FEDERAL COURT OF AUSTRALIA
TT-Line Company Pty Ltd v Commissioner of Taxation [2009] FCAFC 178
A New Tax System (Goods and Services Tax ) Act 1999 (Cth) ss 9-5, 9-15, 9-40
A New Tax System (Commonwealth-State Financial Arrangements) Act 1999 (Cth) Sch 2
Appropriation Act (No. 1) 2007 – 2008 (Cth) Sch 2
Constitution s 114
American Express International Inc v Commissioner of Taxation (2009) 73 ATR 173 referred to
Berry v Federal Commissioner of Taxation (1953) 89 CLR 653 referred to
Combet v Commonwealth (2005) 224 CLR 494 referred to
TT-LINE COMPANY PTY LIMITED v COMMISSIONER OF TAXATION
NSD 685 of 2009
EMMETT, EDMONDS & PERRAM JJ
18 DECEMBER 2009
SYDNEY
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IN THE FEDERAL COURT OF AUSTRALIA |
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NEW SOUTH WALES DISTRICT REGISTRY |
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GENERAL DIVISION |
NSD 685 of 2009 |
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ON APPEAL FROM THE FEDERAL COURT |
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BETWEEN: |
TT-LINE COMPANY PTY LIMITED Appellant
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AND: |
COMMISSIONER OF TAXATION Respondent
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JUDGES: |
EMMETT, EDMONDS & PERRAM JJ |
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DATE OF ORDER: |
18 DECEMBER 2009 |
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WHERE MADE: |
SYDNEY |
THE COURT ORDERS THAT:
1. The appeal be dismissed.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using eSearch on the Court’s website.
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IN THE FEDERAL COURT OF AUSTRALIA |
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NEW SOUTH WALES DISTRICT REGISTRY |
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General Division |
NSD 685 of 2009 |
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ON APPEAL FROM THE FEDERAL COURT |
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BETWEEN: |
TT-LINE COMPANY PTY LIMITED Appellant
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AND: |
COMMISSIONER OF TAXATION Respondent
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JUDGES: |
EMMETT, EDMONDS & PERRAM JJ |
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DATE: |
18 DECEMBER 2009 |
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PLACE: |
SYDNEY |
REASONS FOR JUDGMENT
EMMETT J:
INTRODUCTION
1 This appeal concerns the construction of provisions of the A New Tax System (Goods and Services Tax) Act 1999 (Cth) (the GST Act). Specifically, it involves the meaning of s 9-15(3)(c), which is concerned with an exemption for payments made by one government related entity to another government related entity, where the payment is specifically covered by an appropriation under an Australian law. It also involves the meaning of s 9-15(1), which defines consideration for the purposes of the GST Act.
2 The appeal arises out of a dispute between the appellant, TT Line Company Pty Limited (TT Line), and the respondent, the Commissioner of Taxation (the Commissioner), concerning the liability of TT Line for goods and services tax (GST) under s 9-40 of the GST Act. Under s 9-40, an entity must pay the GST payable on any taxable supply that the entity makes. Under s 9-5, an entity makes a taxable supply if, relevantly, the entity makes the supply for consideration. Under s 9-15(1), consideration includes any payment or any act or forbearance in connection with a supply of anything. Under s 9-70, the amount of GST on a taxable supply is 10% of the value of the taxable supply. Section 9-75 provides for the calculation of the value of a taxable supply.
3 However, s 9-15(3)(c) provides that a payment made by a government related entity to another government related entity is not the provision of consideration if the payment is specifically covered by an appropriation under an Australian law. It is common ground that TT Line is a government related entity for the purposes of s 9-15(3)(c).
4 TT Line commenced a proceeding in the Court in which it sought a declaration that it is not liable to pay GST in accordance with s 9-40 in relation to payments made by the Commonwealth of Australia to TT Line under the Bass Strait Passenger Vehicle Equalisation Scheme (the Scheme) or that it is exempt by reason of the operation of s 9-15(3)(c). The proceeding was conducted on the basis of agreed facts. On 18 June 2009, a judge of the Court declined to make the declarations and ordered that the application be dismissed. By agreement between TT Line and the Commissioner, no order was made concerning the costs of the proceeding. By notice of appeal filed on 9 July 2009, TT Line appealed from the orders of the primary judge.
THE SCHEME
5 In September 1996, the Commonwealth established the Scheme. The stated aim of the Scheme was to reduce the costs associated with the transport by sea of passenger vehicles across Bass Strait. When the Scheme was first promulgated, the then Minister for Transport and Regional Services stated in a press release that sea travel between Tasmania and the mainland would be cheaper with the introduction of a proposed rebate on fares for motorists accompanying their vehicles across Bass Strait. The press release stated that the rebate would be provided against the fare charged by a ferry operator for a driver plus passenger vehicle to travel by sea across Bass Strait. The proposed rebate was to be calculated to ensure that the net fare for a vehicle plus driver travelling in standard share cabin accommodation on a Bass Strait crossing would be comparable to the notional cost of driving an equivalent distance on a highway. The rebate was to be provided to the driver of a passenger vehicle as a reduction in the fare charged by the relevant ferry operator and the ferry operator would be reimbursed on a monthly basis by the Commonwealth Department of Transport and Regional Services (the Department).
6 The Scheme currently operates under Ministerial Directions of 21 September 2002 (the Directions). Clause 2 of the Directions states that the aim of the Scheme is to reduce the cost of seagoing travel for eligible passengers. An eligible passenger is a passenger accompanied by an eligible passenger vehicle on a Bass Strait service, being the driver of that passenger vehicle. A passenger vehicle is a motor vehicle or bicycle designed for the carriage of passengers. An eligible passenger vehicle is a passenger vehicle that accompanies an eligible passenger on a Bass Strait service. Bass Strait service is a commercial shipping service engaged in the carriage of passengers and passenger vehicles on a direct sea voyage between a port in Tasmania and a port on the Australian mainland and vice versa.
7 Clause 7.1 of the Directions provides that a rebate provided by a service operator to an eligible passenger is to take the form of a reduction to the passenger’s vehicle fare. Upon taking a booking for the carriage of a passenger, a service operator must determine whether the passenger is an eligible passenger for the purposes of the Scheme. Under clause 7.3, where a service operator determines that a passenger is an eligible passenger, the operator must, concurrently with the payment for a booking, deduct from that person’s passenger vehicle fare a rebate determined in accordance with Schedule 1 to the Directions. At all relevant times, the standard passenger vehicle rebate applicable under the Scheme was $168 each way.
8 Under clause 8.1 of the Directions, where a passenger has not received a rebate from a service operator, the passenger may claim a rebate directly from the Department. Clause 9.1 provides for the submission of claims for reimbursement by a service operator to the Deputy Secretary of the Department. A service operator may make a claim for reimbursement for an eligible passenger who has travelled within the previous 12 months. The Directions also provide for recovery of all over payments made to an operator.
THE APPROPRIATION
9 Schedule 1 to the Appropriation Act (No 1) 2007-2008 (Cth) (the Appropriation Act) specifies services for which money is appropriated. Under that schedule, $720,706,000 was appropriated for the Department. The sum of $720,706,000 included an amount of $451,981,000 for:
Outcome 1: Fostering an efficient, sustainable, competitive, safe and secure transport system.
10 Figure 3.2 in the 2007-08 Budget Statements for the Transport and Regional Services Portfolio (the Budget Statements) deals with:
Outcome 1 - Outputs and administered expense programs for 2007-08.
Output Group 1.4 is for “Transport Services”. Output 1.4.1, which is for “Maritime and Land Transport”, specifies the Scheme. Table 3.2.1 in the Budget Statements includes the sum of $32,000,000 as budget estimate for 2007-08 for the Scheme in relation to Outcome 1.
11 Thus, the payment of rebates under the Scheme is provided for in the Appropriation Act. Thus, the payment of the rebate is covered by an appropriation under an Australian law.
THE REBATE IN QUESTION
12 TT Line operates a passenger vehicle and freight ferry service between Tasmania and the Australian mainland under the trading name “Spirit of Tasmania”. At the time of making an internet booking for a Bass Strait crossing with TT Line, a prospective passenger must check a box to confirm that the passenger has read and accepts the fare conditions and the terms and conditions of carriage relating to the proposed voyage. Those conditions make no reference to the Scheme. However, on the page of the TT Line’s internet site that deals with fares, the following statement appears:
The prices listed include the deduction of the Bass Strait Passenger Vehicle Equalisation Scheme Rebate of [$168] for a standard car.
13 On 17 April 2008, a Mr Egan made an internet booking with TT Line for a Bass Strait crossing for two adults. Mr Egan’s booking included the transport of a motor vehicle. Mr Egan was an eligible passenger and his motor vehicle was an eligible passenger vehicle. The total fare was $574, including GST. Upon completion of his internet booking, Mr Egan was provided with a reservation confirmation, which confirmed the details of the reservation and a total price of $574, including GST. A document entitled “Reservation Confirmation”, which was generated by TT Line for internal purposes but which was not provided to Mr Egan, showed that the gross amount paid by Mr Egan was $574. The document also referred to the rebate of $336 payable under the Scheme. It follows that the total fare payable by Mr Egan, before any reduction for the rebate, was $910.
14 On 27 May 2008, TT Line submitted a claim for reimbursement, in accordance with clause 9 of the Directions, for the period from 28 April 2008 to 25 May 2008. The total amount of the claim for that period was $1,958,729, which included $336 in respect of Mr Egan’s transport. On 4 June 2008, TT Line received payment of the sum of $1,958,729 by way of reimbursement under the Scheme for the period of 28 April 2008 to 25 May 2008. That sum included the sum of $336 in respect of Mr Egan’s transport. Thus, there was, at least in one sense, a payment by one government related entity (the Department) to another government related entity (TT-Line).
THE ISSUES
15 The issue in the proceeding is whether TT Line is liable to pay GST in respect of the transport services supplied by it to Mr Egan by reference to:
- the amount it actually received from Mr Egan as payment for those services; or
-
that amount, together with the amount of the rebate paid to TT Line by the Commonwealth under the Scheme, in respect of those services.
That issue turns upon two questions as follows:
- whether the amount received by TT Line from the Commonwealth by way of reimbursement under the Scheme was consideration in connection with the supply of transport services to Mr Egan within the meaning of s 9-15(1) of the GST Act;
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whether the amount received by TT Line from the Commonwealth by way of reimbursement under the Scheme of the rebate allowed by TT-Line to Mr Egan, in respect of the services provided to Mr Egan, is a payment made by one government related entity to another government related entity specifically covered by an appropriation under an Australian law within the meaning of s 9-15(3)(c) of the GST Act.
The primary judge answered the first question in the affirmative and the second question in the negative, with the consequence that the proceeding was dismissed.
THE CONSIDERATION RECEIVED BY TT-LINE
16 There can be no doubt that TT Line supplied transport services to Mr Egan. The first question that is raised is whether the payment of $336 made by the Commonwealth to TT Line was consideration received by TT Line in connection with the supply of those services.
17 The Scheme provides a rebate to eligible passengers, not to operators. A passenger does not actually pay the full fare to TT Line. Rather, the Scheme contemplates that an operator such as TT Line will charge a passenger the net fare after deducting the amount of the rebate, on the basis that the operator will then claim reimbursement from the Commonwealth of the rebate allowed to the passenger. Mr Egan was an eligible passenger and his vehicle was an eligible passenger vehicle. Accordingly, under the Scheme, Mr Egan was entitled to a rebate in order to reduce the cost to him of travelling across Bass Strait to Tasmania and return. TT Line had no entitlement to the rebate. Rather, it was entitled to be reimbursed for the amount of the rebate that it allowed to Mr Egan. Mr Egan received the benefit of the rebate, since he paid to TT Line only the net fare, calculated after deducting the rebate.
18 The correct analysis of the arrangement is that the fare for the transport services provided by TT Line to Mr Egan was, in aggregate, $910, being $574 paid by him plus the rebate of $336 given to Mr Egan by the Commonwealth. That is the consideration received by TT Line for providing the transport services to Mr Egan. Accordingly, that is the amount upon which GST should be calculated. That is to say, the sum of $336 received by TT Line from the Commonwealth was part of the consideration for the supply of transport services to Mr Egan. The primary judge was correct in concluding that the payment received by TT Line from the Commonwealth was a payment in connection with the supply by TT Line of transport services to Mr Egan.
OPERATION OF S 9-15(3)(C)
19 The GST Act arose in part from an inter-governmental agreement on the reform of Commonwealth/State financial relations entered into in 1999 (the Financial Relations Agreement). The parties to that agreement were the Commonwealth and the six States and the two Territories. The Financial Relations Agreement stated that the objectives of certain proposed reforms set down in it included the achievement of a new national tax system, the provision to State and Territory Governments of revenue from “a more robust tax base that can be expected to grow over time” and an improvement in the financial position of all State and Territory Governments.
20 Clause 5 of the Financial Relations Agreement provided that the parties would undertake all necessary steps to have appropriate legislation enacted to give effect to several stated reform measures. The first step was that the Commonwealth would legislate to provide for all of the revenue from the proposed GST to be given to the States and Territories. By clause 7, the Commonwealth was to make GST revenue grants to the States and Territories equivalent to the revenue from the GST, subject to the arrangements in the agreement. GST revenue grants were to be freely available for use by the States and Territories for any purposes. Clause 17 of the Financial Relations Agreement stated that the parties intended that the Commonwealth, States, Territories and local government and their statutory corporations and authorities would operate as if they were subject to the proposed GST legislation in the same way as non-government organisations.
21 The exemption in s 9-15(3)(c) was included by way of amendment to the Bill for the GST Act in order to provide that appropriations by an Australian government agency would not be subject to GST. A memorandum published in connection with the proposed amendment stated that the Bill currently made no special provision for government appropriations and that the amendment was to establish that appropriations between and within governments would not be subject to GST. The proposed s 9-15(3)(c) was to provide that appropriations from one Australian government agency to another would not constitute the provision of consideration under the GST Act. No further rationale was advanced. Indeed, the rationale is by no means clear, in the light of the stated intention in the inter-governmental agreement that all levels of government agencies would operate as if they were subject to the proposed GST.
22 The effect of s 9-15(3)(c) is that a payment will not constitute the provision of consideration if the payment satisfies two pre-requisites, namely, that:
- the payment is made by a government related entity to another government related entity; and
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the payment is specifically covered by an appropriation under an Australian law.
The first pre-requisite is satisfied in a sense, in that the reimbursement by the Department to TT Line in respect of Mr Egan’s transport services was a payment made by one government related entity, namely the Commonwealth, to another government related entity, namely TT Line. Further, the Appropriation Act is an Australian law and there was clearly an appropriation under the Appropriation Act in respect of the amount of the rebate paid in respect of Mr Egan’s transport services.
23 However, while the item in the Output 1.4.1 section of figure 3.2 in the Budget Statements refers to the Scheme in specific terms, it does not refer to TT Line. Thus, any operator would have the same commercial benefit as TT Line has in relation to the rebate under the Scheme. On the other hand, an operator that was not a government related entity could not satisfy the first prerequisite of s 9-15(3)(c). Thus, if TT Line’s claim that it is not liable to pay GST were accepted, there would be an anomalous result as between TT Line, on the one hand, and another operator that is not a government related entity, on the other hand. That is to say, TT Line would have the benefit of the exemption but the other operator would not.
24 The object of the exemption in s 9-15(3)(c) is to ensure that there will be no GST where the purpose of the relevant appropriation is to provide funds to a government related entity. To satisfy the provision, it must be clear that the appropriation is for the benefit of a government related entity. That is not the effect of the appropriation in figure 3.2. As the Direction makes clear, the appropriation is to provide a benefit to eligible passengers in respect of the carriage of eligible passenger vehicles. It was Mr Egan who received the benefit of the rebate, not TT-Line. TT-Line was no more than a conduit for the providing of the rebate to Mr Egan. The payment was not a payment by one government related entity to another in the relevant sense whether or not it was specifically covered by the appropriation under the Appropriation Act. I do not consider that the requirements of s 9-15(3)(c) were satisfied in relation to the subsidy paid by the Department in respect of Mr Egan’s Bass Strait crossing.
CONCLUSION
25 The primary judge did not err in answering the questions as indicated above. The appeal should be dismissed.
I certify that the preceding twenty-five (25) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett.
Associate:
Dated: 18 December 2009
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
general division
NSD 685 of 2009
ON APPEAL FROM THE FEDERAL COURT
BETWEEN:
TT-LINE COMPANY PTY LIMITED
Appellant
AND:
COMMISSIONER OF TAXATION
Respondent
JUDGES:
EMMETT, EDMONDS & PERRAM JJ
DATE:
18 DECEMBER 2009
PLACE:
SYDNEY
REASONS FOR JUDGMENT
EDMONDS J:
26 This is an appeal from a judge of this Court dismissing an application for declaratory relief that the appellant was not liable to pay Goods and Services Tax (‘GST’) under A New Tax System (Goods and Services Tax) Act 1999 (Cth) (‘the GST Act’) in respect of the payment by the Commonwealth of Australia to the appellant of a claim for reimbursement under the Bass Strait Passenger Vehicle Equalisation Scheme (‘the Scheme’).
27 The issue before the primary judge and this Court on appeal is whether the appellant is liable to pay GST on transport services supplied by it by reference to:
1. The amount it actually receives from its fare-paying customers for those services; or
2. that amount together with the amount paid by the Commonwealth under the Scheme in respect of those services.
28 The outcome to that issue turns upon the answer to two questions:
3. Q1: Whether an amount received by the appellant from the Commonwealth by way of reimbursement under the Scheme in connection with the supply of transport services to a customer is consideration within the meaning of s 9-15(1) of the GST Act for the supply of those services; if, and only if, that question is answered in the affirmative –
4. Q2: Whether an amount received by the appellant from the Commonwealth by way of reimbursement under the Scheme is ‘a payment made by a government related entity to another government related entity … specifically covered by an appropriation under an Australian law’, so as not to be the provision of consideration by virtue of s 9-15(3)(c) of the GST Act.
29 The primary judge answered the first question in the affirmative and the second question in the negative, with the result that her Honour dismissed the application.
FACTUAL CONTEXT
30 The facts in respect of which the declaration claimed was sought are set out in the agreed statement of facts filed by the parties prior to the hearing before the primary judge. They are paraphrased in the reasons of the primary judge at [3] – [6] inclusive.
Background
31 The appellant is incorporated under the Corporations (Tasmania) Act 1990 (Tas) and is wholly owned by the State of Tasmania. It operates a passenger, vehicle and freight ferry service between Tasmania and the Australian mainland trading under the name ‘Spirit of Tasmania’.
The Scheme
32 The Commonwealth Government established the Scheme in September 1996. The Scheme is operated under Ministerial Directions approved by the then Minister for Transport and Regional Services dated 1 September 2002 (‘Ministerial Directions’).
33 The stated aim of the Scheme in the Ministerial Directions is ‘to reduce the cost of seagoing travel for eligible passengers’ (cl 2.1). An ‘eligible passenger’ is defined in the Ministerial Directions to mean (relevantly) ‘a passenger accompanied by an eligible passenger vehicle on a Bass Strait Service being the driver of that passenger vehicle’ (cl 1.1(m)). An ‘eligible passenger vehicle’ is defined to mean (relevantly) ‘a passenger vehicle which accompanies an eligible passenger on a Bass Strait Service’ (cl 1.1(o)). A ‘Bass Strait Service’ is, in turn, defined to mean ‘a commercial shipping service engaged in the carriage of passengers and/or passenger vehicles on a Bass Strait crossing’ (cl 1.1(d)).
34 The Ministerial Directions create two alternative mechanisms by which to achieve its stated aim, namely:
(1) By provision of a rebate by the Commonwealth to the ‘Service Operator’ for a reduction in the ‘eligible passenger’s’ vehicle fare at the time of the booking of the travel by him or her (cl 7, Ministerial Directions). A ‘Service Operator’ is (relevantly) a person operating a ‘Bass Strait Service’ (cl 1.1(aa)). The ‘Service Operator’ makes a monthly claim for reimbursement to the Department of Transport and Regional Services (‘the Department’); or
(2) by a rebate direct to an ‘eligible passenger’ where the ‘eligible passenger’ has not received a reduction in his or her fare from the ‘Service Operator’ upon application by the ‘eligible passenger’ to the Department (cl 8, Ministerial Directions).
In practice, and relevantly for the present case, the Scheme operates by the Commonwealth reimbursing the appellant.
35 Funding for the Scheme is conferred by the Appropriation Act (No. 1) 2007 – 2008 (Cth) (‘the Appropriation Act’), of which the Scheme is listed as an ‘Administered programme’ of the Department in accordance with the Portfolio Budget Statements for 2007 – 2008.
Mr J Egan
36 The application before the primary judge adopted as a vehicle to resolve the broader issues identified above the transport services provided by the appellant to Mr J Egan of Hoppers Crossing, Victoria (‘Mr Egan’) and a companion in May 2008, being transport from Melbourne to Devonport on 6 May 2008 for two adults and one motor car on board the ‘Spirit of Tasmania’ and a return voyage on 17 May 2008 (‘Mr Egan’s travel’).
37 When making the booking, Mr Egan confirmed that he had read and accepted the Fee Conditions and the Terms and Conditions of carriage by checking the relevant box on the internet booking form. These conditions made no mention of the Scheme, however, the standard car fares page of the site stated that the listed prices included the deduction of the Scheme rebate of $168 each way for a standard car. A reservation confirmation sent on completion of the booking confirmed the details of the reservation and the total price of $574 (including GST).
38 On 27 May 2008, the appellant made a claim for reimbursement under the Scheme for the period 28 April 2008 to 25 May 2008 in the amount of $1,958,729. That amount included $336 in respect of Mr Egan’s travel. On 4 June 2008, the appellant received from the Commonwealth payment of $1,958,729, which included $336 in respect of Mr Egan’s travel.
Other Factual Matters
39 On the hearing of the appeal, the appellant drew the Court’s attention to the following further matters:
(1) Pursuant to ss 6 and 14 and Schedule 1 to the Appropriation Act, an amount of $846.5 million was appropriated to fund departmental and administered expenses of the Transport and Regional Services Portfolio. Of this $477.8 million was appropriated to administered expenses of the Department, including under ‘Outcome 1 – Fostering an efficient sustainable competitive safe and secure transport system’ an amount of $264.7 million in administered expenses. The Portfolio Budget statements in respect of the Appropriation Act nominated under Outcome 1, in Output Group 1.4.1, Maritime and land transport including the Scheme.
(2) The intended and principal recipient of payments under the scheme is the appellant, upon whose vessel the scheme was launched and by reference to whose charges the subsidy payments are calculated. Some 99.9% of all payments made by the Commonwealth under cl 9 of the Ministerial Directions are made to the appellant.
QUESTION 1 – WHETHER REIMBURSEMENT UNDER THE SCHEME TO THE APPELLANT IS CONSIDERATION FOR A SUPPLY BY THE APPELLANT OF TRANSPORT SERVICES TO AN ‘ELIGIBLE PASSENGER’
The Legislative Scheme
40 Relevantly, the words of the statute provide:
9-15 Consideration
(1) Consideration includes:
(a) any payment, or any act or forbearance, in connection with a supply of anything; and
(b) any payment, or any act or forbearance, in response to or for the inducement of a supply of anything.
(2) It does not matter whether the payment, act or forbearance was voluntary, or whether it was by the *recipient of the supply.
The Primary Judge
41 As indicated at [29] above, the primary judge answered this question in the affirmative. Her Honour’s reasoning on this question is encapsulated in the following passage:
[28] The supply in question is the supply by the applicant of travel services to the eligible passenger. The reimbursement of the deduction allowed to Mr Egan was payment made under the Scheme the express purpose of which was to reduce the cost of such travel services. It was clearly a payment “in connection with” the supply of the travel services to Mr Egan and might also be described as having been made “in response to or for the inducement of” the supply of travel services to Mr Egan. That being so, the fact the consideration for the supply of services to Mr Egan flowed in part from the third party (the Commonwealth) and that Mr Egan was never under any obligation to pay the full (unrebated) amount is not to the point. Similarly, I do not think it is necessary to resort, as the Commissioner did in submissions, to the concept of a practical business relationship between the reimbursement paid to the applicant and the travel services supplied to Mr Egan, although I accept that there was such a relationship. It is sufficient to note that the circumstances of the payment made in the context of the Scheme fall squarely within the words of the Statute.
The Commissioner’s Submissions
42 The Commissioner submitted that her Honour’s conclusion on this question was plainly correct. According to the Commissioner it was fortified, as her Honour noted at [33] of her reasons, by the fact that the appellant’s right to retain any payment it received under the Scheme in relation to Mr Egan’s travel was contingent upon its supply of those travel services to him. If it had failed to supply those services, the appellant was liable to repay any reimbursement it received in connection with them.
43 The Commissioner further observed by way of submission that the primary judge was satisfied that there was a ‘practical business relationship’ between the reimbursement paid to the appellant under the Scheme and Mr Egan’s travel although her Honour found it unnecessary to resort to that concept to reach her conclusion. The reference to ‘practical business relationship’ is derived from the judgment of Kitto J in Berry v Federal Commissioner of Taxation (1953) 89 CLR 653. That case concerned s 84 (repealed) of the Income Tax Assessment Act 1936 (Cth) which included in a taxpayer’s assessable income a ‘premium’ which was defined as ‘any consideration in the nature of a premium, fine or foregift payable to any person for or in connection with the grant or assignment by him of a lease …’. Kitto J considered that the words ‘in connection with’ in that provision were satisfied if there was a ‘substantial relation, in a practical business sense’ between the payment on the one hand, and the grant or assignment of the lease, on the other hand (at 659).
The Appellant’s Submissions
44 The appellant submitted that payments pursuant to an appropriation, that are not expressed to be in connection with any supply, cannot, by definition, be ‘consideration’ because there is no nexus with any supply. This submission was further developed in the following way. While acknowledging that the payment would not be made if no supply of transport services occurred, the appellant submitted that the supply gives rise to no entitlement to receipt of the payment. According to the appellant, payments are made by the Commonwealth under a scheme which is designed to give effect to Government policy, as a subsidy and by way of gratuity, not as a matter of obligation.
45 The appellant made a parallel submission that the Commonwealth payment is made, not relevantly ‘in connection with’ the supply of transportation services, but as a subsidy ‘in connection with’ the Scheme. There was, according to the appellant, a novus actus interveniens, to use the words of Emmett J in American Express International Inc v Commissioner of Taxation (2009) 73 ATR 173 at [57], breaking the nexus required by s 9-15(1).
Analysis and Conclusion
46 In my view, there are difficulties in the way of the scope of the term ‘consideration’ for which the appellant contends, namely, that it does not extend to payments where there is no enforceable entitlement to receive the payment ([44] above) or by reason that there has been some intervening act which has broken the nexus between the payment and the supply ([45] above).
47 As to the first, the fact that the appellant had no enforceable entitlement to receive any payment under the Scheme even if it provided transport services to Mr Egan is rendered irrelevant to the question of whether a payment is consideration for the purposes of the GST Act by the express words of section 9-15(2).
48 As to the second, there is no intervening act, as was found by Emmett J in American Express in the form of the non-compliance by the cardholder of his or her contractual obligations, which breaks the nexus between the payment and the supply.
49 In any event, as the primary judge concluded at [28] of her reasons, the payment might also be described as one made ‘in response to or for the inducement of the supply of travel service to Mr Egan’ and thus falls within s 9-15(1)(b) of the GST Act. On the hearing of the appeal, the appellant did not put this conclusion in issue.
50 The payment by the Commonwealth to the appellant in respect of the appellant’s supply of the transport services to Mr Egan needs to be understood for what it is: reimbursement of the rebate the appellant provided Mr Egan at the time he purchased his ticket. The consideration for the supply of the transport services to Mr Egan included not only what he paid, but the amount of the rebate he was granted by the appellant, which rebate was paid by the Commonwealth to the appellant by way of reimbursement.
51 So understood, I am of the view that, statutory exclusions aside, there is no error in the primary judge’s conclusion that the Commonwealth’s payment to the appellant in respect of the appellant’s supply of the transport services to Mr Egan is part of the consideration for that supply.
QUESTION 2: WHETHER REIMBURSEMENT UNDER THE SCHEME TO THE APPELLANT IS ‘A PAYMENT MADE BY A GOVERNMENT RELATED ENTITY TO ANOTHER GOVERNMENT RELATED ENTITY … SPECIFICALLY COVERED BY AN APPROPRIATION UNDER AN AUSTRALIAN LAW’, WITHIN THE MEANING OF S 9-15(3)(C) OF THE GST ACT
Legislative Scheme
52 GST is imposed on a ‘taxable supply’ by a registered taxpayer (the transport services supplied to Mr Egan was a taxable supply for GST purposes and the appellant is a registered taxpayer) by reference to the amount of the consideration for the supply. ‘Consideration’ is defined in s 9-15(1) to mean, inter alia, a payment in connection with a supply, but subject to s 9-15(3)(c):
9-15(3)However:
…
(c) a payment made by a government related entity to another government related entity is not the provision of consideration if the payment is specifically covered by an appropriation under an Australian law.
53 There is no issue that the payment of a reimbursement under the Scheme to the appellant is ‘a payment by one government related entity’ (namely, the Department) to another ‘government related entity’ (namely, the appellant). What is in issue is whether the payment by the Department to the appellant of a reimbursement under the Scheme is a payment that is ‘specifically covered by an appropriation’.
The Primary Judge
54 The primary judge’s reasoning is comprised in the following passages:
[16] It only remains to consider whether the payment of the rebate is “specifically covered by an appropriation under an Australian law”. The parties accept that the Scheme is funded under the [Appropriation Act] … The issue then is whether it is “specifically” covered by this appropriation. … Considering the context of “specifically” in s 9-15(3)(c) and the need for it to add something to the meaning of the requirement of the subsection, I am of the opinion that it means “expressly” or “explicitly”. The payment to the government related entity must be expressly or explicitly covered by the appropriation.
…
[23] While it may be that the Scheme is specifically covered by the Appropriation Act these references are not sufficient to establish that payments under the Scheme are specifically covered. Under the Scheme, payments may be made to any Service Operator which transports eligible passengers on the Bass Strait crossings or to the individual passengers. The Scheme operates generally, not specifically. It does not require that the recipient of the payments be a government related entity. I note, however, that the subsection, in referring to the payment that must be specifically covered, uses the definite article. It is the payment that is made to the government related entity that must be specifically covered. It is not sufficient for the payment to be consistent with a specified purpose. …
[24] … It is clear from the words of subsection (c) that it is not sufficient for payment merely to be made by one government related entity to another. In order for such payment to be specifically covered by an appropriation it would, at the very least, be necessary for payments to be limited to government related entities. [The] fact that the Scheme allows for payment to a non-government related entity indicates that the appropriation is limited to a purpose not to a payee or class of payees. …
The Commissioner’s Submissions
55 The Commissioner submitted that the primary judge was correct to conclude that s 9‑15(3)(c) did not apply in this case. In the Commissioner’s submission, s 9-15(3)(c) only applies where the purpose of the appropriation pursuant to which the payment is made is to appropriate money for payments specifically to government related entities. The circumstance that the recipient of the payment is a government related entity is not, on the Commissioner’s argument, sufficient to attract the benefit of the provision if the appropriation, pursuant to which the payment is made, would permit payment to a non-government related entity albeit for the same purpose. See too the primary judge’s reasons at [24]. It is common ground that the appropriation in the present case would permit payment to a non-government related entity for the purposes of the Scheme.
56 The Commissioner submitted that such a construction is consistent with the overall intention of the GST legislation in its application to government and that the primary judge recognised this at [34] of her reasons. According to the Commissioner, that intention was that the Commonwealth, State and local government and their instrumentalities should be subject to the GST Act in the same way as non-government organisations, but that appropriations for general government activities or for grants from one level of government to another should be exempt from GST. The Commissioner submitted that s 9-15(3)(c) gives effect to this intention by creating a limited exception to the general subjection of government to GST which applies in the case of payments appropriated for the specific purpose of being made to government related entities. For this, the Commissioner relied on para [17] of the Intergovernmental Agreement which appears as Schedule 2 to the A New Tax System (Commonwealth-State Financial Arrangements) Act 1999 (Cth) and the Explanatory Memorandum to the Bill which introduced s 9-15(3)(c) into the GST Act.
The Appellant’s Submissions
57 The appellant submitted that the qualification supplied by the word ‘specifically’ varies according to the context in which it is used. In the context of s 9-15(3)(c), and of the structure of the Appropriation Acts to which it refers, as elucidated in the judgments in Combet v Commonwealth (2005) 224 CLR 494, e.g. per Gleeson CJ at 525, the word ‘specifically’, according to the appellant, denotes a requirement that the appropriation covering the payments in issue be one which distinguishes and identifies the appropriation for that purpose in particular, rather than one where it is subsumed in the generality of an ‘outcome’. Thus a payment made to a government entity under authority of the appropriation for Output 1.1.2 – ‘Safety’ would not be ‘specifically covered by an appropriation’, but the payment to the appellant under the appropriation under Output 1.4.1 to the Scheme, quantified at $32 million, is ‘specifically covered by an appropriation’.
58 In the context in which it appears – ‘the payment is specifically covered by an appropriation’ – the appellant submitted that the requirement of specificity relates to the appropriation, not to the payment. The requirement is not that the specific payment be identified – either as to amount or as to recipient – by the appropriation, but that the appropriation be sufficiently specific to ‘cover’ the payment claimed to attract GST as ‘consideration’. According to the appellant, the notion imported by ‘cover’ is wider than that imported by ‘nominated in’ or ‘specified in’. The narrower criterion preferred by the primary judge would more aptly have been met by words such as ‘specified in’ or ‘specifically mentioned in’; the construction adopted by her Honour leaves no room for or work to be done by the wider meaning of ‘covered’.
59 The appellant submitted that the essential error in the judgment below lies in an assumption made in [23] of the primary judge’s reasons: that there is a requirement that the appropriation, rather than the payment taken outside the scope of the GST, be limited to a government related entity. To fall within para (c) a payment must (i) be made between government related entities, and (ii) be ‘specifically covered by an appropriation’. But the second criterion – ‘specifically covered by an appropriation’ – does not, the appellant submitted, import any element of the first; it is a second and independent criterion for exclusion from the category of ‘consideration’. The use of the definite article does not import the first criterion into the second: rather, it serves to identify as the same the payment which must meet both criteria in the paragraph in order to be excluded. According to the appellant, nothing in the text or context of the paragraph supports the crucial step in the primary judge’s reasoning, that for such payment to be specifically covered by an appropriation it would, at the very least, be necessary for payments to be limited to government related entities.
Analysis and Conclusion
60 The essential issue raised by this question is whether the criterion of specificity of coverage in s 9-15(3)(c) necessitates reference in the appropriation to a nominated government related entity or, if not a nominated government related entity, a generic reference in the appropriation to such an entity, as the recipient of the payment, as the Commissioner contended or whether, as the appellant contended, it is sufficient that the recipient is a government related entity in fact and the specificity of coverage in the appropriation in respect of which the payment is made is not concerned with the identity of the payee but only whether the appropriation is quantified in amount and identified by reference to a particular purpose.
61 There is undoubted force in the submission of the appellant. A payment to an entity that is not a government related entity could never qualify for the exclusion, so what is the utility in requiring the specificity of coverage of the appropriation to nominate a government related entity in name or, generally by reference to the phrase? Why, in that circumstance, is the specificity of coverage requirement not satisfied by reference to quantification of the amount and identification of the particular purpose?
62 Not without some hesitation, I think the answer to this question lies in the policy underlying the application and scope of the GST, namely that, generally, it is to apply to government related entities, organisations and instrumentalities – Commonwealth, State and local – in the same way as it does to non-government entities and the like: see [56] above. So understood, there is created as between government related entities and non-government entities supplying the same services a ‘level playing field’. A payment, pursuant to an appropriation, for a supply of services which can, under the terms of the appropriation, be supplied by a government related entity or a non-government entity should be subject to the same tax treatment; in other words, as taxable supplies irrespective of the status of the supplier. On the other hand, the potentiality for discrimination between government related and non-government entities does not exist where, by the terms of the appropriation, the services can only be supplied by a government related entity. The exclusion created by s 9-15(3)(c) is only intended to operate in this limited class of case; it is not intended to extend to payments, pursuant to an appropriation, for a supply of services which can, under the terms of the appropriation, be supplied by a government related entity or a non-government related entity (even if the appropriation is otherwise specific as to amount and its particular purpose) because that would discriminate in favour of the government related entity contrary to the general policy underlying the application and scope of the GST Act.
63 So understood, it is not a giant leap to adopt a construction of s 9-15(3)(c) which confines it to payments pursuant to an appropriation the terms of which specify the government related entity by name or, generically, to those entities having that status. That is the minimum specificity of coverage that is required to be found in the terms of the appropriation for the exclusion to apply; whether it is sufficient, is something with which I need not be concerned because clearly, in the present case, the minimum specificity of coverage is not met.
64 The appeal must be dismissed. For the reasons referred to at [36] of the primary judge’s reasons, there will be no order as to costs.
I certify that the preceding thirty-nine (39) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Edmonds.
Associate:
Dated: 18 December 2009
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 685 of 2009
ON APPEAL FROM THE FEDERAL COURT
BETWEEN:
TT-LINE COMPANY PTY LIMITED
Appellant
AND:
COMMISSIONER OF TAXATION
Respondent
JUDGES:
EMMETT, EDMONDS & PERRAM JJ
DATE:
18 DECEMBER 2009
PLACE:
SYDNEY
REASONS FOR JUDGMENT
PERRAM J:
65 I have had the advantage of reading in draft the reasons of Edmonds J with which I agree. I would only add these few additional remarks.
66 Section 114 of the Constitution prohibits the imposition by the Commonwealth of “any tax on property of any kind belonging to a State”. That prohibition made impossible the imposition by the Commonwealth upon the States of a tax on supplies of the kind contemplated in the legislation introducing the GST. At least in relation to the provision of supplies of property, the interposition of a State at any point along the supply chain would have disrupted the process of credits upon which the system depends. The introduction of the GST could not practically proceed therefore unless the States voluntarily agreed to subject themselves to it. This they promised to do by the Financial Relations Agreement (Consequential Provisions) Bill (Cth) 1999. Clause 17 of that agreement provided:
The Parties intend that the Commonwealth, States, Territories and local government and their statutory corporations and authorities will operate as if they were subject to the GST legislation. They will be entitled to register, will pay GST or make voluntary or notional payments where necessary and will be entitled to claim input tax credits in the same way as non-Government organisations. All such payments will be included in GST revenue.
(emphasis added)
67 Two aspects of this are worth noting. First, as envisaged by cl 17 the liability of the States and their organs to the GST is achieved not by federal taxation legislation but instead by a series of State acts: e.g. s 5 Intergovernmental Agreement Implementation (GST) Act 2000 (NSW). Secondly, and more significantly for present purposes, what cl 17 contemplated was liability “in the same way” as non-government organisations. That principle of equality of treatment is a practical one but encounters conceptual difficulties where the governmental activity in question bears no resemblance to the activities of any non-government organisation. At that point, the imposition of liability to tax “in the same way” as a non-governmental organisation makes little sense.
68 Of course, to make that observation provides little assistance in locating the demarcation between the governmental and the non-governmental. However, cl 17, which is certainly part of the background against which ss 9-15(3)(c) is to be interpreted, suggests that the expression “specifically covered by an appropriation” is seeking to draw a line between those matters where a government organisation might be exposed to a GST liability “in the same way” as a non-governmental one, and those where that might not be so. So viewed, the fact in this case that the payments could be made, under the appropriation, to non-government organisations who, unlike the appellant, would have to collect GST rather tends to suggest that the principle of equality of treatment embodied in cl 17 is undermined if the appellant's construction of ss 9-15(3) be correct.
69 That observation, however, does not easily resolve the construction issue which arises. This is because the language used by the Parliament – “specifically covered by an appropriation” – does not, at least as a matter of first impression, present some meaning which might be seen as serving the end identified in cl 17. The learned primary judge thought that “specifically” should be interpreted to mean “expressly” or “explicitly” and that those words qualified the payment. The appellant, on the other hand, contended that all that is meant is that appropriation be sufficiently specific to cover the payment claimed to attract GST. The trial judge's view is, with respect, more consistent with cl 17. This is for the positive reason that expenditure by way of specific appropriation is unlikely to resemble any expenditure which a non-government organisation might make and hence to fall outside what is contemplated by cl 17. It is also for the negative reason identified by Emmett and Edmonds JJ that the appellant's position leaves non-government operators having to collect the GST whilst exempting the appellant, an outcome inconsistent with the principle of equality underpinning cl 17.
70 I would dismiss the appeal.
I certify that the preceding six (6) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Perram.
Associate:
Dated: 18 December 2009
Counsel for the Appellant:
Mr A H Slater QC with Mr B L Jones
Solicitor for the Appellant:
KPMG Tax Lawyers Pty Ltd
Counsel for the Respondent:
Dr M Perry QC with Mr M O’Meara
Solicitor for the Respondent:
Australian Government Solicitor
Date of Hearing:
5 November 2009
Date of Judgment:
18 December 2009
