (the outputs are the turnover) but with provision for offsetting deductions (or credits) for the GST content of input costs (the expenses incurred in producing the outputs).
[87] Importantly, in the context of this proceeding, the Supreme Court confirmed that GST was introduced to be a neutral tax:40
[42] … GST was intended to be broad-based, efficient and neutral. Nevertheless, as the review done in 1999 highlighted, compliance and administration costs preclude perfect neutrality ever being achieved. …
36 For example, r 326(4).
37 Rule 326(6).
38 Glenharrow Holdings Ltd v Commissioner of Inland Revenue [2008] NZSC 116, [2009] 2 NZLR 359.
39 Footnote omitted.
40 Footnotes omitted.
[44] From a reading of the Act as a whole it is clear that the legislature anticipated that, for a trader in goods and services, there will over time usually be some balancing out or netting off of the GST components of sales and purchases …
[88] The Club provides the stake money, which is paid to participants subject to the GST liability, and the trainers/riders pay the GST for which they are liable. The Club, however cannot claim any input deduction.
[89] The current and proposed positions were furnished by Mr Colson on behalf of the Club:
(a)The current GST position, with an owner not GST registered and the payment of stakes of $1,000 exclusive of GST is demonstrated as follows:
(i)Stakes $1,000 (excluding GST);
(ii)Owner pays trainer $115 (10 per cent plus GST);
(iii)Owner pays rider $57.50 (five per cent plus GST);
(iv)Owner retains $827.50; and
(v)Owner cannot claim back GST paid to trainer and rider.
(b)The proposed GST position where the owner is not GST registered on a stakes payment of $1,000 exclusive of GST, the following would occur:
(i)Stakes $1,000 (excluding GST);
(ii)Club pays trainer $115 (10 per cent plus GST);
(iii)Club pays rider $57.50 (five per cent plus GST);
(iv)Club claims back GST of $22.50; and
(v)Club pays owner $850.
[90] Under the current position, owners who are not GST registered are not able to claim back the GST on the payments to the trainer and jockey. Because the
owners are not GST registered, they do not need to account for GST and cannot claim as input tax the GST on the payments made.41 Effectively, in this example, the owner pays the GST on the trainers’ and jockeys’ payments.
[91] The current GST position in the example above under (a) illustrates that the current position is not GST neutral. NZTR makes the payments to the participants on behalf of the Club. The Club cannot claim any input deduction and nor can the non-GST registered owner, who bears the cost of GST on the payments.
[92] Under the proposed GST position, the Club (through NZTR) pays the trainer and rider GST on their payments and claims back the GST. There, the owner receives 85 per cent of the stakes money, whereas under the current position, the owner is credited with a payment, less the GST paid by the Club, for the trainer and rider. If the proposed position is upheld, it is GST neutral. Trainers and riders are providing services to the Club and being paid stakes plus GST in return by the Club (through NZTR). Those GST payments to the trainers and riders can then be claimed by the Club as GST input tax. If this occurs, owners who are not GST registered receive more than those who are, because the GST on stakes payments to the trainer and the rider is not credited against or paid by them.
[93] There is an inconsistency in the Commissioner’s position on stake money. Stake money is treated by the Commissioner as GST liable in the hands of a registered trainer or rider. But the Commissioner denies that the Club, on whose behalf the stake money is paid together with GST, can claim the input tax deductions. As the example on the current position shows, in the case of the non- GST owner, the GST position is not neutral, contrary to the authorities and the scheme of the Act.
Conclusion
[94] Trainers and riders supply services to the Club on race day. The Club pays stakes in exchange for those services, together with GST.42 Consistent with that
41 Goods and Services Tax Act 1985, s 20(3)(a).
42 GST is payable if the trainers and riders are GST registered.
supply, trainers and riders (where GST registered) have GST deducted on their stakes payment, if their horse finishes a race in a stake-bearing place.
(c) Is the contribution of trainers and riders to the Club on race day a “benefit” rather than a “supply”?
[93] I have found that trainers and riders supply services to the Club on race day, but for completeness, I now address the Commissioner’s further submission that trainers and riders do contribute to the success of the Club’s races, but that such contribution is a benefit rather than a supply to the Club.
[94] Both parties relied on Wilson & Horton for each of their different positions.43 The Commissioner submits that the relationship between the Club and trainers/riders is similar to the facts of Wilson & Horton, which held that a benefit may be conferred without any supply to, or any consideration being provided by, the recipient of the benefit. The benefits to the Club in this case, in the Commissioner’s view, do not establish any supplies to the Club by the trainers and/or riders.
[95] Conversely, the Club relies on Wilson & Horton to show that the recipient for GST purposes should be the contractual recipient of the relevant services rather than some other party that might derive incidental benefits. Because the Club is required to pay owners, trainers and riders their percentage of the stakes under the Rules to recognise their services, the obvious commercial inference is that the party paying a bill expects to receive a benefit from it. The Club argues it benefits from the services provided by trainers and riders and pays them for it.
[96] In Wilson & Horton, the Court of Appeal focussed on the contractual arrangements of the parties, finding that the legal nature of the particular transaction concerned will establish whether there is supply with a sufficient nexus to the consideration:44
Those provisions [ss 2, 6, 8, 9 and 10 of the GST Act] are directed to the contractual arrangements between the supplier and the recipient of the supply. In keeping with the general statutory scheme in that respect s 11, providing for zero-rating of supply transactions where the stated overseas
43 Wilson & Horton, above n 22.
44 At 30 (emphasis added).
element is present, follows that same pattern. It follows that where, as in the presently material s 11(2)(e), the provision refers to “services . . . supplied . . . to a person” the statutory dictionary applies and the phrase refers to the contractual position and so to the person who has provided the consideration.
[97]I deal with the issue of stakes payments as consideration under Question
2.45 I have found that while there is no contract with the Club, there is a legally enforceable obligation on the Club under the Rules, to make stakes payments to successful trainers and riders on race day.
[98] The contest between the parties on this issue is whether race day services by trainers and riders are in the nature of a benefit to the Club, or whether they are supplied to the Club for consideration.
[99] In contending that the Club receives a benefit, not a supply of services, the Commissioner points to two facts in support of that proposition:
(a) compliance with the Rules of Racing does not create a supply to the Club; and
(b) the fact that NZTR (on behalf of the Club) pays stake money directly to the trainers and riders does not establish there has been any supply by those trainers and riders to the Club. Proof of payment, the Commissioner says, does not amount to proof a taxable supply was made in return for that payment.
[100] Compliance with the Rules is a pre-requisite before a horse may be entered into a race and potentially win stakes money. That is an agreed fact. In entering a horse for the race, the owner, trainer and rider must comply also with the Rules, “in order to ply their trades” as the Commissioner submits. I consider “plying their trades” is in effect a supply of their respective services, for which both the trainers and riders (who are GST registered) are obliged to pay GST.
45 At [107]–[132] of this judgment.
[101] It is difficult to accept that while trainers and riders contribute to the success of the Club’s races, as the Commissioner concedes, this contribution should be viewed as a benefit only, rather than a supply. I accept the Commissioner’s submission that the Club provides various taxable supplies to the race-going public who attend race meetings, including the use of race course facilities, paying for refreshments and placing bets.
[102] Although there may be an additional benefit conferred on a third party, the Court in Wilson & Horton found that the obvious commercial inference is that a contracting party paying a bill expects to receive a benefit from it. As McKay J said:46
The tax is based on the value of the consideration for the supply: s 10. It is not concerned with the value of the supply to persons who are not parties to the contract, nor with any benefits which may result to such persons.
[103] Although McKay J referred to parties to a contract, as the Court in Turakina found, it is not necessary that there be a contract between the parties, provided the payment or consideration is “in response to or for the inducement of the supplier.”47
[104] In light of the parties’ legal arrangements here, I consider that Wilson & Horton supports the Club’s position, in that the Club is providing the stakes money; expects to receive a benefit from it; and that benefit derives from the services supplied by trainers and riders to the Club on race day. Consistent with this, trainers and riders must pay GST on the stakes money received for their supply of services. The owner, trainer and rider are all paid directly by NZTR on behalf of the Club, with GST being levied for registered persons.48
[105] The fact that the Club receives a benefit does not exclude there being a supply of services. I am unable to accept the proposition that the participation by trainers, riders and horses in the Club’s races benefits the Club by attracting the race- going public but their participation does not establish a supply to the Club by the trainers and riders. The betting profit received by the Club provides the means to
46 Wilson & Horton, above n 22, at 36.
47 Turakina, above n 19, at 10,036.
48 Rules of Racing 2013, rr 326; 332 and 505.
pay stake money to the trainers and riders. Indeed, the definition of supply under s 5(1) of the GST Act includes “all forms of supply”.
Conclusion
[106] Participation by the trainers and riders in Club races on race day is a supply of services, for which the Club pays stakes money to the successful trainers and riders and from which the Club derives a benefit. This benefit does not affect the fact that there is a supply of services.
Question 2: Are stakes payments to trainers and riders consideration for the services provided?
[107]To determine this question, I will focus on two questions:
(a)Is there the necessary nexus or reciprocity in the payment of stakes to qualify as consideration?
(b)Are stakes payments rewards by way of “prize money”, not fees for services?
(a) Is there the necessary nexus or reciprocity in the payment of stakes to qualify as consideration?
Parties’ positions
[108] The Club argues that stakes payments are consideration for the services provided and that there is a linkage or reciprocity in the relationship between it and the trainers and riders, as required for a taxable supply. Clubs organise, manage and promote race meetings as well as compete to attract horses, trainers and riders to participate in their races (including through the stakes payments offered). A club depends on owners, trainers and riders participating in race meetings and races run on race day. There is reciprocity between the services provided by trainers and riders on the one hand, and the payment of stakes by clubs, such as Canterbury, on the other. If a trainer or rider performs in accordance with the Rules and becomes entitled to stakes payments, then each would have legal recourse against the relevant club for the payments.
[109] The Commissioner argues that the payments are not consideration and there is a lack of the necessary reciprocal nexus in the relationship between the Club and the trainers and riders required for a taxable supply. The Commissioner says there is no clear connection between mandatory compliance with the Rules by trainers or riders and receiving stakes payments (the alleged consideration), because an intervening event must take place before stakes payments are made; a rider or trainer must finish a race in a stakes-bearing place. Not all of those who enter and participate are awarded such payments.
[110] The Commissioner submits that entry and participation in races run by the Club, with payments of stake money, are not sufficiently strongly linked to be able to conclude the stakes payments are made “in respect of, in response to, or for the inducement of the supply” of entry and participation in the races.
[111] The Commissioner submits further that stake money is in the nature of a prize and the Rules reflect the difference between prize money and fees. The Commissioner says that proof of payment does not amount to proof that a taxable supply was made in return for that payment and nor does it show the necessary reciprocity for a taxable supply.
Legal principles on consideration and nexus
[112]Consideration is defined under s 2(1) of the GST Act:
consideration, in relation to the supply of goods and services to any person, includes any payment made or any act or forbearance, whether or not voluntary, in respect of, in response to, or for the inducement of, the supply of any goods and services, whether by that person or by any other person; but does not include any payment made by any person as an unconditional gift to any non-profit body
[113] In analysing the definition of “consideration” in s 2(1) of the GST Act, the Court of Appeal in Turakina held:49
Likewise, the value of the supply is to be measured by the consideration, whether or not the consideration is provided by the person to whom the service is supplied. It is not necessary that there should be a contract between the supplier and the person providing the consideration, so long as
49 Turakina, above n 19, at 10,036.
the consideration is “in respect of, in response to or for the inducement of the supply”.
[114] Subsequently, the Court of Appeal in Wilson & Horton, observed that the legal nature of the transaction, which was governed by a contract, will establish whether there is supply with a sufficient nexus to the consideration.50 The Court noted that while there may be a benefit to a third party, namely the publication of advertisements for overseas clients in the New Zealand Herald, the imposition of GST will depend upon the contractual relationship formed.
[115] The Court of Appeal in Commissioner of Inland Revenue v New Zealand Refining Co Ltd described the relationship between the preliminary sections of the GST Act and the need for a supply of services, with a connection between payment and supply, to impose GST.51 The Court stated:52
It is fundamental to the GST Act that the tax is levied on or in respect of supplies. It is not a tax on receipts or on turnover; it is a tax on transactions: Commissioner of Inland Revenue v Databank Systems Ltd. It is therefore necessary … to distinguish between supplies and the taxable activity (as defined in s 6) in the course of which they are made. The definition in s 6 itself requires a nexus between a supply and consideration, as does s 10.
The tax itself is levied by s 8 on a supply in the course or furtherance of a taxable activity and is “by reference to the value of that supply.” Section 10 provides that the value of a supply is “to the extent of the consideration for the supply” the amount of the money involved or the non-monetary open market value of the consideration. Already, before turning to the definition of “consideration”, it can be seen that, again, a linkage between supply and consideration is requisite to the imposition of the tax.
The definition of “consideration”, though broad, cannot and does not dispense with that requirement. To constitute consideration for supply a payment must be made for that supply, though it need not be made to the supplier nor does the supply have to be made to the payer.
There is a practical necessity for a sufficient connection between the payment and the supply. The mechanics of the legislation will otherwise make it impossible to collect the GST.
[116] Thus, the taxpayer must be able to show that the payment has a sufficiently strong connection or nexus to the supply of goods or services.
50 Wilson & Horton, above n 22, at [32] and [36].
51 New Zealand Refining, above n 15.
52 At 13,193.
[117] In Chatham Islands, the Court of Appeal identified the need for a linkage or connection and the need for reciprocity in establishing this.53 Tipping J noted:
[30] When coupled with the definitions of taxable activity and consideration, to which I shall come, and in spite of the width of those definitions, the concept of supplying services has a reciprocal connotation…
[118] Although there need not be a contract between the parties, there must be consideration paid in respect of, in response to, or for the inducement of the supply of services.54 There must be a linkage or connection between supply and consideration.
[119] In New Zealand Refining, the New Zealand Refining Co operated an oil refinery and processed products for five oil companies in return for fees.55 The Government encouraged New Zealand Refining to borrow substantial sums to carry out a large expansion of the refinery. Ten years later, the Government changed its policy to one of deregulation, which meant oil companies were free to import refined products. This meant New Zealand Refining faced overseas competition. An agreement was reached between the Crown and New Zealand Refining, where the Crown agreed to repay the company’s loans and pay them $85 million over three years, which was conditional on the refinery remaining in operation.
[120]
The Commissioner sought GST on the Crown’s payments to New Zealand Refining, contending that the payments were made in relation to the supply of services by New Zealand Refining to its customers. The Court of Appeal found against the Commissioner, holding that a linkage or connection between supply and consideration is required to impose GST. In terms of the agreement between the Crown and New Zealand Refining, there was little or no linkage between the Crown’s payments and the supply of goods or services by New Zealand Refining to its customers. The Court held that while the payments were received in the course of the taxable activity of the taxpayer, they were not in consideration for any supply made by it. The payments were intended as an inducement to the taxpayer to keep the refinery open.53 Chatham Islands, above n 14.
54 Definition of “consideration” in s 2(1) and definition of “taxable activity” in s 6(1) of the Goods and Services Tax Act 1985.
55 New Zealand Refining, above n 15.
[121] In Chatham Islands, a trust was set up by the Crown to acquire certain Crown assets and undertakings that were integral to the infrastructure and commercial activities of the Chatham Islands.56 The Crown wanted to remove itself from the role of providing infrastructure and commercial activities. To do so, the Minister of Internal Affairs, acting as settlor on behalf of the Crown, endowed the trust with $8 million. The trust was then required to provide these services. The Commissioner sought GST in respect of these endowment payments.
[122] The Court of Appeal held against the Commissioner and found there was no taxable activity for the purposes of the GST Act. The Crown had vested money in a trust for the Chatham Islands’ people and the trustees accepted an obligation to hold the fund and apply it in a specified way. There was no reciprocity in the relationship: the trust did not make a supply of anything to the Crown in exchange for, or induced by, the payment. Rather, the trust was the recipient of an endowment to be held upon the terms of the trust deed.
Discussion
[123] The authorities establish that payments made to induce particular behaviour by the payee cannot be taxable for GST, unless there is a sufficient connection between the two. Turning then to stakes payments, there must be a sufficient connection between the Club and the trainer/rider, to induce them to provide their services on race day. The phrase “inducement of” in the s 2(1) definition of consideration in the GST Act supports the conclusion that clubs are entitled to GST input tax deductions. The payments are paid to riders and trainers to ride and train the horses to participate in the races put on by the particular club. I consider that stakes payments to riders and trainers by the Club are in response to, or for, the inducement of supplying their services to the Club by participating. Stakes payments are paid to riders and trainers as consideration for the services they provide.
[124] While a contract between the parties to a supply may not always be necessary, the supply for GST purposes does require some reciprocity or nexus
56 Chatham Islands, above n 14.
between the supply made and the consideration passing between supplier and recipient. There needs to be a focus on the legal relationship between the parties and there is a commercial inference that the party paying for the services, expects to benefit from them, even if others do too.57
[125] Here, there is a nexus between the club paying the stakes and the trainers and riders providing their services on race day. When successful, the trainer/rider receives stakes payment as consideration for their services. The stakes are inducements for the supply of their services on race day.
[126] I accept the Club’s submission therefore, that despite my finding that there is not a contractual relationship between it and the participants, consideration can still be given and is given here. There is no need for a contract under this definition of consideration.58
[127] However, stakes cannot be made for the sole purpose of inducement. There must be a linkage or connection between riders and trainers participating in club races, (their services) and the payments made to induce their participation.
[128] The Court in Chatham Islands focused on the need for a linkage or connection using the language of “reciprocity”. The Court specifically addressed the issue of payment being made in exchange for, or for the inducement of, the supply of services. In Chatham Islands, the Crown endowed the trust with funding to execute its objectives. There was no two-way relationship of reciprocity where the Crown received services from the trust in return.
[129] I consider Chatham Islands is distinguishable from the present case, in that that there is a reciprocity in the relationship between clubs and riders/trainers. The Club pays riders and trainers as an inducement to participate in their races, and there is a reciprocal relationship because riders/trainers participate and provide these services to the Club. In turn, this means that more horses run in the race and more
57 Wilson & Horton, above n 22, at 33.
58 Turakina, above n 19.
spectators attend races and place bets. This appears to me to be a relationship of reciprocity.
[130] In so finding, I do not accept the Commissioner’s submission that because every trainer and rider in a race does not receive stakes money, there can be no reciprocity between entry/participation and stake money. For those that enter, participate and win, stakes payments must be paid. If the payment were not made in accordance with the Rules, the trainer/rider would have legal recourse against the Club. While it is correct that the Club cannot force a trainer/rider to participate, such a requirement is not necessary. The Rules govern those that wish to participate and the Club provides an inducement to race at their club race days. The reciprocal relationship then occurs.
[131] It is important to clarify that the Club is not just a collection agency. It provides the services for race day, paying GST on expenses (as it is GST registered) and pays each participant for their service. Stakes are paid with the GST deduction by NZTR on their behalf.
Conclusion
[132] Stakes are paid to riders and trainers as consideration for the services they provide in participating and succeeding in obtaining a stake-bearing place in races on race day. There is a connection between the supply of race day services and stakes payments made by the Club. The Club pays riders and trainers as an inducement to participate in their races. There is a reciprocal relationship because riders/trainers participate and provide their services on race day for which they receive stakes payments, if they are successful.
(b) Are stakes payments “prize money”?
[133] The Commissioner also says it is significant that the Rules describe all amounts payable as a result of a horse having finished in a stakes-bearing place in the same way, no matter whether they are payable to an owner, trainer or rider. The Rules describe the stakes payments as a proportion of the gross stake credited to the
horse. The Commissioner argues this makes the payments “prizes”, given as a reward to a winner, rather than “fees”, contingent on success.59
[134] The Commissioner also notes that in the United Kingdom, tax tribunals have held that prize money resulting from horse racing is not consideration for any supply, either of goods or services.60
Legal principles
[135] Under s 5(11CB) of the Act, prize money is treated as consideration for a service by an owner to the racing club in the course of the taxable activity. Section 5(11CB) provides:
(11CB) For the purposes of this Act, if a registered person in the course of a taxable activity receives a prize from a racing club or racing code for the performance in a race of a horse or greyhound owned by the registered person, the prize is treated as being consideration for a service provided by the registered person to the racing club or racing code in the course of the taxable activity.
[136] Although this section applies to owners, not trainers or riders, it is instructive that prize money is treated as consideration for a service provided by the owner.
[137] In Canada, the issue of prize money was considered by the Federal Court of Appeal in J Hudon Enterprises Ltd v Canada.61 The issue in Hudon was whether “purse money” paid to trainers and drivers of horses was intended to remunerate them for services rendered to owners, or whether they were “prizes”, which are exempt from GST under Canadian law.
[138] The Court held that these payments amounted to fees, contingent on success, for services rendered to owners and were not prizes. A prize was described under the relevant legislation as “an honour, an award or winnings that are won by those who demonstrate superiority or achievement over and beyond the rest of the
59 This is particularly so considering “riding fees” are separately identified in r 332(1) of the Rules of Racing 2013.
60 Brian Gubby Ltd (1985) 2 BVC 205,360 (VAT Tribunal) at 205,366, adopted in Michael Jackson Bloodstock Ltd [1992] BVC 945 (VAT Tribunal).
61 J Hudon Enterprises Ltd v Canada [2010] FCA 37.
field of competitors in a competition or contest.”62 A fee, however, was described by the Court as “remuneration, emolument, recompense or compensation that is earned by a particular person for performing particular services under a contract of employment or other direct retainer.”63
[139] Based on the regulatory framework and the agreements under which drivers and trainers received their payments, the Court determined the amounts were fees, not prizes. The Court noted that Standardbred horse racing is a heavily regulated activity. Under the regulations, purse money is payable to owners alone and the fees of drivers and trainers is deducted from this purse money. Further, the agreements between recognised harness participants’ associations and racing associations distinguished between purse money, won by horses and paid to the owners, from the fees that are paid to the drivers and trainers. Drivers and trainers were therefore not awarded purse money directly. As the payments made to drivers and trainers are fees and not prizes, the Court concluded that GST must be paid on these payments.
Discussion
[140] In New Zealand, in the normal course of business, trainers and riders provide their services to owners of race horses, and in consideration for this are paid fixed fees or wages by owners, independently of whether the horses win a stake- bearing place on race day. It was accepted by the parties that trainers are usually paid a monthly fee by owners, under a separate contractual arrangement, to cover the training services they provide and clubs are not a party to these arrangements.
[141] On race day, the participants must comply with the Rules. The owner/trainer must register the horse but the trainer and the rider must also provide their services. If they succeed in obtaining a stakes placement, they are paid individually on behalf of the Club. The GST component is also paid, where the participants are GST registered. NZTR deducts the GST component on behalf of the Club and the Club makes any required GST payments to Inland Revenue directly.
62 At [19], citing Excise Tax Act RSC 1985 c E-15, s 188(2).
63 J Hudon, above n 61, at [19].
[142] In Hudon, the Court held that the equivalent stakes money (purse money) were fees, contingent on success, that were intended to remunerate drivers and trainers for services rendered to owners.64 This is the distinguishing feature between the New Zealand regulatory framework and the regulations prevailing in Canada. The equivalent stakes money was payable to owners alone and the fees of drivers and trainers were deducted from the purse or stakes money. The Court in Hudon also considered the agreements in place, which made a distinction between stakes money won by horses and paid to the owners and the fees that were paid to the drivers and trainers.
[143] In New Zealand, however, the stakes money is payable directly to the trainers, riders and owners respectively in the proportions predicated by the Rules. GST must be paid on these payments, where participants are registered for GST. The Hudon decision is not helpful or relevant here.
[144] The Commissioner submits there is nothing in the Rules that states the payments should be treated as fees, contingent upon success, and therefore stakes payments are prizes gained due to a horse’s performance, paid to owners, trainers and riders in the same way. However, as canvassed above, the Commissioner’s position is problematic.
[145] The Commissioner refers to the Concise Oxford Dictionary definition of a prize as:65
A thing given as a reward to a winner or in recognition of an outstanding achievement. Something won in a game of chance.
[146] Prizes were exempt from GST under Canadian law, as the Court held in Hudon. Similarly, the United Kingdom Tax Tribunals have held that prize money resulting from horse racing is not consideration for any supply, either of goods or services, as the Commissioner submits.66
64 J Hudon, above n 61.
65 The precise edition of the Concise Oxford Dictionary referred to by the Commissioner could not be located, and is not known.
66 Brian Gubby, above n 60.
[147] The Commissioner’s position that stake money must be treated as prize money does not accord with the current practice in New Zealand, where GST and tax are payable on stakes payments. The fact that GST is deducted on behalf of the Club by NZTR is inconsistent with the Commissioner’s argument that stake money should be treated as prize money. Not only is GST payable on stake money, but so too is income tax.
[148] By way of comparison, Mr Colson on behalf of the Club, referred to the Australian Taxation Office’s (ATO) statement, in which it has provided guidance to its industry on the characterisation of stake money.67 Although it is a prize in Australia, it is not considered a classic prize, like a lottery. It is money acquired in the course of a taxable activity, for which income tax and GST must be deducted.
[149] The ATO, in a Goods and Services Tax Ruling, said in support of its position:68
[29] All participants make a supply to the event holder by participating in the event, although the event holder may give a prize only to the winner of the event. Other participants may receive nothing despite having also supplied their participation.
[150]Further, the ATO said:69
[37] An event holder offers prizes in an event as an inducement and reward for a winning performance in the event. As these prizes are in the nature of rewards for services rendered, we consider that there is a sufficient nexus between a prize given to the winner and the supply of the winners participation.
[151] I record that the Commissioner disputes that the ATO ruling is of assistance to this case, because the ruling does not deal with the issue of mere compliance with the Australian Rules, as a supply of services, and does not address the treatment of owners, trainers and/or riders in respect of prize money, among other reasons.70
67 Australia Taxation Office GST for the Racing Industry (July 2007).
68 Commissioner of Taxation Goods and Services Tax: Prizes (Australian Taxation Office, Goods and Services Tax Ruling GSTR 2002/3, October 2002).
69 Commissioner of Taxation, above n 66 (footnote omitted).
70 The Commissioner submits (i) there is no suggestion in the Ruling that mere compliance with the Australian Racing Rules is a supply to or by anyone; (ii) the Ruling does not suggest trainers’/riders’ contributions to the success of races in Australia are supplies; (iii) the Ruling still requires a nexus between the prize and supply; (iv) the Ruling addresses the owner of a race
Despite the Commissioner’s misgivings about the absence of detail in the Ruling, the ATO’s Ruling accords with my view of the characterisation of stakes money and its treatment in New Zealand.
[152] Both counsel referred to the characterisation of the “services” provided by rodeo riders and prize money in McCarthy v Australian Rough Riders Assoc Inc.71 There, Spender J observed that the “local organising rodeo acquires the ‘services’ of the rough rider”, which include his participation in the particular event and thereby the provision of entertainment to the spectators at the rodeo.72 He noted specifically:73
These services are provided by the rodeo rider in exchange for the prize money he earns.
[153] The Commissioner submits, in a rodeo event, riders simply enter themselves and the animal that is ridden is drawn randomly from a pool and allocated to the rider. The legal position is different, the Commissioner submits, and McCarthy is distinguishable.
[154] I accept that there are differences in the legal arrangements in relation to rodeo riders, and that the statutory definition of services under the Australian Trade Practices Act 1974 differs from the GST Act definition. McCarthy was not concerned with issues of GST or income tax but the unlawful restraint of trade of one of the rules of the Australian Rough Riders Assoc excluding participation in unaffiliated rodeos. However, it is notable for the comments made by Spender J, where he describes riders as providing services to event holders by participating in their races and, in exchange, event holders paying those who are successful.
[155] This view gains support from s 5(11CB), where prize money is treated as a consideration for a service provided to the Club by an owner and is GST liable. Stakes payments in New Zealand are treated as consideration for the supply of services, being GST liable where participants are registered for GST. The argument
horse, not the trainer or rider – indicating it is the owner who supplies the horse; and (v) the Ruling does not address prize money for trainers and/or riders.
71 McCarthy, above n 33.
72 At [56].
73 At [56].
that stakes payments are prizes is redundant because the label of “prize money” does not alter the way in which the stakes payments are treated for GST.
Conclusion
[156] Stakes payments to trainers and riders are consideration for the services provided and are treated as such both under the Rules and in practice, because in the hands of GST registered participants, the stakes payments are GST liable.
Summary of conclusions
[157]Question 1 – Do trainers and riders supply services to the Club?
(a)The legal arrangement among the Club, trainers and riders is governed by the Rules of Racing, which impose enforceable and reciprocal obligations on each of the Club, trainers and riders.
(b)Trainers and riders supply services to the Club on race day. The Club pays stakes in exchange for those services, together with GST. Consistent with that supply, trainers and riders (where GST registered) have GST deducted on their stakes payment, if their horse is placed in a stake-bearing place.
(c)Participation by the trainers and riders in Club races on race day is a supply of services, for which the Club pays stakes money to the successful trainers and riders and from which the Club also derives a benefit. This benefit does not alter the position that there is a supply of services.
[158] Question 2 – Are stakes payments to trainers and riders consideration for the services provided?
(a)Stakes are paid to riders and trainers as consideration for the services they provide in participating and succeeding in obtaining a stake-bearing place at race meetings and in races on race day.
(b)The Club pays riders and trainers as an inducement to participate in their races. There is a reciprocal relationship because riders/trainers participate and provide their services to the Club on race day for which they receive stakes payments, if they are successful.
(c)Stakes payments to trainers and riders are not treated as “prize money” but treated as “consideration” under the Act, the Racing Rules and in practice, because in the hands of GST registered participants, the stakes payments are GST liable.
Result
[159] Canterbury Jockey Club is entitled to GST input tax deductions for stakes payments made to GST registered trainers and riders in horse races conducted by the Club.
[160] In the absence of agreement between counsel on costs, counsel are to file memoranda within 20 working days of this decision.
Cull J
Solicitors:
Bell Gully, Wellington for Plaintiff Crown Law, Wellington for Defendant
0
3
0