Goods and services tax: supplies 

 

What this Ruling is about

1. This Ruling examines the meaning of 'supply' in the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). The ' Background ' section of the Ruling discusses the general context of the GST Act and outlines how this informs the meaning of the term 'supply' in the GST Act including its relevance to input tax credit entitlements. It also discusses the use of the term supply in the context of United Kingdom Value Added Tax and New Zealand GST regimes and highlights some differences and similarities to the GST Act.

2. Part 1 of the 'Ruling with Explanation' section discusses the concept of 'supply' in the GST Act and the meaning of 'supply' in section 9-10. This part lists the special rules that qualify or affect that meaning in the GST Act. The special rules are set out in paragraph 47 of this Ruling.

3. Part 2 focuses on the characteristics of 'supply' in the context of a two party transaction. Part 2 discusses ten propositions that are considered relevant in analysing a transaction in relation to a supply.

4. Part 3 builds on the ten propositions. It discusses six further propositions which also apply to analysing more complex multi-party arrangements, commonly known as tripartite arrangements.

5. The Ruling concludes with two case studies in Part 4 which are used to illustrate several of the propositions.

6. This Ruling focuses on analysing the various arrangements in which supplies are made. An arrangement may be evidenced by various written agreements, oral agreements, legal instruments, or combinations of such things. Unless a particular type of agreement is mentioned by name, such as a contract, the Ruling uses 'the agreement' to refer to these things collectively. They include but are not limited to:

·

  written and oral contracts;

·

  various deeds, assignments and options;

·

  licence or permit conditions;

·

  memoranda of understanding; and

·

  legislative instruments, Ministerial directions and Departmental guidelines.

7. Unless otherwise stated in this Ruling:

·

  all legislative references are to the GST Act; and

·

  all Explanatory Memorandum references are to the Explanatory Memorandum to the A New Tax System (Goods and Services Tax) Bill 1998 (the EM).

Date of effect

8. This Ruling explains the Commissioner's view of the law as it applied from 1 July 2000. You can rely upon this Ruling on and from its date of issue for the purposes of section 105-60 of Schedule 1 to the Taxation Administration Act 1953 . Goods and Services Tax Ruling GSTR 1999/1 explains the GST rulings system and the Commissioner's view of when you can rely on our interpretation of the law in GST public and private rulings.

9. If this Ruling conflicts with a previous private ruling that you have obtained or a previous public ruling, this public ruling prevails. However, if you have relied on a previous ruling, you are protected in respect of what you have done up to the date of issue of this public ruling. This means that if you have underpaid an amount of GST, you are not liable for the shortfall prior to the date of issue of this later ruling. Similarly, you are not liable to repay an amount overpaid by the Commissioner as a refund.

Background

The meaning of supply in the context of the GST Act

10. GST is a broad based indirect tax payable on consumption in Australia. Generally, GST is payable on the value added at each stage of the commercial chain of dealings with goods, services and other things. The GST Act describes these dealings as 'supplies'. In the absence of a supply (or importation) GST cannot arise.^F1 The Full Federal Court noted the importance of supply in Sterling Guardian Pty Ltd v. Commissioner of Taxation (Sterling Guardian) :^F2

In economic terms it may be correct to call the GST a consumption tax, because the effective burden falls on the ultimate consumer. But as a matter of legal analysis what is taxed, that is to say what generates the tax liability (and the obligations of recording and reporting), is not consumption but a particular form of transaction, namely supply; see generally HP Mercantile Pty Ltd v Commissioner of Taxation (2005) 143 FCR 553 at [10]-[15].

 

The meaning of 'supply' is given in section 9-10.

11. Chapter 2 of the GST Act has the basic rules dealing with liability for GST and the obligations for recording and reporting GST noted in Sterling Guardian . The basic rules provide for when and how GST arises, who is liable to pay GST and how input tax credits arise.

12. The basic rules require an entity, the supplier, to make the supply and generally another entity, the recipient, to acquire the supply. GST on a taxable supply is payable by the supplier who is registered or required to be registered for GST. The requirements for a taxable supply are stated in section 9-5.

13. A recipient who is registered for GST is generally able to claim input tax credits for acquisitions it makes in the course of its business. By providing for input tax credits the GST Act ensures that there ordinarily is no cascading of GST for taxable and GST-free supplies. It provides that tax will be payable by each supplier in a chain only upon the value added by that supplier. Subject to some exceptions, input tax credits are not available for acquisitions in relation to making input taxed supplies so that the inputs to these supplies will be taxed and not the value added by the supplier.^F3

14. Supply is important in relation to input tax credits because if a supply is not made an entity cannot acquire anything for a creditable purpose, as required by paragraph 11-5(a). Making an acquisition of something is the first element to be considered in determining whether you make a creditable acquisition under section 11-5. The meaning of acquisition is given in section 11-10. The second element is the requirement in paragraph 11-5(b) that the supply of the thing to you is a taxable supply.

15. You make an acquisition if you are the recipient of a supply. That is, the supply is made to you. In most transactions concerning GST the recipient of a supply is the entity that is also provided with that supply. In contrast, some supplies are made to the recipient, but provided to another entity. Arguably, such provisions are also supplies. However, these are not relevant because there is no contractual or reciprocal relationship between the supplier and the entity being provided with the supply. An entity must have made an acquisition of a thing to satisfy the requirements of section 11-10. It is not sufficient that an entity has merely been provided with the supply. Also, an entity does not make an acquisition merely by paying for a supply.

16. Chapter 3 of the GST Act covers the exemptions from GST, being those supplies that are GST-free or input taxed. Chapter 4 has special rules that can apply in particular cases to modify the basic rules. Both Chapters 3 and 4 provide exceptions to the basic rules.

17. Because GST is intended to be broad based a supply may manifest itself in various ways. For example, a supply may be mixed, composite or neither and an analysis of a transaction may indicate one or more supplies. However, the scheme of the GST Act is not so broad as to embrace the notions of: an entity making a supply to itself; a supply being made by more than one entity; a supply arising out of the creation of expectations alone without more; or a supply without the supplier doing something.

Judicial approach to context

18. The High Court has considered the relevance of context both in a broad sense and in relation to the text of specific provisions within an Act. The judgment of Brennan CJ, Dawson, Toohey and Gummow JJ in CIC Insurance Ltd v. Bankstown Football Club Ltd ^F4 indicates it is appropriate to consider the context '...in its widest sense to include such things as the existing state of the law and the mischief which, by legitimate means such as those just mentioned, one may discern the statute intended to remedy.' The Court went on to add that '...inconvenience or improbability of result may assist the court in preferring to the literal meaning an alternative construction which, by the steps identified above, is reasonably open and more closely conforms to the legislative intent.'

19. However, consideration of the context of supply in its broadest sense in the GST Act does not obviate the need for close attention to the text of the provisions chosen by Parliament under consideration and the context of the provision in the GST Act. As the High Court noted in the judgment of Gleeson CJ, Gummow, Hayne and Heydon JJ in Stevens v. Kabushiki Kaisha Sony Computer Entertainment ^F5 'No particular theory or "rule" of statutory interpretation, including that of "purposive" construction, can obviate the need for close attention to the text and structure of [the relevant part of the legislation].'^F6 Ultimately, the task of the courts and the Commissioner is to construe the language of the statute.^F7

20. Further, as has been noted by Kirby J in The Queen v. Lavender ^F8 it is important to take a consistent approach to issues of statutory interpretation and not '...pluck out considerations of "context", "purpose" and "history" arbitrarily, so as to sustain the outcomes of interpretation ... in some, but not other cases.'

Propositions for characterising and analysing supplies

21. The propositions for characterising supplies and analysing more complex transactions in Parts 2 and 3 of this Ruling flow from the concept of supply in the context of both a broad based GST and the text and structure of the GST Act. The propositions are not universal as they may have exceptions or be qualified by the operation of particular provisions of the GST Act. The length of discussion of a proposition is not intended to indicate a difference in importance of the proposition in relation to other propositions. Some propositions are obvious and so little has been said, whereas other propositions require a more in-depth explanation.

22. The propositions discussed in Part 2 are:

23. The propositions discussed in Part 3 are:

Comparison with the United Kingdom and New Zealand

24. The concept of supply is also fundamental to value added tax regimes in other countries and, as such, foreign law may shed light on the meaning of supply. However, it needs to be appreciated that differences exist between the Australian GST and value added tax regimes in other countries. Relevant places in this Ruling explain some of the differences contained in the United Kingdom Value Added Tax Act 1994 (the UK VAT Act), the Sixth VAT Directive of the European Council (the Sixth Directive),^F9 and the New Zealand Goods and Services Tax Act 1985 (the NZ GST Act).

25. The Ruling recognises the context in which these differences appear and their relevance to our GST Act. As the characteristics of supply in two party situations and in tripartite arrangements have been the subject of extensive judicial consideration in the United Kingdom and New Zealand, the Ruling discusses several of these cases. The Ruling also considers some relevant Australian decisions.

Supply of goods

26. A supply of goods is defined under subparagraph 1(1) of Schedule 4 to the UK VAT Act as 'any transfer of the whole property in goods', with the exception that the transfer 'of any undivided share of property' or 'of the possession of goods' is a supply of services. The transfer of possession of goods is further qualified in that there will be a supply of goods if possession is transferred under an agreement for sale or an agreement that provides that at some future point (no later than when the goods are paid for) ownership will transfer (see subparagraph 1(2) of Schedule 4 to the UK VAT Act).

27. Under article 5(1) of the Sixth Directive, a supply of goods is 'the transfer of the right to dispose of tangible property as owner'. Both this and the UK VAT Act's definition of a supply of goods are in this sense more restricted than the definition in our GST Act.

28. 'Goods' is defined under subsection 2(1) of the NZ GST Act to mean 'all kinds of personal or real property; but does not include choses in action or money, or a product that is transmitted by a non-resident to a resident by means of a wire, cable, radio, optical or other electromagnetic system or by means of a similar technical system'. This definition in embracing real property is in that sense much wider than the definition in our GST Act.

Supply of services

29. Under subsection 5(2) of the UK VAT Act 'anything which is not a supply of goods but is done for consideration (including, if so done, the granting, assignment or surrender of any right) is a "supply of services"'. Under article 6(1) of the Sixth Directive, a supply of services is defined as 'any transaction which does not constitute a supply of goods' and the term includes 'obligations to refrain from an act or to tolerate an act or situation'.

30. Under subsection 2(1) of the NZ GST Act 'services' means 'anything which is not goods or money'. In Case S65 ^F10 Willy DJ warned that there are limits to this definition. In that case a costs order was made against a solicitor who was struck off the roll by the New Zealand Law Practitioners Disciplinary Tribunal. The costs order required the solicitor to pay amounts to the New Zealand Law Society and the District Law Society for their costs and expenses relating to the disciplinary proceedings. Willy DJ held that these payments were not consideration for a supply of services by the Law Societies to the solicitor. He ruled that the ordinary meaning of the word supply limited the breadth of the phrase 'supply of services', which was only so wide as to include activities where the provider has done something for , not against , the recipient. To rule otherwise would lead to absurdity because it would allow the concept of a supply to encompass situations where a person sues for recovery of property, or steals something from someone else. The analysis in Case S65 is consistent with the Commissioner's analysis of the effect of payments made under court orders or out-of-court settlements in GSTR 2001/4.^F11

31. The wide meaning of supply in section 9-10 and differences in the structure of our legislation mean that overseas cases should be considered with some caution.

Ruling with Explanation

Part 1: The concept of 'supply' in the GST Act

Section 9-10

32. Section 9-10 states:

9-10 Meaning of supply

(1)

  A supply is any form of supply whatsoever.

(2)

  Without limiting subsection (1), supply includes any of these:

(a)

  a supply of goods;

(b)

  a supply of services;

(c)

  a provision of advice or information;

(d)

  a grant, assignment or surrender of real property;

(e)

  a creation, grant, transfer, assignment or surrender of any right;

(f)

  a financial supply;

(g)

  an entry into, or release from, an obligation:

(i)

  to do anything;

(ii)

  to refrain from an act;

(iii)

  to tolerate an act or situation;

(h)

  any combination of any 2 or more of the matters referred to in paragraphs (a) to (g).

(3)

  It does not matter whether it is lawful to do, to refrain from doing or to tolerate the act or situation constituting the supply.

(3A)

  For the avoidance of doubt, the delivery of:

(a)

  livestock for slaughtering or processing into food; or

(b)

  game for processing into food;

 under an arrangement under which the entity making the delivery only relinquishes title after food has been produced, is the supply of the livestock or game (regardless of when the entity relinquishes title). The supply does not take place on or after the subsequent relinquishment of title.

(4)

  However, a supply does not include a supply of money unless the money is provided as consideration for a supply that is a supply of money.

 

Subsection 9-10(1)

33. The words 'A supply is any form of supply whatsoever' in subsection 9-10(1) cover all supplies regardless of whether they concern goods or services. This obvious breadth of the concept of supply is confirmed by the EM, which states (in reference to subsection 9-10(1)):

This is defined broadly and is intended to encompass supplies as widely as possible.^F12

 

Subsection 9-10(2)

34. The intended scope of subsection 9-10(1) is more fully illustrated in subsection 9-10(2), of which the EM states:

[It] provides a list of things that are included as supplies. It is not an exhaustive list. It does not limit the possible breadth of the definition of supply in subsection 9-10(1).^F13

 

35. Subsection 9-10(2) does not limit subsection 9-10(1). Something that is not listed in subsection 9-10(2) but falls within subsection 9-10(1) will be a supply.

References to paragraphs in subsection 9-10(2)

36. The subject matter of several of the paragraphs in subsection 9-10(2) is discussed in other GST public rulings:

·

  9-10(2)(c) a provision of advice or information:

 See paragraphs 71 to 73 and 195 to 201 of GSTR 2000/31 (Goods and services tax: supplies connected with Australia).

 See also paragraph 90 of GSTR 2000/11 (Goods and services tax: grants of financial assistance).

·

  9-10(2)(d) a grant, assignment or surrender of real property:

 See paragraphs 82 to 97 of GSTR 2003/7 (Goods and services tax: what do the expressions 'directly connected with goods or real property' and 'a supply of work physically performed on goods' mean for the purposes of subsection 38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999 ?).

 See also paragraph 18 of GSTR 2003/3 (Goods and services tax: when is a sale of real property a sale of new residential premises?).

·

  9-10(2)(f) a financial supply:

 See generally GSTR 2002/2 (Goods and services tax: GST treatment of financial supplies and related supplies and acquisitions).

·

  9-10(2)(g) an entry into, or release from, an obligation:

 See paragraphs 26 to 36 of GSTR 2000/11 (Goods and services tax: grants of financial assistance).

·

  9-10(2)(h) any combination of any two or more of the matters referred to in paragraphs (a) to (g):

 See generally GSTR 2001/8 (Goods and services tax: apportioning the consideration for a supply that includes taxable and non-taxable parts).

 See also paragraph 26 of GSTR 2003/7 (Goods and services tax: what do the expressions 'directly connected with goods or real property' and 'a supply of work physically performed on goods' mean for the purposes of subsection 38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999 ?).

Relationship between subsections 9-10(1) and (2)

37. The Full Federal Court noted in Westley Nominees Pty Ltd v. Coles Supermarkets Australia Pty Ltd (Westley) ^F14 that for various reasons it thought the ordinary meaning of supply in subsection 9-10(1) 'is arguably extended by pars (f) and (g), if not by pars (a) - (e)' of subsection 9-10(2). Given the breadth of subsection 9-10(1) being stated to mean 'a supply is any form of supply whatsoever', the Commissioner is of the view that whilst paragraph 9-10(2)(f) expands subsection 9-10(1) in relation to financial supplies, subsection 9-10(2) does not limit the operation of subsection 9-10(1). This non-limitation is expressly stated in the opening words of subsection 9-10(2).

A 'thing'

38. As well as the supply examples listed in subsection 9-10(2), the GST Act recognises the concept of a 'thing'. 'Thing' is defined in section 195-1 as:

thing means anything that can be supplied or imported.

 

39. 'Thing' is used to refer to goods, services or other matters that are the subject of supplies covered by section 9-10. For example, paragraph 11-5(b) uses the words: 'the supply of a thing to you is a taxable supply'. The use of the term 'thing' gives further emphasis to the breadth of the meaning of supply.

Subsection 9-10(3)

40. Subsection 9-10(3) states:

It does not matter whether it is lawful to do, to refrain from doing or to tolerate the act or situation constituting the supply.

 

Under the GST Act something that is done illegally may constitute a supply. For example, in applying subsection 9-10(3), the Commissioner considers that a second hand car dealer who sells cars, which the dealer has either stolen or has received knowing they have been stolen, is making supplies.^F15

41. The European Court of Justice (ECJ), in interpreting the Sixth Directive, has held that the principle of fiscal neutrality precluded a generalised differentiation between lawful and unlawful transactions 'except where, because of the special characteristics of certain products, all competition between a lawful economic sector and an unlawful sector is precluded'.^F16 The ECJ has held that there was no liability to VAT on the illegal distribution of prohibited drugs because their supply was subject to a total prohibition in the member states (except within strictly controlled economic channels for medical and scientific purposes).^F17

42. In contrast to the European position, under the GST Act something that is done illegally may still constitute a supply even where all competition between a lawful and an unlawful sector is precluded. For example, in applying subsection 9-10(3), the Commissioner considers that the illegal distribution of prohibited drugs, or the sale of 'fake' brand name handbags or clothing in breach of intellectual property rights, would constitute supplies for our GST purposes.

Subsection 9-10(3A)

43. Subsection 9-10(3A) is an 'avoidance of doubt' provision. It provides that the delivery of livestock for slaughtering or processing into food, or of game for processing into food under an arrangement under which title does not pass until after food has been produced, is the supply of livestock or game.

44. In identifying the thing supplied, and in emphasising that the supply does not take place on or after the subsequent relinquishment of title, subsection 9-10(3A) clarifies both the time and character of the supply.

Subsection 9-10(4)

45. Subsection 9-10(4) provides that a supply does not include a supply of money unless the money is provided as consideration for a supply that is a supply of money.^F18

46. Money is defined by section 195-1 to include:

(a)

  currency (whether of Australia or of any other country); and

(b)

  promissory notes and bills of exchange; and

(c)

  any negotiable instrument used or circulated, or intended for use or circulation, as currency (whether of Australia or of any other country); and

(d)

  postal notes and money orders; and

(e)

  whatever is supplied as payment by way of:

(i)

  credit card or debit card; or

(ii)

  crediting or debiting an account; or

(iii)

  creation or transfer of a debt.

 However, it does not include:

(f)

  a collector's piece; or

(g)

  an investment article; or

(h)

  an item of numismatic interest; or

(i)

  currency the market value of which exceeds its stated value as legal tender in the country of issue.

Special rules relating to supply

47. Some provisions of the GST Act determine that:

·

  a supply is not a taxable supply;

·

  there is no supply; or

·

  a supply is made.

This table sets out special rules relating to supplies:

Part 2: Supply in the context of a transaction

48. Part 1 of this Ruling looked at the concept of 'supply' in the context of the GST Act. This Part of the Ruling looks at how to identify and characterise supplies in the context of the transactions in which they are made.

49. The Ruling uses ten propositions to assist in analysing a transaction to identify the supply or supplies made in that transaction. The propositions are not universal as they may have exceptions or be qualified either by the operation of particular provisions of the GST Act, or by the facts and circumstances of a transaction.

50. The propositions in this Part are:

51. Transactions may also require consideration of the total fact situation. The Ruling discusses the total fact situation as Proposition 16 in paragraphs 222 to 246. While this is discussed in Part 3 of the Ruling, the need to consider the total fact situation is also relevant in analysing two party transactions.

The propositions explained

Proposition 1: for every supply there is a supplier

52. The Commissioner considers that for every supply there is a supplier. The term 'supplier' is not defined in the GST Act. However, whenever the term is used in the Act it refers to the entity that makes a supply or is capable of making a supply.

Proposition 2: generally, for every supply there is a recipient and an acquisition

53. The meaning of 'acquisition' in section 11-10 is the corollary of the meaning of supply in section 9-10. Subsection 11-10(1) provides that, 'An acquisition is any form of acquisition whatsoever'. Subsection 11-10(2) refers to the thing acquired, such as goods, services or a right, and the means by which the thing is acquired, such as its receipt or acceptance.

54. To make an acquisition you have to be the 'recipient' of the supply of the thing you are acquiring. Although the term 'recipient' does not appear in Division 11, it is defined in section 195-1 to mean the entity to which the supply was made. This definition suggests that there is a supplier, a recipient and that something is passed from the supplier to the recipient.^F19

55. The supplier and the recipient have to be different entities because an entity cannot make a supply to itself.^F20 Also, the recipient has to be identified, as you cannot make a supply to the world at large.^F21However, a supply can be made for no consideration.

Creditable acquisitions and input tax credits

56. If you make an acquisition and the other requirements of section 11-5 are met then the acquisition is a creditable acquisition. However, if you are not the recipient of the supply you will not have made a creditable acquisition, even if you provide consideration for the supply.

57. An entity that is the recipient of a supply may make a creditable acquisition of that supply and be entitled to an input tax credit.^F22 An entity makes a creditable acquisition under section 11-5 if:

·

  the entity acquires anything solely or partly for a creditable purpose;

·

  the supply of the thing to the entity is a taxable supply;

·

  the entity provides, or is liable to provide, consideration for the supply; and

·

  the entity is registered or required to be registered.

58. Under subsection 11-15(1) an entity acquires a thing for a creditable purpose to the extent that the entity acquires it in carrying on its enterprise. However, under subsection 11-15(2) an entity does not acquire a thing for a creditable purpose to the extent that the acquisition relates to making input taxed supplies, or is of a private or domestic nature. Subsections 11-15(4) and 11-15(5) set out circumstances where an acquisition for the making of certain financial supplies is not treated as relating to making input taxed supplies.

59. Division 81 deems that the payment of a tax, fee or charge imposed under an Australian law is consideration for a supply. This means there is a deemed supply in relation to the tax, fee or charge and its payment. Without Division 81 it may be that no supply is made if nothing passes from the entity receiving the payment (the deemed supplier) to the entity making the payment. However, if the particular tax, fee or charge is specified in a written determination of the Treasurer the payment of it is treated as not being the provision of consideration.

60. In some cases an entity can have something without having made an acquisition of the thing. For example, an author of an original literary work does not make an acquisition of a right where the Copyright Act 1968 protects the copyright in that work. Contrast this with an inventor who needs to be granted a patent under the Patents Act 1990 (Commonwealth) before being able to exclusively exploit their invention. The inventor acquires those rights to exclusively exploit the invention through the grant of the patent.

61. Paragraph 115 of GSTR 2002/2 (Goods and services tax: GST treatment of financial services and related supplies and acquisitions) explains that 'A financial supply consisting of the acquisition of a financial interest is treated by the legislation as being "made to" a recipient, so it does not matter that the recipient of the acquisition-supply may not actually receive something. The GST regulations^F23 treat the receipt of this interest by the acquirer as being a supply to the provider.' Paragraphs 110 to 116 of GSTR 2002/2 provide further information on the acquisition of a financial interest.

Recipient in tripartite arrangements

62. Determining the recipient of the supply is not difficult where there are only two parties to a transaction. Part 3 of this Ruling, which begins at paragraph 114, discusses how to identify the recipient of a supply in the more difficult tripartite arrangements.

Proposition 3: a supply may be mixed, composite or neither

63. A supply may consist of separately identifiable taxable and non-taxable parts. In GSTR 2001/8 the Commissioner refers to this as a 'mixed supply'. Section 9-80 describes how you work out the value of the part of a mixed supply that is a taxable supply.

64. If all of the parts in a supply have the same GST treatment, then there is no requirement to separately identify each part. That is, if all of the parts are taxable, then apportionment of the consideration is not necessary as GST is payable on the total value of the supply. Similarly, if all of the parts are non-taxable, then no GST is payable on the supply and apportionment is not necessary. Apportionment may still be necessary in relation to the acquisition of the supply, such as where not all the parts of the supply are acquired for a creditable purpose.

65. A supply that contains a dominant part, but also includes something that is integral, ancillary or incidental to that part is a 'composite supply', being the supply of a single thing.

66. On the other hand, a supply may simply involve something that is different to, and has a separate identity from, its parts, for example, the supply of a cake. The cake is made from ingredients such as flour, butter, sugar and eggs, but it is readily apparent that it is a cake that is supplied. There are no separately identifiable parts.

Proposition 4: a transaction may involve two or more supplies

67. In a straight forward commercial transaction, a supply is made to a recipient, who provides consideration in the form of money to the supplier. As the payment of money in these circumstances is not a supply,^F24the recipient's payment of money is not a supply.

68. However, if the recipient provides consideration in a non-monetary form, the consideration itself is a separate supply.^F25 In a transaction of this kind between two entities, there are two supplies, one going each way. As a result, each party to the transaction needs to account for any GST on the supply it makes, and each party needs to account for any input tax credit entitlement for the acquisition it makes.

69. In GSTR 2001/6^F26 the Commissioner points out that the recipient of a supply may provide or make a thing available for the supplier to use in making the supply. However, the provision of such a thing is not necessarily consideration. The corollary of this proposition is that providing or making the thing available does not necessarily give rise to a supply. It will depend on the facts and circumstances of the transaction between the parties whether the supplier's use of, for instance, facilities provided by the recipient in order to make the supply is simply part of the circumstances in which the supply is to be made, or does in fact involve a supply by the recipient to the supplier.

70. For example, a supplier may need to perform services on the recipient's premises. The recipient may agree to allow the supplier to use its computer facilities and stationery in performing the services. Depending on the particular circumstances, allowing the use of these things could be a condition of the contract that goes to defining the supply the supplier makes rather than being a supply of these things to the supplier by the recipient.

Proposition 5: to 'make a supply' an entity must do something

71. In overseas jurisdictions the term 'supply' has been held to take its ordinary and natural meaning, being 'to furnish or to serve' or 'to furnish or provide'.^F27 The Commissioner picks up this meaning in considering the meaning of supply in the GST Act at paragraph 41 of GSTR 2004/9,^F28 a ruling which is about the assumption of liabilities:

In adopting the ordinary and natural meaning of the term, 'to furnish or provide', it follows that an entity must take some action to 'make a supply'. This approach is consistent with the use of active phrases throughout the examples of supplies in subsection 9-10(2), such as the normalised verbs: 'a provision'; 'a grant'; 'a creation'; 'a transfer'; 'an entry into'; and 'an assignment'.

 

72. The use of the word 'make' in the context of section 9-5 was considered by Underwood J in Shaw v. Director of Housing and State of Tasmania (No. 2) ('Shaw')^F29 in relation to the payment of a judgment debt. His Honour was of the view that GST only applies where the 'supplier' makes a voluntary supply and not where a supply occurs without any action by the entity that would be the 'supplier' had there been a supply. He considered the actions of the judgment creditor with respect to the extinguishment of the debt when the judgment debtor made the payment of the judgment sum to meet the judgment debtor's obligations.

73. The Commissioner agrees with Underwood J's decision that there was no supply by the judgment creditor, as the judgment creditor did not do any act or thing to extinguish the obligation when the judgment debtor paid the judgment debt.^F30

74. However, Underwood J was of the view, with which the Commissioner also agrees, that an entity can still make a supply even if the supply is made under the compulsion of statute if the entity takes some action to cause a supply to occur. His Honour went on to compare a supply resulting from a positive act against a situation where there is no supply because nothing is done:^F31

It seems to me that different considerations arise when considering the meaning of 'supply' in the Act. Notwithstanding the statutory compulsion, the liquidator's disposition in St Hubert's Island Pty Ltd (in liq) was something that was 'made' by him and for that reason would be likely to be considered a supply within the meaning of the Act. This is quite a different situation from the matter at hand, for the release of the obligation to pay a judgment sum by the payment of that sum will occur regardless of whether the judgment creditor makes or does any act at all. It was held in Databank Systems Ltd v. Commissioner of Inland Revenue (NZ) (1987) 9 NZTC 6213 that 'supply' means 'to furnish or provide'. Application of that proposition to the word 'supply' as enacted in the Act, s9-10 reinforces the concept that there is a legislative intention not to include in the word 'supply' the release of an obligation that occurs independently of the act of the releasor.

 

75. Underwood J considered the disposition by the liquidator would have been a supply under the GST Act because it was something 'made' by the liquidator. His Honour did not find a supply in relation to the release of the obligation to pay a judgment sum because the release occurred upon payment and not as a result of the judgment creditor doing something. However, an entity may do something and make a supply by agreeing to refrain from an act or to tolerate an act or situation.

76. In Westley the Full Federal Court considered two questions: whether the acquisition of a property subject to an existing lease constituted a 'supply' for the purposes of section 9-10; and whether, for purposes of section 13 of the A New Tax System (Goods and Services Tax Transition) Act 1999 , a review opportunity arose when the lease provided for a rent review. The Court noted that the ordinary meaning of 'supply' required a positive act and continued on to suggest paragraphs 9-10(2)(f) and (g), 'arguably', extend the ordinary meaning of supply. At paragraph 16 the Court said:^F32

The concept of 'supply' in its ordinary meaning in subs 9-10(1) of the GST Act does seem to require some act of provision, furnishment, conferral or giving of some thing. The inclusions in subs 9-10(2) specifically identify some of these things, without limitation to subs (1), as goods, services, advice or information, real property and any right, (pars (a) - (e) inclusive). On the other hand, the concept of 'financial supply' in par (f) is defined in the GST Regulations 1999 (40-5.09) to include, amongst other things, the acquisition of an interest in or under specified financial instruments and par (g) extends the concept of 'supply' to include the entry into an obligation to do something, to refrain from doing something or to tolerate an act or situation. For these reasons, the ordinary meaning of 'supply' is arguably extended by pars (f) and (g), if not by pars (a) - (e) inclusive.^F33

 

77. The Court concluded, at paragraphs 22 and 23:

While the matter is not free from doubt, we have concluded that when the appellants purchased the reversion they assumed the obligation of Lake Eerie to honour the lease according to its terms and in that sense entered into an obligation to tolerate an act or situation and in consequence, made a 'supply' by virtue of s 9-10(2)(g). The fact that the obligation arises by operation of law does not, in our view, impede this conclusion; after all, the reference to 'obligation' in s 9-10(2)(g) must be a legal obligation, although not necessarily one sourced in contract.^F34

 

In the circumstances, it is unnecessary for us to determine whether there is a '... "supply" by way of lease of the exclusive possession of the demised property in accordance with the lease' as her Honour below concluded in reliance of the ordinary meaning of the word 'supply' in s 9-10(1). However, the indications discussed at [16] above tend to point away from that construction.

 

78. The Court's wider comments about 'supply' and 'obligation' in paragraphs 16, 22 and 23 of its decision were expressed with some caution. With respect, the Commissioner does not consider the Court has stated a general principle, contrary to our proposition, that a supply can be brought about by operation of law in the absence of an entity taking any positive action. The Commissioner distinguishes something brought about solely by operation of law where there is no supply, from something done by an entity as a consequence of a legal requirement where there may be a supply, as was the situation noted by Underwood J in Shaw citing the example of the liquidator's actions in St Hubert's Island.^F35 The Commissioner also distinguishes an action that results in obligations arising by operation of law, as the Full Court found in Westley , where there may be a supply by the entity taking the action.

79. Also, the Court did not discuss whether Westley made an ongoing supply in relation to honouring the existing lease, as this question was not central to its conclusion that Westley assumed the obligation to honour the lease. Our view is that an owner who has acquired a reversion interest in a lease is making a positive act by continuing to tolerate the lessee's occupation subject to the terms of the existing lease and is also making a supply of real property. The owner is making a supply under paragraph 9-5(a) and if all of the other requirements of section 9-5 are satisfied, the action of tolerating the occupation in return for the consideration of the lease payments is a supply for a period for the purposes of Division 156.

Extinguishment of real property rights

80. Various government authorities are empowered by legislation to acquire an interest in real property. Two common mechanisms employed by legislation are:

·

  the vesting of the interest in the relevant government authority and extinguishing any previous interests in the real property; and

·

  the particular statute may allow the government authority to acquire the real property by agreement.

Vesting in the government authority

81. An example of vesting is provided by section 20 of the Land Acquisition (Just Terms Compensation) Act 1991 (NSW), where the required acquisition notices are gazetted, the relevant land is:

·

  'vested in the authority of the State acquiring the land'; and

·

  'freed and discharged from all estates, interests, trust, restrictions, dedications, reservations, easements, rights, charges, rates and contracts in, over or in connection with the land'.

The entity whose interest in the land is extinguished is compensated for the loss of that interest. That entity may agree to the compensation determined by the Valuer-General and execute a form of release. If the entity disputes the compensation amount, there is provision for payment of 90% of the initial valuation until the matter is resolved.

82. The effect of the gazettal notice is that the legal ownership of the land, described in the notice, is vested in the authority acquiring the land, and that the land becomes freed from any other interests. The entity's interest in the land, whether legal or equitable, is extinguished. In this case the entity does not make a supply because it takes no action to cause its legal interest to be transferred or surrendered to the authority.

83. Some statutes provide that land remaining, where only part of the land (the 'target land') is to be compulsorily acquired, will also be compulsorily acquired if the owner and the acquiring authority agree that the remaining land will be of no practical use or value to the owner. Although the owner requests the remaining land be also acquired, it is by operation of the statute that the remaining land is compulsorily acquired with the 'target' land. The actual transfer of the interest is made by statute rather than by the owner.

84. Mere acceptance by an owner of an amount of compensation payable on the compulsory acquisition does not provide a sufficient nexus between the land which passes and the means by which it passes. The fact that the owner does not dispute the acquisition is not an activity that effects the supply of the land. Even if the owner agrees to the terms of the acquisition and the amount of compensation, the land is acquired by operation of the statute, upon publication of the acquisition notice, not by an action taken by the landowner.

Example 1: compulsory acquisition

85. A government authority is compulsorily acquiring land and interests relating to that land, including the native title rights under a particular statute. The effect of compulsory acquisition is that every registered and unregistered interest in the land is extinguished, and each person who formerly held such an interest has that holding converted into a claim for compensation.

86. As required by the statute, the authority has made a public announcement that it is acquiring the land, and as a result, a number of groups of claimants have registered their respective native title over the land.

87. The authority has negotiated with each of the claimant groups as required by the statute, as to just compensation for the extinguishment of their rights over the land, and has entered into a deed with them. The deed sets out, among other things, that:

·

  the claimants accept the compulsory acquisition and extinguishment of any and all native title rights and interests in the land and agree to withdraw a related objection made under the statute to compulsory acquisition; and

·

  the authority undertakes to provide compensation to the native title claimants in the form of funding, land and certain services.

88. Although the claimants have agreed to accept the compulsory acquisition and the amount of the compensation, the agreement does not cause claimants' rights to be extinguished. These rights over the land are extinguished when all the limitations, reservations and restrictions over the land are revoked by the operation of the statute. The claimants are not making a supply of surrendering their rights.

89. It may be argued that the native title claimants are making a supply of entering into an obligation to withdraw any objections made under the relevant native title statute. However, no part of the compensation is consideration for a supply of withdrawing objections to the compulsory acquisition. The compensation relates to the loss suffered by the claimants on the extinguishment of their interest in the land.

90. In contrast, the extinguishment of an owner's interest by statute needs to be distinguished from the doing of a thing that is compelled by statute.^F36

Acquisition by agreement

91. It may transpire that, before a compulsory acquisition under a statute is initiated, an owner and an authority enter into negotiations that result in the owner selling land under a standard land contract. The land in this case is not vested in the authority through the compulsory acquisition process. Instead, the interest in the land transfers as a result of settlement of the contract and execution of a transfer instrument. As such, the owner makes a supply of land to the authority.

Proposition 6: 'supply' usually, but not necessarily, requires something to be passed from one entity to another

92. The fact that 'supply' requires something to be passed from one entity to another is largely self-evident in a transaction based tax. However, not all forms of supply have this characteristic. For instance, paragraph 9-10(2)(e) includes a creation of a right as a supply. The 'creation' of a right does not involve a passing of the right from one entity to another. In this case, the action of the supplier causes the recipient to make an acquisition but without anything passing between them.

93. Also, a comparison of subsection 9-10(2) with its corresponding provision, subsection 11-10(2), shows that the thing supplied is not necessarily the thing acquired. For example, a supply that is 'an entry into an obligation' is mirrored by an acquisition that is 'an acquisition of a right'. The obligation remains with the supplier, while the 'right' is created in the hands of the recipient, rather than there being a thing that passes from one entity to another.

94. A 'financial supply' includes the acquisition of an interest, as defined in the GST regulations. An acquisition is not a supply in the ordinary sense as it focuses on the receipt of a thing rather than the passing of a thing from one to another. Nonetheless, because the acquisition is deemed to be a supply, the entity from which it is made is deemed to have made an acquisition of the acquisition-supply, even though nothing passes from one entity to the other.

Proposition 7: an entity cannot make a supply to itself

95. The proposition that an entity cannot make a supply to itself flows from the proposition 'supply usually, but not necessarily, requires something to be passed from one entity to another'. It also seems self evident in a transaction based tax.

96. An exception to this proposition is provided in Division 54 which allows an entity to register its branches separately for GST. Paragraph 54-40(2)(c) deems all transfers of anything by the GST branch to the parent entity (including other GST branches of the parent), that would have been supplies made by the branch if it were an entity, to be supplies made by the branch as a separate entity. This has effect for working out the parent's additional net amount in relation to the branch. Without this specific provision a 'supply' from the branch to the parent entity would not be a supply for GST purposes as they are not separate entities.

97. The GST Act recognises that an entity can act in more than one capacity. Subsection 184-1(3) states that:

A legal person can have a number of different capacities in which the person does things. In each of those capacities, the person is taken to be a different entity.

 

98. For example, a company that is the trustee of a trading trust acts in a different capacity when it supplies administrative services to the trust. Because the entity is a different entity in relation to each capacity in which it acts, the provision of trustee services by the company to itself as trustee of the trust is a supply between two entities, the company and the trustee/trust.

Proposition 8: a supply cannot be made by more than one entity

99. This proposition has been stated by Millet LJ in C & E Commrs v. Wellington Private Hospital Ltd [1997] BVC 251 at 252:

Where supplies are made by different suppliers, they cannot be fused together to make a single supply...

 

100. As part of its judgment, the House of Lords in The Trustees of the Nell Gwynn House Maintenance Fund v. Customs and Excise Commissioners [1999] 1 All ER 385 ( Nell Gwynn ) endorsed Millett LJ's statement above.^F37 In Nell Gwynn the House of Lords considered whether maintenance fees paid to an entity other than the lessor or the lessor's agent were consideration for the grant of the lease. The trustees submitted that the grant of the lease and provision for the supply of maintenance services all formed part of a single economic transaction and should be treated as one exempt supply.

101. The House of Lords rejected this approach. The court held that it was not possible to view the supply of the services and the supply of the lease as a single supply because the supply of services was separate from the supply of the lease and they could not be a single supply because the services and the lease were supplied by different taxpayers.^F38

Proposition 9: creation of expectations alone does not establish a supply

102. The Commissioner considers that an agreement that does not bind the parties in some way is not sufficient to establish a supply by one party to the other. This requirement was emphasised by the New Zealand Court of Appeal in C of IR v. New Zealand Refining Co. Ltd (1997) 18 NZTC 13,187 (New Zealand Refining). The case concerned payments made by the New Zealand Government to the New Zealand Refining Company, which were only to be made on condition that the refinery remained operational.

103. The New Zealand Court of Appeal noted there was an expectation among the parties that the refinery would continue to operate, but that there was no contractual obligation to that effect.^F39 The Government's only recourse in the event that the refinery ceased to be operational was to stop making payments. Although the payments were intended as an inducement to keep the refinery open, they were not linked to any identifiable supply:

In our view the payments related to the structure or framework within which supplies of services were expected to be made. They were to compensate NZRC for the removal of the protections given by the Support Letters and its exposure to the hot winds of competition. It was compensation directed to the same purpose as the grants which repaid the loans. The payments were received in course of the taxable activity of NZRC but they were not in consideration for any supply made by it. Accordingly, they are not subject to GST.^F40

 

Supply and consideration

104. In Europe for a supply to occur there is a requirement for a pre-existing framework of a reciprocal legal relationship between the supplier and the recipient. This is illustrated in former Article 2(a) of the Sixth Directive, replaced by Article 2(1), under which taxable transactions within the framework of the VAT system presuppose the existence of a transaction between the parties in which a price or consideration is stipulated.^F41 That is, the linkage between the supply and consideration is worked out between the parties in advance.

105. In the European Court of Justice (ECJ) case Town & County Factors Ltd v. Customs & Excise Commissioners [2002] BVC 645 the ECJ held there was reciprocal performance between the organiser of a 'spot-the-ball' competition and the competitors. The entry fees received by the organiser were consideration for the services the organiser supplied to the competitors. The existence of this reciprocal relationship did not depend on the obligations of the supplier of the services being enforceable. It was agreed between the parties to the transaction that the obligations created for the organiser were not legally enforceable but binding in honour only.

106. The relationship between a supply and consideration in Australia is less strict than in Europe. Paragraph 9-5(a) states that 'you make the supply for consideration'. If read alone, 'making a supply for consideration' arguably suggests the existence of enforceable obligations, be they written or oral, between the supplier and recipient. However, this is not an absolute prerequisite to making a supply for consideration.

107. The definition of consideration in section 195-1 states:

consideration , for a supply or acquisition, means any consideration within the meaning given by section 9-15, in connection with the supply or acquisition.

 

Hence, consideration for a supply is defined as being any consideration in connection with a supply. Consideration in section 9-15 relevantly means:

(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 ...

The Commissioner takes the view that the words 'in connection with the supply or acquisition' in section 195-1, and the phrases 'in connection with a supply of anything' and 'it does not matter whether the payment, act or forbearance was voluntary' in section 9-15 mean that there does not have to be an enforceable relationship for there to be a sufficient nexus between the supply and a payment. Nor does the consideration have to be agreed in advance.

108. For GST purposes you may still make a supply in the absence of enforceable obligations, provided there is something else, such as goods, services or some other thing, passing from the supplier to the recipient.^F42 For the supply to be a taxable supply there must also be consideration and a sufficient nexus between the supply and the consideration.^F43 The Ruling considers 'sufficient nexus' further in paragraph 180.

Example 2: voluntary payments for restaurant supplies

109. A restaurant run by a sole trader accepts tips from its customers, including tips on bills paid by credit card. These tips are unsolicited and are in addition to the price stipulated by the restaurant in the bills presented to the customers. The sole trader does not pass these tips on to the restaurant's employees.

110. The tips are voluntary payments made in connection with the restaurant supplies made by the sole trader to its customers. Although there is no obligation on the customers to make these payments, the tips form part of the consideration for the restaurant supplies by the sole trader to its customers.

111. On the other hand, if the sole trader passes the tips on to the restaurant's employees, the payments are not for the restaurant supplies by the sole trader. The tips constitute income of the restaurant employees^F44 and such payments are not subject to GST as the employees are not carrying on an enterprise for GST purposes.^F45 If the bill is paid by credit card and the amount of a tip is marked on the payment slip the restaurateur would need to demonstrate that the tip is passed on to the employee.

Proposition 10: it is necessary to analyse the transaction that occurs, not a transaction that might have occurred

112. There may be a number of different ways by which an entity could achieve a desired end result. In determining whether the entity has made a supply, and the true character of any supply it has made, what is relevant is what the entity actually did, rather than what it might have done.

113. For example, A could provide B with money so that B can pay to receive a particular service from another entity. A has not made a supply as the provision of money in this example is not a supply (subsection 9-10(4)). If A itself provides the service to B, A has made a supply of the service. It is not open to A to argue what it could have done. That is, it is not open to A to argue that if it had provided cash it would not have made a supply for GST purposes and, therefore, it should not be considered to be making a supply when it provides those services directly. Similarly, if A did provide money to B so B can pay to receive a particular service from another entity, it would not be open to B to argue that A could have provided the service and B should be considered to have made an acquisition from A.

Part 3: Supply in the context of a tripartite arrangement

Analysing a tripartite arrangement

114. In a two party transaction, a thing supplied to an entity is typically also provided to that entity.

115. In more complex arrangements involving more than two entities, which the Commissioner refers to as tripartite arrangements, analysis may reveal:

·

  a supply made to one entity but provided to another entity;

·

  two or more supplies made; or

·

  a supply made and provided to one entity and consideration paid by a third party.

116. As with two party transactions, the GST consequences of tripartite arrangements turn on identifying:

·

  one or more supplies;

·

  consideration (a payment, act or forbearance);

·

  a nexus between the supply and the consideration; and

·

  to whom the supply is made.

117. The propositions used to characterise two party transactions hold true for characterising tripartite arrangements. But, as Lord Millett points out in Customs and Excise Commissioners v. Plantiflor Ltd [2002] UKHL 33 ( Plantiflor )^F46, the involvement of a third entity in a tripartite arrangement calls for close analysis. This part of the Ruling uses some further propositions to analyse the transaction. They are:

Grandma's flowers

118. The scenario of Grandma's flowers illustrates some of the tripartite propositions.

A enters into a contract with B for B to provide goods to C. A is an individual, B is a florist, the goods are flowers, and C is A's grandmother:

Proposition 11: the agreement is the logical starting point when working out the entity making the supply and the recipient of that supply

119. Examining the agreement or other reciprocal legal relationships is the starting point in analysing an arrangement to determine who is making a supply to whom.

120. In Grandma's flowers there is no contractual relationship between A and C. Also, there is no contractual relationship between B and C. B simply provides flowers to C on A's behalf.

121. If you take a contractual approach in analysing the arrangement in Grandma's flowers , then the only contractual relationship is between A and B. Under this contract B makes a supply of flowers to A and consideration is paid by A to B. That supply is provided by B to C:

122. The analysis of Grandma's flowers raises the following propositions for identifying supplies in tripartite arrangements:

·

  transactions that are neither based in an agreement that binds the parties in some way nor involve a supply of goods, services, or some other thing, do not establish a supply; and

·

  when A has an agreement with B for B to provide a supply to C, there is a supply made by B to A (contractual flow) that B provides to C (actual flow).

These two propositions are discussed next.

Proposition 12: transactions that are neither based in an agreement that binds the parties in some way nor involve a supply of goods, services, or some other thing, do not establish a supply

123. The Commissioner explained in Part 2 of this Ruling at paragraphs 102 to 103 how an agreement that does not bind the parties in some way is not sufficient to establish a supply by one party to the other unless there is something else, such as goods, services, or some other thing, passing between the parties.

124. The following example examines a transaction (in a tripartite arrangement) that is not based in an agreement that binds the parties and does not involve a supply of goods, services, or some other thing.

Example 3: loyalty payment with no supply of goods, services, or some other thing

125. M is a manufacturer of goods. M supplies goods to authorised dealers who on-supply those goods to end users. M makes a standing offer to end users that if an end user's purchases from an authorised dealer reach a certain level, M will pay the end user a 'loyalty payment'.

126. D is a dealer and E is an end user. The supply chain is that M supplies goods to D and D supplies goods to E. E receives a loyalty payment from M.

127. There is no supply from E to M in relation to the loyalty payment. There is a contract between M and E as a result of E's acceptance of M's standing offer to make the loyalty payment. However, E is not under any binding obligation to M to purchase goods through D and does not make a supply to M simply by making acquisitions from D.

128. It is E's entry into the contract with D for supply of the goods to E that constitutes E's acceptance of M's standing offer and the contract between M and E is formed at this time. Although M is obliged to make the loyalty payment to E, at no point can M compel E to complete the contract of sale with D.

129. In the absence of any entry into an obligation by E to complete a contract of sale with D, E also does not provide or furnish anything else to M that may be considered to be a supply. There is no supply of goods, services or some other thing by E to M. The loyalty payment made by M to E cannot be consideration for a supply from E to M because E does not make a supply to M. Further, the payment does not give rise to an adjustment event for either M or E. ^F47

Proposition 13: when A has an agreement with B for B to provide a supply to C, there is a supply made by B to A (contractual flow) that B provides to C (actual flow)

130. In Grandma's flowers pursuant to the contract between A and B, B makes the supply to A but provides the flowers to C.

131. 'Made' in the context of 'a supply made' takes its meaning from the definition of 'recipient' in section 195-1:

recipient , in relation to a supply, means the entity to which the supply was made.

 

132. 'Provide' is used to contrast with 'made' - it distinguishes between the contractual flow of the supply to the recipient (the entity to which the supply is made) and the actual flow of the supply to another entity (the entity to which the supply is provided).

133. The Commissioner uses 'made' and 'provide' in analysing tripartite arrangements in the sense given to those words by the subsection 38-190(3) context, similar to the sense in which those words were used by Neuberger LJ in WHA Ltd & Anor v. Customs & Excise [2004] EWCA Civ 559 (WHA). At paragraph 38, Neuberger LJ said 'the services in question are "supplied" to WHA...[T]he fact that they are also provided to the vehicle owner does not, to my mind, prevent them from being treated as "supplied" to WHA'. WHA is discussed in more detail at paragraphs 50 to 54 of GSTR 2006/10 Goods and services tax: insurance settlements and entitlement to input tax credits.

134. In contrast, 'provided' is used elsewhere in the GST Act in a number of other senses, for example:

·

  'provision' as the action by which advice or information is supplied (paragraph 9-10(2)(c));

·

  consideration being 'provided' (subsection 11-30(3));

·

  the day 'provided for' (subsection 151-20(3));

·

  fringe benefits 'provided' (in the headings in Division 71); and

·

  information to be 'provided' (subsection 31-20(2)).

Redrow and related cases

135. The UK House of Lords' case Customs and Excise Commissioners v. Redrow Group plc [1999] BVC 96 (Redrow) has been cited by others in support of the view that when A contracts with B for a supply to be provided to C, B makes two distinct supplies:

·

  B supplies to A a right to have a supply made to C; and

·

  B makes a supply of the thing to C.

136. The Commissioner does not accept that Redrow supports this view.^F48 As pointed out in GSTR 2003/8:^F49

Rights are created under executory contracts and although the creation of such rights is supported by valuable consideration, the supply may not be characterised as a supply that is made in relation to rights if, for example, those rights contribute to the supply as a whole but cannot be identified as the dominant part of the supply.

 

137. The grant of a right or entry into an obligation may be a term or condition of a larger transaction. Where the grant of the right or entry into the binding obligation is the substance of the transaction it will be the subject matter of a supply.^F50

138. The Commissioner considers the proposition to be derived from Redrow is no broader than: the entity that has an agreement with a supplier for a supply is the recipient of that supply (even if that supply is provided to a third party). This proposition is consistent with our proposition here, that when A has an agreement with B for B to provide a supply to C, there is a supply made by B to A that B provides to C. The proposition finds support in UK cases before and after Redrow and is also endorsed in NZ cases.

Redrow

139. In Redrow , a builder, Redrow, constructed new houses for sale. Most prospective Redrow purchasers could not purchase a Redrow home unless they had a buyer for their existing home. To expedite sales of its homes Redrow instructed an estate agent to value the prospective purchaser's existing home and to handle the sale.

140. Redrow monitored progress in the marketing of the property, maintaining pressure on the agent to achieve a sale. Redrow entered into an agreement with both the agent and the prospective purchaser that it would pay the estate agent's fee plus VAT if the prospective purchaser bought a Redrow home. Redrow was not liable to pay the agent's fee if the prospective purchaser did not purchase a Redrow home.

141. Redrow advised the agent to enter into a separate agreement in the normal terms with the prospective purchaser, to provide cover in the event that Redrow was not liable to pay the fee if the prospective purchaser bought elsewhere. The instructions to the agent could not be changed without Redrow's agreement.

142. The agent made a supply of services on which it was obliged by subsection 2(1) of the UK VAT Act to charge VAT. The issue was whether Redrow's expenditure was consideration for services supplied by the agent to Redrow. Redrow was only entitled to deduct the tax which it paid as input tax if the estate agent supplied services to Redrow. The UK Commissioners contended that the estate agent was only supplying services to the prospective purchaser.

143. The House of Lords held that estate agent services were supplied to Redrow. Lord Hope of Craighead said, at 100:

The service is that which is done in return for the consideration...Questions such as who benefits from the service or who is the consumer of it are not helpful. The answers are more likely to differ according to the interest which various people have in the transaction...The fact that someone else - in this case, the prospective purchaser - also received a service as part of the same transaction does not deprive the person who instructed the service and who has had to pay for it of the benefit of the deduction.

 

144. Lord Millett said, at 105:

Everything which the agents did was done at the taxpayer's request and in accordance with its instructions and, in the events which happened, at its expense. The doing of those acts constituted a supply of services to the taxpayer.

 

145. Redrow is unusual because both Redrow and the prospective purchaser contracted for a supply of services from the agent. Usually when an entity arranges for a supply to be provided to another entity, it is only the first entity that contracts for the supply.

British Airways

146. Redrow was applied in British Airways plc [2000] BVC 2207 ( British Airways) . British Airways had an arrangement where food outlets provided food to passengers of delayed flights. When there was a flight delay, an announcement was made to passengers that vouchers of a specified amount were available for passengers' use at food outlets. Passengers could use their boarding pass when a voucher was not available.

147. For British Airways to succeed in claiming a deduction for the VAT included in the charge to it for the refreshments provided to delayed passengers there must have been a supply of something by the outlets to British Airways. The issue was did British Airways obtain 'anything - anything at all?' The VAT tribunal followed Redrow and found the answer to be, at paragraph 9:

Yes - it obtained the right to have its delayed passengers fed at its expense - and that was clearly for the purpose of its business. That is enough to enable it to succeed.

 

148. The tribunal held that there was a supply of services made to British Airways. Under subsection 5(2) of the UK VAT Act 'anything which is not a supply of goods but is done for consideration (including, if so done, the granting, assignment or surrender of any right) is a "supply of services"'.

149. The Commissioner agrees there is a supply made to British Airways, but, respectfully, it is considered that the character of the supply made by the food outlets to British Airways is a supply of a meal. The meal is provided to the passengers. In this case there is a contract between two entities, British Airways and the food outlet, under which a third entity is to be provided with the thing that is the subject of the supply between the first two entities. That is, British Airways and the food outlet have contracted for the food outlet to provide a meal to the passengers. For GST purposes the Commissioner considers British Airways is analogous to the scenario in Grandma's flowers .

150. The British Airways case above was not the first time British Airways disputed the VAT treatment of this arrangement. Before Redrow, British Airways had argued a case in the VAT tribunal and on appeal to the High Court.^F51 Those earlier decisions focused on whether there was a supply of goods rather than services to British Airways. The definition of supply of goods under both the Sixth Directive and the UK VAT Act required a transfer of dispositive power. As British Airways never had dispositive power over the supply of food, the tribunal and the court could not hold that a supply of goods had been made to British Airways.

151. As stated in paragraph 27 of this Ruling, the definition of supply in section 9-10 in relation to a supply of goods is not restricted in this way. Section 9-10 places supplies of goods and services alongside things like rights and obligations. This reduces the need to resort to creative language in analysing a transaction as a supply of services. The differences in the structure of our legislation mean that the characterisation of a supply as being a supply of goods or a supply of services in the VAT tripartite cases should be treated with caution when being examined in an Australian context.

Other UK cases

152. The arguments accepted in Redrow have been unsuccessfully argued in two subsequent cases:

·

  Poladon Ltd [2001] BVC 4046; and

·

  London Borough of Camden [2001] BVC 4139.

In each of these cases the relevant entity failed in its Redrow type argument because it did not contract for the supply from the supplier. This proposition, Proposition 13, was at work in the UK VAT before Redrow . For example, the proposition was successfully argued in P&O European Ferries (Dover) Ltd [1992] BVC 955 where it was found on the evidence that the company instructed the relevant solicitors and was the contractual recipient of the solicitors' services 'notwithstanding that the individual employee also received the benefit of those services'.

New Zealand cases

153. The courts in New Zealand have also adopted the proposition that the entity that has an agreement with a supplier for a supply is the recipient of that supply (even if that supply is provided to a third party).

154. Durie J in C of IR v. Capital Enterprises Ltd (2001) 20 NZTC 17,511 (at paragraph 50), after stating that the core provisions of the NZ GST Act 'are directed to contractual arrangements between the suppliers and the recipients of the supply', said that GST 'attaches to the supply to the person who at contract can require its performance'.

Certain supplies of health services

155. Under the GST health provisions in Subdivision 38-B (except for sections 38-45 and 38-47 dealing with particular supplies of goods and section 38-55 dealing with private health insurance and ambulance insurance), the supply is only GST-free where an individual receiving that service or specific health treatment is the recipient of that supply. This outcome results from the specific wording in some health provisions, whilst in other provisions it is due to the nature of the services themselves. This means that a GST-free supply of a health service cannot be made to a business entity or a non-profit body.

156. In some fiduciary relationships it may be necessary for one party to give consent to the supply of a health service for another party. For example, a custodial parent gives consent for the medical treatment of a child. The Commissioner accepts in these circumstances that the other party, the child, is the recipient of the supply.

Examples applying the proposition: when A has an agreement with B for B to provide a supply to C, there is a supply made by B to A (contractual flow) that B provides to C (actual flow)

Example 4: ambulance services supplied to hospital

157. A, a supplier of ambulance services, enters into an agreement with B, a hospital, under which A agrees to provide ambulance services as and when B requests them and B agrees to pay for the services. The obligations under the agreement between A and B are binding.

158. Pursuant to the agreement, A transfers C, a patient, from hospital B to another hospital. The transfer of C is in the course of C's treatment and B pays A to provide A's services to C.

159. The recipient of A's supply of ambulance services is hospital B. A's supply is made to B and provided to C.

160. One of the requirements under subsection 38-10(5) for a supply of an ambulance service to be GST-free is that the service is supplied in the course of treating the recipient of the supply. As hospital B is the recipient of the supply, not the patient, and there is no treatment of the hospital, the supply of the ambulance service is not GST-free.

Example 5: occupational therapist

161. A, an occupational therapist, is engaged by B, a company, to assess the needs of C, its employee. C suffers from multiple sclerosis and needs to use a wheelchair. A and B enter into an agreement which requires A to undertake an assessment of C's condition, to give recommendations in a report to B and for B to pay for the service.

162. A's supply of services is made to B. Although C may benefit from these services, it is B who contracts for the supply of these services and is the recipient of the supply.

163. This supply is not GST-free under subsection 38-10(1). This is because paragraph 38-10(1)(c) requires the supply to be generally accepted in the relevant profession as being necessary for the appropriate treatment of the recipient of the supply. B is the recipient of the supply. The supply is not for the treatment of B. Paragraph 38-10(1)(c) is not satisfied.

164. If C engages the occupational therapist to supply its services and B merely pays the therapist on behalf of C, the recipient of the occupational therapist's services is C. This supply will be GST-free if all of the requirements of subsection 38-10(1) are satisfied.

Example 6: teaching services

165. A, a supplier of teaching services, enters into a contract with B, a course provider, to provide teaching services to B's students.

166. B conducts professional or trade courses that are GST-free under section 38-85. Students enrol with, and pay fees directly to, B. When a student completes the course, B is authorised by the relevant State or Territory authority to conduct a test. If a student passes the test, B facilitates the issuing of the qualification/licence by the relevant State or Territory authority.

167. A has no contractual relationship with the students.

168. A makes a supply of the teaching services to B and A provides this supply to the students. A's supply is not a GST-free supply of a professional or trade course.

169. However, B does make a GST-free supply of a professional or trade course to the students. The student