(1)  No taxable supply for no show
(2)  Supply of scaffolding not supported
(3)  The Commissioner channels “The Castle”
(4)  Farm-out arrangements in the mining industry
(5)  Loyalty programs
(6)  Financial services amendments
(7)  Other developments

(1)  No taxable supply for no show

In Qantas Airways Ltd v Commissioner of Taxation (link) the Full Federal Court has unanimously allowed the taxpayer’s appeal against the earlier Administrative Appeal Tribunal’s decision that the airline made a taxable supply for GST purposes when a passenger cancels his or her flight booking, or failed to show for the flight, and no refund was either available or claimed.

The Commissioner argued in the appeal that there was a taxable supply when payment of the fare was made, being the reservation provided to the passenger. The Commissioner referred to the High Court’s decision in the Reliance Carpet case (link) (which dealt with a forfeited deposit on a real property sale) as supporting his submission that the fact that the parties bargain for an outcome which does not come to pass does not mean that nothing was supplied.

Qantas’ principal submission was that there was only one taxable supply in contemplation, namely the flight, and that failed.

The Court proceeded on the premise that a passenger entered into a contract with Qantas at the time of making the reservation, but considered that simply because an outcome, which is the supply paid for, fails, does not provide some warrant, “statutory mandate aside”, to search for and identify some anterior supply as representing the taxable supply. That was then where reliance on Reliance Carpet was misplaced because in that case there was a statutory mandate, being section 99-5 of the A New Tax System (Goods and Services Tax) Act 1999 which specifically treats a deposit as consideration for a supply if and when a deposit is forfeited.

In Reliance Carpet the High Court had made it clear that while the entering into the contract for the sale of real property was a supply, absent the mandate of Division 99 it would not have been the relevant supply which would have been the conveyance of the property. In this case, the relevant supply was the flight contemplated by the contract and not the reservation, and since that did not happen, there was no taxable supply. Actual travel was the essence, and sole purpose, of the transaction.

While the facts of each individual situation will need to be closely considered to determine what is the ‘relevant supply’, the decision casts serious doubt on many other circumstances in which ‘facilitation supplies’ as described by the ATO in its ruling on cancellation fees, GSTR 2009/3 (link), are actually taxable supplies. At the time of writing we are still awaiting news of whether the Commissioner will seek special leave to appeal to the High Court, but businesses should now review payments they receive or retain in the nature of forfeitures or cancellations, not just in the travel industry but for all sorts of events, accommodation and appointments, to determine their correct GST treatment and the potential for refunds of overpaid GST.

(2) Supply of scaffolding not supported

In an interesting case the Federal Court has explored the concept of making a supply in the context of a taxpayer which obtained a judgement against a third party for the conversion of the taxpayer’s scaffolding – Reglon Pty Limited v Commissioner of Taxation (link).

The taxpayer hired scaffolding to a hiring company which on-hired the scaffolding to a builder. The scaffolding was moved onto a site where it was intermingled with the scaffolding of another company. The builder went into liquidation and a finance company as mortgagee entered into possession of the builder’s assets and granted another party a licence to use the intermingled scaffolding. The taxpayer commenced proceedings in the NSW Supreme Court seeking return of its scaffolding or, alternatively, damages for conversion of the scaffolding. The taxpayer obtained judgement against the finance company for the tort of conversion, and was awarded damages representing the GST-inclusive market value of the taxpayer’s scaffolding at the time of conversion.

The Commissioner assessed the taxpayer for GST of 1/11th of the damages received. The Federal Court however ruled that, while ownership of the scaffolding vested in the finance company through the conversion, the taxpayer did not make a supply as the transfer/extinguishment of ownership occurred by operation of law and without the taxpayer’s consent and was triggered by the payment of the damages which did not depend upon any action by the taxpayer.

The corollary of this is that the finance company is also presumably unable to claim an input tax credit, so the taxpayer has effectively obtained a GST windfall gain at the expense of the finance company. The Commissioner has appealed this decision to the Full Federal Court.

(3) The Commissioner channels “The Castle”

In a case involving the (since-amended) obscure gambling supply provisions, the Federal Court in International All Sports v Commissioner of Taxation (link) has found that the taxpayer could include prizes paid to non-resident gamblers in its calculation of “total monetary prizes”, even though “total amount wagered” in the legislative calculation of the taxpayer’s GST liability did not include amounts wagered by those non-residents.

The GST legislation was amended from 1 November 2009 to address this anomaly, and the Explanatory Memorandum to the amendment specifically acknowledged that on a literal interpretation of the provisions total monetary prizes did include bets by persons outside Australia.

The Commissioner sought to argue how the text of the previous provisions could support the exclusion of non-resident prizes, and argued that the literal interpretation was not appropriate in the circumstances as it provided an outcome that could not have been intended by the legislature. The Court however dismissed the Commissioner’s textual interpretation, and considered that this was not a case where a court could be confident not only that the words of the provision could not have been intended but also that the meaning actually intended was an obviously alternative identifiable one. At most it might be a case where the draftsman had not thought through the implications of the words which he or she used, but this was not sufficient to warrant the court to dismiss the literal meaning.

The Court also rejected the Commissioner’s submission that he was not required to refund the net amounts to the taxpayers under section 105-65 in Schedule 1 to the Taxation Administration Act 1953. That provision allows the Commissioner to refuse to pay a refund to a taxpayer in certain circumstances, one of which is that a supply was incorrectly treated as a taxable supply. This was clearly not a case where a supply was incorrectly treated as taxable, so again the Commissioner again asked the Court to reject the literal interpretation in favour of what the Commissioner thought the legislature would have meant and the ‘evident purpose’ of the provision. Not surprisingly the Court dismissed this argument, including the comment that it was not “too literal a meaning” as the Commissioner contended; it was the only reading which the words of the section sensibly convey.

Maybe the Commissioner would have more luck with “the vibe” at the High Court.

(4) Farm-out arrangements in the mining industry

The ATO has released two draft rulings dealing with income tax and GST implications of farm-out arrangements in the mining industry – MT 2011/D1 dealing with immediate transfer farm-out arrangements (link), and MT 2011/D2 dealing with deferred transfer farm-out arrangements (link).

The draft rulings generally cover situations where the owner of an interest in a mining tenement (the farmor) transfers a percentage of that interest to the farmee if the farmee meets specified exploration commitments (and the farmee may also make cash contributions). The difference between the immediate and deferred arrangements is that in the former the transfer of the interest to the farmee happens on entry into the agreement whereas for the latter it happens after the farmee has met all of its commitments.

Essentially the ATO view is that these are barter arrangements, with both the farmor and farmee potentially making taxable supplies to each other, and any monetary consideration paid also attracts GST.

The timing of attribution of the respective GST liabilities and input tax credits is the main issue here, in particular for the deferred farm-out arrangements where the farmee provides some exploration benefits and/or makes some cash payments but not all the pre-conditions are met and the transfer of the interest in the mining tenement does not eventuate. A draft Legislative Instrument is intended to alter the general attribution rules so that the farmor’s GST liability (and the farmee’s input tax credit entitlement) on the supply of the interest in the mining tenement does not arise until the farmee exercises its right to acquire the interest.

The draft ruling indicates that, if the interest is not ultimately transferred, the farmor does not have to account for GST in respect of any cash or non-cash benefits received that were to be consideration for the transfer of the interest. This would appear to concur with the Qantas decision referred to above, although precisely what each cash or non-cash benefit was provided to the farmor for would need to be closely examined.

The ATO also raises the possibility of the farmor making a supply of a going concern, such that there could be a barter supply involving a GST-free and taxable supply. From the farmee’s perspective it may be preferable to not agree to treat the farmor’s supply as GST-free to avoid the need to be funded its GST liability by the farmor.

The draft rulings are quite specific as to what arrangements they cover and what they don’t, so parties to farm-out arrangements should closely examine their individual circumstances.

(5) Loyalty programs

On 24 August 2011 the ATO issued a draft public ruling regarding loyalty programs, GSTR 2011/D3 (link). This is the first public ATO document issued on loyalty programs for more than 11 years, although there have been many private rulings issued to particular taxpayers. The draft ruling doesn’t attempt to encompass all the GST issues which loyalty programs raise, nor all types of loyalty programs, but it does provide detailed analysis of the characterisation of the supplies being made in a ‘typical’ loyalty program and what the consideration is for those supplies. A few of the more interesting points are discussed below.

Commonly a program partner (eg a financial institution providing a credit card) makes payments of ‘points fees’ to the program operator in respect of points allocated to program members (eg credit card customers), which effectively go towards funding the goods or services redeemed for the points allocated to the members. The ATO’s view is that these payments are consideration for supplies made by the program operator to the program partner of points provided to the members, which are supplies of rights to acquire goods or services. These supplies are then not subject to GST to the extent that the points would be redeemed for GST-free or input taxed supplies. Program operators are expected to determine on a fair and reasonable basis the extent to which points would be redeemed for GST-free or input taxed supplies to determine the GST payable on its supplies to the program partners. Given that many program partners are unable to claim full input tax credits for GST they incur, the supplies not being wholly subject to GST is a welcome financial result.

When the points are redeemed, the ATO takes the view that the redemption partner makes a supply of the goods or services both to the program operator and to the member. The payment by the program operator to the redemption partner is consideration for the supply of the goods or services to the program operator, and there is only consideration for the supply by the redemption partner to the member if the member makes a ‘top-up’ or ‘points plus’ payment.

One aspect of the draft ruling that appears to differ from what we understood to have been the ATO position prior to the issue of the draft ruling, is that where the payments made by program partners are made to a trust nominated by the program operator. The ATO takes the view that the program operator is still making the supplies to the program partners and, to the extent that those supplies are taxable, is liable for GST. There is zero explanation of this conclusion in the draft ruling (except a footnote to an unrelated AAT decision), but presumably it is on the basis that the program operator made supplies ‘for consideration’ which was ‘in connection with’ its supplies, even though the consideration was actually paid to another entity. But surely rather than such a broadbrush approach the nature of each individual arrangement needs to be examined? It may be in some situations that the trust is actually making the supplies to the partners.

Taxpayers involved in any way in loyalty programs should ensure that they understand the implications of this draft ruling on their arrangements.

(6) Financial services amendments

The first round of amendments to the financial services rules announced in the 2010/2011 Federal Budget was released through Exposure Draft legislation on 18 August 2011.

This related to:

The other recommendations of the Board of Taxation in relation to GST and financial services that the Government has accepted are expected to be included in amendments to the GST Regulations. These include making hire purchase transactions wholly taxable and some amendments to the ‘reduced input tax credit’ provisions.

(7) Other developments

If you would like further information or assistance with any of the issues highlighted above or any other GST issues, please contact Damian Welshe on 0415 477 099 or at dwelshe@gstconsulting.com.au.

The GiST 6 September 2011 Edition © Damian Welshe & Associates Pty Ltd

The information in this newsletter is general in nature and does not constitute tax advice. It does not take account of your individual circumstances, for which you should seek specific professional advice.