LUXOTTICA RETAIL AUSTRALIA PTY LTD v FC of T

Members:
J Block DP
SE Frost SM

Tribunal:
Administrative Appeals Tribunal, Sydney

MEDIA NEUTRAL CITATION: [2010] AATA 22

Decision date: 15 January 2010

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J Block, SE Frost (Deputy President, Senior Member)

Part A - Introduction and background

1. The objection decisions under review concern assessments of a GST net amount for monthly tax periods commencing:

• (a) 1 October 2002 and ending on 31 August 2006 (referred to as "the 2002 to 2006 tax periods" and also referred to as "the earlier period"); and
• (b) 1 April 2008 and ending on 30 September 2008 (referred to as "the 2008 tax periods" and also referred to as "the later period").

2. It will be noted that there are three applications; on 28 August 2009 the Tribunal directed that they be heard together.

3. The Applicant was represented by Mr R Cordara SC and Ms K Deards of counsel instructed by Deloitte Lawyers; the Respondent was represented by Mr M Wigney SC and Mr J Smith of counsel instructed by the Australian Government Solicitor.

4. The Tribunal had before it the T documents lodged pursuant to s 37 of the Administrative Appeals Tribunal Act 1975 in respect of each of the earlier period and the later period and in addition, and in respect of the earlier period, supplementary T documents; although the supplementary T documents are page numbered sequentially after the T documents for the earlier period, they were referred to by the parties in the documents and at the hearing by references to "ST" and will be referred to in the same way in these reasons. References to T documents should be construed, unless the context otherwise requires, to the T documents for the earlier period.

5. The Tribunal also admitted exhibits as follows:

Exhibit A1:	Chronology prepared by the Applicant;
Exhibit A2:	Affidavit of Mr Ian David Whelan dated 15 October 2009;
Exhibit A3:	Affidavit of Ms Sallyanne O'Neil dated October 2009;
ATC 3206 Exhibit A4:	Affidavit of Ms Karen Price dated 16 October 2009;
Exhibit A5:	Affidavit of Ms Gai Lynne Stephens dated 15 October 2009;
Exhibit A6:	Extract from the Luxottica Annual Report 2006 commencing with the words "Each of these brands";
Exhibit A7:	Extract from the Luxottica Annual Report 2005 headed "Luxottica Group in 2005";
Exhibit A8:	Extract from the OPSM Annual Report 2003 headed "Chairman's Report";
Exhibit A9:	Opinion by Mr S Gageler SC dated 14 February 2008;
Exhibit A10:	Receipt for spectacles; and
Exhibit R1:	Invoice of Deloitte Touche Tohmatsu to Luxottica South Pacific Holdings Pty Limited, dated 10 November 2006.

6. The Tribunal was furnished with statements of facts, issues and contentions by the parties and also comprehensive written submissions; "AS" refers to the submissions by the Applicant dated 23 November 2009, "RS" refers to the Respondent's outline of submissions dated 9 December 2009 and "AR" refers to the Applicant's reply dated 14 December 2009.

7. This matter was heard over three days and being 15, 16 and 17 December 2009. The Respondent, who is also referred to as "the Commissioner" did not require the witnesses (Mr Whelan, Ms O'Neil and Ms Price) to whom Exhibits A2, A3 and A4 are referable for cross-examination, and so that oral evidence was given only by Ms Stephens (Exhibit A5). Ms Stephens confirmed the contents of Exhibit A5 save only for one alteration of a minor nature and so as to substitute "ST" for an incorrect reference in one clause; her cross-examination related almost entirely to the question of the GST advice sought by the Applicant or furnished by the Applicant's own employees and which was relevant to the question of penalty. Her evidence as to the promotions which gave rise to these applications and also the evidence of the other witnesses as to the promotions and who were not required for cross-examination, can be accepted without reservation. The witness statements in question were plainly prepared with meticulous care and no little effort. Exhibit KP-1, which is an exhibit to Exhibit A4, is a very lengthy document described as a Stocktake Sale Report listing the details of relevant transactions.

Part B - Issues

8. The main issue in this case turns on a fact situation, which is not complex. The Applicant is a company registered under A New Tax System (Goods and Services Tax) Act 1999 ("the GST Act") and it is the representative member of a GST group formed with its ten subsidiaries. The companies in the group are retailers of spectacles, and operate under trading names including OPSM, Laubman & Pank, Kays Optical and Sunglass Hut. The applications relate to the group members' supplies of spectacles, which in each case comprised prescription lenses fitted into frames for glasses and sunglasses. (References in these reasons to the Applicant are to be read as references to any of the members of the Applicant's GST group.)

9. During the periods under review, the Applicant ran various promotions. Under these promotions, spectacle frames were offered at a discount from the normal selling price (and the discounts offered took various forms), but on condition that the customers acquired not only the frames but also lenses for those frames (that is, an entire pair of spectacles). There was no discount offered for the lenses. The aspect of conditionality is referred to as the "conditionality issue". The discount offered in respect of the frames was sometimes a percentage of up to 50 percent off the normal selling price of the frames and sometimes a specific monetary amount. That monetary amount was in respect of certain promotions an amount of $100.

10.

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ATC 3207

It will be appreciated then that where a customer wished to buy a frame only, and there was a promotion on foot in relation to that frame, he or she could not take advantage of the discount offered. There is no dispute as to the evidence before the Tribunal that over the years in question frames have become fashion items and so much so that customers may wish to change frames for reasons of fashion and even where their eyesight has not deteriorated to an extent where new lenses are required. Mention was made during the hearing of why the Applicant saw fit to impose the condition; it was suggested (although this is conjecture only) that the Applicant might have desired to ensure that a given customer did not take the new frame on the basis that he or she would then acquire lenses elsewhere.

11. It will also be appreciated that what was held out to a customer who wished to take advantage of one of these promotions was that the frame was being sold to the customer at a discount, the lenses were sold without any discount, and the price of the complete pair of spectacles was the aggregate of these two amounts. There was no additional charge for fitting the lenses into the frame.

12. The central issue is as to the manner in which the discount should be treated for GST purposes, bearing in mind that the supply of the frame attracts GST whereas the supply of the lenses is GST-free. The Applicant contends that, since the discount relates only to the frame, GST should be calculated on the discounted frame price. The Commissioner, on the other hand, contends that for GST purposes the discount allowed to the customer should be apportioned between the frame and the lenses. The effect of the Commissioner's contention is to strike, for GST purposes, as between the frame and the lenses, a mathematical relationship that does not reflect what the Applicant says are the prices of each of those components when sold under one of the promotional arrangements. Instead, according to the Commissioner, the relationship between the two components should be the same as it was when no promotional arrangements were in place. A worked example showing the difference in approach between the Applicant and the Commissioner is examined later in these reasons, at [16] below.

13. There has been over time some considerable degree of alteration as to the actual amount of GST in dispute between the parties. It is convenient in this context to draw on the Respondent's Combined Statement of Facts, Issues and Contentions dated 13 October 2009; clauses 7 to 32 read as follows:

" The assessments for the 2002 to 2006 tax periods

• 7. At the time of each supply subject to the percentage-off and set dollar amount off discount an employee of the applicant entered the price of the prescription spectacles into the applicant's electronic accounting system. In doing so, the employee applied the applicable discount to the total price of the prescription spectacles. The applicant then submitted business activity statements and accounted for GST on this basis.
• 8. On 5 October 2006 the applicant sought a refund in the amount of $1,895,394 in respect of a net overpayment of GST for the 2002 to 2006 tax periods on the basis that the price of the frames had been incorrectly entered and that the entire discount should have been applied to the price of the frames.
• 9. The respondent refunded this amount on 14 November 2006 and subsequently commenced audit action in respect of the GST treatment of the discount. On 17 April 2007 the audit was completed and the applicant was advised by the respondent that the discount was properly applied to both the frames and lenses proportionately.
• 10. A notice of assessments of net amounts for the tax periods March 2003 to August 2006 was issued to the applicant on 17 April 2007. Notices of assessment for the tax periods October 2002 to February 2003 were issued on 22 November 2006, 18 December 2006, 16 January 2007, 21 February 2007, and 22 March 2007 respectively. Under these various notices of assessment the total GST shortfall was $1,894,214.
• 11. On 26 April 2007 the respondent issued a notice of assessment of penalty for having a tax shortfall amount. The amount of penalty was $236,776.65 (a remission of 50% under s298-20 of Schedule 1 of the [Taxation Administration Act 1953 ('TAA')] was made due to the applicant's compliance history).

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  ATC 3208

  12. On 16 May 2007 the applicant lodged an objection against the notices of assessments for GST net amounts. On 21 May 2007 it lodged an objection against the notice of assessment of penalty.
• 13. On 4 June 2007 the respondent issued a notice of decision disallowing the GST objection in full.
• 14. On 28 June 2007 the respondent issued a notice of decision disallowing the penalty objection in full.
• 15. On 27 July 2007 the applicant lodged with the AAT applications for review of the respondent's decision on the objections.
• 16. On 5 December 2008 the applicant advised the respondent that the set dollar amount off transactions for the 2002 to 2006 tax periods in the amount of $978,779 would no longer be pressed. The applicant advised that this was because the terms and conditions for the set dollar amount off discount promotions kept changing during the relevant period and due to a discard policy applied to promotional material during that period, the terms and conditions of the particular dollar amount off discounts offered during the relevant period could not be established.
• 17. Therefore the applicant no longer seeks to press its claims in respect of set dollar amount off transactions for the 2002 to 2006 tax periods reducing the GST amount in dispute by $978,779.
• 18. In consequence, the applicant does not press the corresponding amount of penalty of $122,347.38.
• 19. The applicant further advised the respondent that in respect of the percentage-off transactions for the 2002 to 2006 tax periods, it would only press its claim for the amount of $100,017.70. The balance, $815,415.30 would no longer be pressed being a mixture of percentage-off and budget eyewear transactions, the latter being mistakenly included. The applicant said the percentage-off transactions were excluded as a result of a cautious approach in reviewing its evidence.
• 20. While the same discard policy applied to the percentage-off discount promotions the applicant contends that a marketing manager of the applicant is able to provide evidence to the effect that the terms and conditions of the percentage-off discounts for the 2002 to 2006 tax periods were precisely the same as for those transactions after that period for which there is evidence of specific terms and conditions.
• 21. On 24 September 2009 the applicant advised that on the basis of new data that it has now been able to extract from its sales records, the applicant now presses the amount of $873,468.01 in respect of the percentage-off transactions.
• 22. Therefore the applicant contends in this appeal that the assessments for the 2002 to 2006 tax periods are excessive by amounts totalling $873,468.01. The corresponding amount of penalty in dispute is $109,183.50.
• 23. The total GST shortfall under the assessments for the 2002 to 2006 tax periods is $1,894,214 and the difference of $1,020,745.99 is not pressed unless it is held that the supply of prescription spectacles is a GST-free supply."

The assessments for the 2008 tax periods

• 24. Whilst preparing for the hearing of the applications for the 2002 to 2006 tax periods the parties agreed that set dollar amount off transactions would be the subject of further assessment and objection in the 2008 tax periods and any subsequent proceeding filed with the AAT would be joined with the existing proceeding.
• 25. Consequently on 27 February 2009 the applicant requested the respondent to issue GST assessments for the 2008 tax periods.
• 26. On 25 March 2009 the respondent issued GST assessments to the applicant for the 2008 tax periods.
• 27. On 22 May 2009 the applicant objected to these same GST assessments.
• 28. On 25 August 2009 the respondent issued a notice of decision disallowing the GST objection in full.
• 29. On 28 August 2009 the applicant lodged with the AAT an application for review of the respondent's decision on the objection. This appeal for the 2008 tax periods is now co-joined with the appeal for the 2002 to 2006 tax periods in respect of the percentage-off transactions.

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  ATC 3209

  30. On 24 September 2009 the applicant advised that it would no longer press the supplies made by the applicant pursuant to the set dollar amount off promotions (that is, the Celebrate 100 years of Laubman & Pank with $100 off the normal selling price of selected frames when purchased as a complete pair (frame and lenses); and Improve your visibility with DriveWear lenses, $150 or $100 off certain frames when purchased as a complete pair (frames and specified lenses)).
• 31. Therefore, the GST amount in dispute is reduced from $105,311 to $85,824.34 and concerns only the assessments for the June to August 2008 tax periods.

Total amount in dispute

• 32. In summary, the applicant contends in this appeal that the assessments for the 2002 to 2006 and the 2008 tax periods are excessive by amounts totalling $959,292.35. The total penalty in dispute for tax shortfalls in the 2002 to 2006 tax periods is $109,183.50."

14. The Tribunal was advised at the commencement of the hearing that there have been further adjustments of the amounts in dispute and so that in respect of the earlier period, the amount in dispute is $50,126 and in respect of the later period, the amount in dispute is $82,544. These are the only amounts in respect of each of the periods that are before the Tribunal. In respect of the later period, there is no penalty aspect before the Tribunal because during the later period, the Applicant accounted for GST to the Commissioner in the manner for which the Commissioner contends and so as to spread the frame discount between the frame and the lenses on a proportionate basis. In respect of the earlier period, there is a penalty issue in that the Commissioner imposed a penalty of 25 percent which was then reduced by one-half. There is no dispute between the parties as to the evidence in respect of the promotions, although there is a degree of dispute as to the evidence in respect of the penalty aspect. On this basis it is convenient to include a part of AS which contains a detailed and helpful summary of the evidence which is not in dispute. That evidence summary sets out (in footnotes) references to the relevant witness statements. Clauses 17 to 27 of AS read as follows:

"Facts in more detail

• A. Background
  • 17. The background facts are important for the usual reasons, but also because they show a shift in the sales emphasis of the Applicant over recent years, which has been led by the increasingly significant commercial role of frames as a fashion item - one which now can command very substantial prices. This is to be contrasted with the historic role of opticians as essentially providing a medical or quasi-medical service. That role remains central to the overall nature and function of spectacles, of course. However, the rise of fashion in spectacles has become a focus of many customers, who take sight correction for granted (although it is, objectively speaking, the principal aim of getting glasses). This enhanced commercial significance provides context for the Applicant's sales approach to frames, as opposed to lenses, including the giving of discounts on frames.
  • 18. OPSM has operated its business in Australia under the well known brand 'OPSM' for many years. It was listed on the Australian Stock Exchange in the mid 1950s^[1] Stephens affidavit at [10]. . During the Relevant Period, L&P was (and remains) a member of the OPSM group.
  • 19. Prior to 1990, OPSM was regarded as a 'quasi-medical' retailer^[2] Whelan affidavit at [14]. . Many of the retail stores operated by OPSM were located near a medical centre^[3] Whelan affidavit at [17]. , or next to the consulting room of an optometrist with whom OPSM had an arrangement^[4] O’Neil affidavit at [10]. . Customer service was focused on convenience, which meant providing a frame and lens combination on the same day a customer placed an order^[5] Ibid. . To this end some stores ground their own lenses on site^[6] Ibid. .

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    ATC 3210

    20. In the early 1990s there was perceived to be a change in consumer buying. Customers had come to regard spectacle frames as fashion items rather than items which purely assist in delivering the medical benefit of sight correction, and that it was the appearance (and price) of the frames that was important in driving customer purchases^[7] Whelan affidavit at [14]. . Younger customers distinguished between retailers on the basis of the look and branding of the frames in stock, whereas lenses were regarded as a standard product^[8] Ibid. . Brand names now often appear on the sides of frames. This was regarded as a commercially positive development as it drove a reduced 'repurchase cycle' (a shorter average period between purchases)^[9] Whelan affidavit at [15], [16]. . In other words, customers returned to buy new frames, even though their prescription needs had not altered^[10] Whelan affidavit at [15]. .
  • 21. OPSM responded to the change in the market by:
    • (a) moving many of its retail stores to shopping centre locations^[11] Whelan affidavit at [17]; O’Neil affidavit at [11]. ;
    • (b) sourcing frames from recognised 'consumer brands' as opposed to specialist optical suppliers^[12] Whelan affidavit at [17]. ;
    • (c) introducing modernised 'express stores' which carried a greatly increased number of frames^[13] Whelan affidavit at [18]. targeted at the demographic where the stores were located^[14] O’Neil affidavit at [12]. , with new frame displays designed to enhance the attractiveness of the frames^[15] O’Neil affidavit at [12]. ;
    • (d) training staff to assist customers on whether particular frames suited the customer's face shape^[16] Ibid. ;
    • (e) increasing advertising and promotions^[17] Ibid. ;
    • (f) placing more emphasis in promotions on frames rather than lenses, and directing the bulk of the promotional discounting to the frames^[18] Whelan affidavit at [26]. .
  • 22. These changes gave rise to an increase in marketing and fit-out costs, which were allocated to individual retail stores and directly impacted their profits^[19] O’Neil affidavit at [14]. .
  • 23. The 'express stores' were modernised again in 2001, by which time they were referred to as 'OPSM large stores'. The new layout was directed at updating the 'look' of the store^[20] O’Neil affidavit at [15]. , and at making the frames a stronger feature: there were more frame displays, the displays were illuminated, and they were grouped by fashion brand^[21] Whelan affidavit at [18]. . At that time OPSM had appointed new executives with a background in fashion retailing, who developed a strategy whereby OPSM was to be marketed as a fashion frame retailer, and L&P was to be marketed as a high quality optical provider with a strong secondary emphasis on fashion frames^[22] Whelan affidavit at [19]. .
  • 24. In 2003 Luxottica Group SpA, an Italian company, acquired an 83% stake in OPSM through an Australian subsidiary^[23] Stephens affidavit at [10]. . The Luxottica group is a global designer, manufacturer and distributor of premium fashion, luxury and sports eyewear^[24] Stephens affidavit at [11]. . Becoming part of a global fashion retailer served to increase OPSM's emphasis on fashion frames^[25] Whelan affidavit at [21]. . At around the same time, a new CEO was appointed to OPSM. The new CEO directed the marketing department to focus promotional activity on frame discounts^[26] Whelan affidavit at [20]. .
  • 25. In 2005, the OPSM business was 'rebranded' in order to raise its profile as a fashion retailer^[27] Whelan affidavit at [22]. . Part of the rebranding was the implementation of the 'Accelerated Fashion Project', which involved another upgrade to the fitout of OPSM stores. A key part of the upgrade was the introduction of a 'fashion wall', which was a special display of frames made by luxury brands^[28] O’Neil affidavit at [16a]. . Special lighting and advertising displays were introduced^[29] O’Neil affidavit at [16b], [16c]. . Sales assistants were given special training, and other aspects of the fitout were changed to emphasise the exclusivity of the high fashion frames^[30] Whelan affidavit at [23]. . The changes brought the shopping experience at OPSM more in line with a fashion boutique^[31] O’Neil affidavit at [16f]. .

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    ATC 3211

    26. L&P also underwent refurbishment with a view to shifting the market's perception of it as a "technical" retailer to a quality fashion retailer^[32] Whelan affidavit at [24]. . Backlit wall displays were introduced together with new brand plates. A luxury display area for "Tiffany & Co" frames was introduced in 2006^[33] Ibid. .
  • 27. The changes made pursuant to the Accelerated Fashion Project came at a cost in excess of a million dollars^[34] Whelan affidavit at [25]. . Capital works expenditure was borne by the stores that had undergone refurbishment^[35] Whelan affidavit at [25]. .

Part C - Attachment 1 to RS

15. Attachment 1 to RS contains a worked example of the main or central issue between the parties and which is referable to the first transaction detailed at the commencement of exhibit KP-1, which in turn is an exhibit to Exhibit A4. Attachment 1 relates in its terms to s 9-80 of the GST Act, and it helpfully distinguishes between the position which obtains if the Commissioner is correct and pursuant to which the discount must be spread between the frame and the lenses, and the position which obtains if the Applicant is correct and so that the discount applies to the frame alone. It is emphasised in this context that the Applicant contends that the result is the same regardless of whether s 9-80 or s 9-75 of the GST Act apply. The Commissioner originally contended (and see in this context clause 33 of RS) that the position is the same regardless of whether s 9-75 or s 9-80 applies, but as the argument before the Tribunal developed, the Commissioner increasingly inclined to the contention that this case must be decided pursuant to s 9-80 of the GST Act.

16. Attachment 1 to RS in relation to the Applicant's view contains a minor error in that it specifies that the GST payable on $100 is $10.72, which is, of course, clearly a typographical error in that $10.72 should read $10. In producing attachment 1 to RS in its entirety, this minor error has been corrected and attachment 1 as corrected reads as follows:

"ATTACHMENT 1

EXAMPLE OF THE APPLICATION OF SECTION 9-80

The facts:

This example is based on the transaction that is the first entry in exhibit KP-1 and referred to by the applicant at paragraph 69 of the applicant's outline of submissions

GST inclusive price of the frames:	$163.90
GST-free price of the lenses:	$ 89.00
Less: discount amount	$ 53.90
Price of the actual supply (i.e. glasses):	$199.00

Section 9-80

Ss 9-80(1) - defines the value of a taxable supply for an actual supply that is partly taxable and partly GST-free or input taxed.

value of taxable supply

=

value of actual supply

×

value of taxable supply value of actual supply

Ss 9-80(2) - establishes the value of the actual supply for the purposes of ss 9-80(1)

value of actual supply

=

*Price × 10 10 + taxable proportion

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ATC 3212

*Price is a defined term in section 195-1 and, in relation to a supply, has the meaning given by section 9-75. This is the GST inclusive consideration payable for the supply.

Taxable proportion is defined in ss 9-80(2) and must be between 0 (the taxable proportion for a GST-free supply i.e. none) and 1 (the taxable proportion for a fully taxable supply i.e. 100%).

the taxable proportion

=

value of the taxable supply (frames) value of the actual supply (frames & lenses)

Value is an undefined term and requires a valuation to be made of each component of the actual supply.

The Commissioner's view

The Commissioner considers that for the purposes of working out the taxable proportion in the formula in ss 9-80(2), the price that the frames and lenses are sold for separately is a fair and reasonable measure of their value when sold as a complete pair of spectacles.

The Commissioner's application of ss 9-80(2) to the facts

Price of the actual supply (frames and lenses)			$199.00
Value (GST-exclusive) of the frames $163.90 × 10/11			$149.00
Value (GST exclusive) of the frames & lenses $149.00 + $89.00			$238.00
Taxable proportion			0.62605042016
$149.00 $238.00
Therefore:
value of the actual supply (frames & lenses) (calculated in accordance with ss 9-80(2))	=	$199.00 × 10 10 + 0.62605042016	$187.28

The Commissioner's application of ss 9-80(1) to the facts

value of taxable supply	=	value of actual supply	×	value of taxable supply value of actual supply
	=	$187.28	×	$149.00 $238.00
	=	$187.28	×	0.62605042016
	=			$117.22

Section 9-70

The amount of GST payable is 10% of the *value of the taxable supply. The value of the taxable supply is defined in 195-1 to have the meaning given in s 9-80. Therefore the GST payable is 10% of $117.22 = $11.72.

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ATC 3213

The applicant's view

The applicant considers that for the purposes of working out the taxable proportion in the formula in ss 9-80(2), the so-called "agreed price" is a fair and reasonable measure of their value.

The applicant's application of ss 9-80(2) to the facts

Price of the actual supply (frames and lenses)	$199.00
Value (GST-exclusive) of the frames less discount (GST exclusive)
$163.90 × 10/11 − $53.90 × 10/11	$100.00
Value (GST exclusive) of the frames & lenses: $100.00 + $89.00	$189.00
Taxable proportion	0.5291005291
$100.00 $189.00
Therefore:
value of the actual supply (frames & lenses) (calculated in accordance with ss 9-80(2))	=	$199.00 × 10 10 + 0.5291005201	$189.00

The applicant's application of ss 9-80(l) to the facts

value of taxable supply	=	value of actual supply	×	value of taxable supply value of actual supply
	=	$189.00	×	$100.00 $189.00
	=	$189.00	×	0.5291005291
	=			$100.00

Section 9-70

The GST payable is 10% of $100.00 = $10.00.

The difference in GST payable between the Commissioner's view and the applicant's view is $11.72 − $10.00 = $1.72.

17. A consideration of attachment 1 indicates that if the Commissioner's approach is correct, the GST payable is $11.72, while if the Applicant is correct, the GST payable is $10.

Part D - Relevant legislation and the ruling

18. It is convenient to gather in this Part D a number of statutory provisions some of which are considerably more relevant than others, and also to include an extract of a relevant ruling.

19. In respect of the GST Act, we include ss 7-1, 9-5, 9-15, 9-70, 9-75 9-80, 38-45, 72-70 and the dictionary definition of "consideration" in s 195-1 as follows:

" 7-1 GST and input tax credits

• (1) GST is payable on *taxable supplies and *taxable importations.
• (2) Entitlements to input tax credits arise on *creditable acquisitions and *creditable importations.

For taxable supplies and creditable acquisitions, see Part 2-2.

For taxable importations and creditable importations, see Part 2-3.

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ATC 3214

9-5 Taxable supplies

You make a taxable supply if:

• (a) you make the supply for *consideration; and
• (b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and
• (c) the supply is *connected with Australia; and
• (d) you are *registered, or *required to be registered.

However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed.

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.
• (2A) It does not matter:
  • (a) whether the payment, act or forbearance was in compliance with an order of a court, or of a tribunal or other body that has the power to make orders; or
  • (b) whether the payment, act or forbearance was in compliance with a settlement relating to proceedings before a court, or before a tribunal or other body that has the power to make orders.
• (2B) For the avoidance of doubt, the fact that the supplier is an entity of which the *recipient of the supply is a member, or that the supplier is an entity that only makes supplies to its members, does not prevent the payment, act or forbearance from being consideration.
• (3) However:
  • (a) if a right or option to acquire a thing is granted, then:
    • (i) the consideration for the supply of the thing on the exercise of the right or option is limited to any additional consideration provided either for the supply or in connection with the exercise of the right or option; or
    • (ii) if there is no such additional consideration-there is no consideration for the supply; and
  • (b) making a gift to a non-profit body is not the provision of consideration; and
  • (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.

9-70 The amount of GST on taxable supplies

The amount of GST on a *taxable supply is 10% of the *value of the taxable supply.

9-75 The value of taxable supplies

• (1) The value of a *taxable supply is as follows:
• Price × 10/11
• where:
• price is the sum of:
  • (a) so far as the *consideration for the supply is consideration expressed as an amount of *money-the amount (without any discount for the amount of GST (if any) payable on the supply); and
  • (b) so far as the consideration is not consideration expressed as an amount of money-the *GST inclusive market value of that consideration.
• Example: You make a taxable supply by selling a car for $22,000 in the course of carrying on an enterprise.
• The value of the supply is:
  • $22,000 × 10/11 = $20,000
• The GST on the supply is therefore $2,000 (ie 10% of $20,000).
• (2) and (3) omitted as not relevant.

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ATC 3215

9-80 The value of taxable supplies that are partly GST-free or input taxed

• (1) If a supply (the actual supply ) is:
  • (a) partly a *taxable supply; and
  • (b) partly a supply that is *GST-free or *input taxed;

    the value of the part of the actual supply that is a taxable supply is the proportion of the value of the actual supply that the taxable supply represents.

• (2) The value of the actual supply, for the purposes of subsection (1), is as follows:
  

  *Price of the actual supply × 10 10 + Taxable proportion

• where:
• taxable proportion is the proportion of the value of the actual supply that represents the value of the *taxable supply (expressed as a number between 0 and 1).

38-45 Medical aids and appliances

• (1) A supply is GST-free if:
  • (a) it is covered by Schedule 3 (medical aids and appliances), or specified in the regulations; and
  • (b) the thing supplied is specifically designed for people with an illness or disability, and is not widely used by people without an illness or disability.
• (2) and (3) (omitted as not relevant)

72-70 The value of taxable supplies for inadequate consideration

• (1) If a supply to your *associate for *consideration that is less than the *GST inclusive market value is a *taxable supply, its value is the *GST exclusive market value of the supply.
• (2) Subsection (1) does not apply if:
  • (a) your associate is *registered or *required to be registered; and
  • (b) your associate acquires the thing supplied solely for a *creditable purpose.
• (3) This section has effect despite section 9-75 (which is about the value of taxable supplies).

195-1 Dictionary

In this Act, except so far as the contrary intention appears:

…

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

Note: This meaning is affected by sections 75-12, 75-13, 75-14, 78-20, 78-35, 78-45, 78-50, 78-65, 78-70, 79-60, 79-65, 79-80, 80-15, 80-55, 81-5, 82-5, 82-10, 99-5, 100-5, 100-12 and 102-5."

20. It is sufficient to note that lenses for prescription spectacles are GST-free under Item 155 of Schedule 3 to the GST Act.

21. In respect of GSTR 2001/8 ("the Ruling") we include paragraphs 92 to 119 as follows:

" Reasonable methods of apportionment

• 92. Where there is no legislative provision specifying a basis for apportionment you may use any reasonable method to apportion the consideration to the parts of a mixed supply. However, the apportionment must be supportable by the facts in the particular circumstances.
• 93. What is a reasonable method of apportioning the consideration for a mixed supply depends on the circumstances of each case.⁵² In some cases, there will be only one reasonable method you may use.
• 94. Depending on your circumstances, you may use a direct or indirect method when apportioning the consideration for a mixed supply.
• 95. The method you choose should be based on a consideration of all the circumstances and not because it gives you a particular result. You may need to use different methods, or a combination of methods, for different supplies to ensure the appropriate amount of GST is payable. You need to keep records that explain all transactions and other acts you engage in that are relevant to supplies you make, including supplies that are GST-free and input taxed.⁵³

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  ATC 3216

  96. Where consideration is apportioned in a manner that cannot be justified in terms of reasonableness, the general anti-avoidance provisions of the GST Act may have application.⁵⁴

Direct methods

• 97. Direct methods use relevant variables that measure the connection between what is supplied (the taxable and non-taxable parts) and the consideration for the supply. A direct method usually gives you the most accurate measure of the consideration for the taxable part of the supply you make. Such methods may include:
  • • the comparative price of each part if it were supplied on its own, relative to the whole payment received (see paragraphs 98 to 103);
  • • the relative amount of time required to perform the supply (see paragraphs 104 to 105); and
  • • the relative floor area in a supply of property (see paragraphs 106 to 108).

Price of each part relative to the whole

• 98. Where it is possible to determine the price for which each part would have been supplied if it was supplied separately (for example, the general retail market price for which the goods are sold), then an apportionment on this basis may be reasonable. If you use this method, the GST you pay is the same as if you supplied the taxable parts separately in the same market.
• 99. Where you cannot establish an appropriate market price for which particular goods are sold, then it may be reasonable for you to use a relevant market price for a similar supply (or an industry standard), to determine the appropriate price of the particular goods.
• 100. In many cases, you may make a mixed supply for a package price. The package price for the mixed supply may be discounted. It may be reasonable for you to apply the discount to the usual market selling price of each part, unless special circumstances exist. On this basis, you may discount the price of each item proportionately according to the consideration for the mixed supply.

Examples of apportionment using relative price

Example 14 - commercial and residential premises

• 101. Hilary is registered for GST. She sells a property that consists of commercial premises and residential premises. The property is on a single title and is currently untenanted, although the commercial part was recently rented for $1,000 per week and the residential part for $500 per week.⁵⁵ Hilary may reasonably apportion two thirds of the consideration for the sale to the commercial part and one third to the residential part.

Example 15 - education courses

• 102. Pierre signs up for a college course at a discounted package price. There are four units in Pierre's course - two that are GST-free and two that are taxable. The college usually charges $500 for each of the GST-free units and $825 for each of the taxable units. Pierre would normally pay $2,650 for the course, but after a discount of 20%, he pays $2,120.
• 103. To reasonably apportion the consideration for the course, the college discounts each of the units by 20%. The consideration for each of the GST-free units is $400 (that is, $500 less 20%), and for each of the taxable units, the consideration is $660 (that is, $825 less 20%).

Relative time to perform the supply

• 104. Where you supply services and charge them out on a time basis (for example, at an hourly rate), it may be reasonable to apportion the consideration for a mixed supply based on the time taken to perform the relevant taxable and non-taxable parts of the supply. This method may be suitable where you make mixed supplies of professional or trade services.

Example 16 - GST-free and taxable services

• 105. Under direction from a doctor, Gilda provides community care to a privately funded client in the client's own home. She charges a flat hourly rate for her services that include helping to feed and dress her client. These services are GST-free under section 38-30. Gilda also tidies her client's house and garden. These latter services are taxable. Gilda apportions the consideration for her services on the number of hours it takes for her to perform the services. This is a reasonable method of apportionment.

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  ATC 3217

Relative floor area in a supply of property

• 106. In some cases, it is reasonable for you to allocate the consideration for a mixed supply by reference to the relative floor area of the property being supplied. To make an allocation on this basis, you also need to consider the relative price of different types of floor space (for example, floor space in residential, retail and industrial property are often priced differently). That is, you may simply work out the proportionate floor area if the value per square metre does not vary. However, if the value per square metre is variable, then you can reasonably apportion on a basis of each area and its relative value. You may also need to take into account external features, such as the value of recreational areas.

Example 17 - commercial and residential premises

• 107. Warren rents out a property to Josef for $2,000 per month. The property is comprised of residential and commercial premises. The floor area of the residential part is 160 square metres and the commercial part is 80 square metres. In the locality, the rental of commercial space is worth twice as much as residential space.
• 108. It would be reasonable for Warren to base the taxable proportion of the supply on the floor area of the commercial part as a proportion of the combined floor area of the commercial and residential parts. However, he also needs to take into account the difference in the relative value of the commercial and residential floor space. Warren may reasonably apportion the consideration equally between the commercial and the residential parts.

Indirect methods

• 109. You may decide that it is appropriate that you use an indirect method to apportion the consideration for a mixed supply you make. For example, you may use a reasonable method that includes the addition of an appropriate mark-up to reflect your profit margin relative to the market you supply.
• 110. Another example is where an arm's length wholesaler or manufacturer makes a mixed supply to you of things that have been packaged in the form in which you will market them. In this case, you may adopt the apportionment ratio worked out by your supplier. On the other hand, if your supplier characterises a supply to you as a composite supply, you will not necessarily be able to adopt the same characterisation. This is because your supplier may have used the approach provided at paragraph 21 which may not be applicable to your particular circumstances because of your profit mark-up.

Example 18 - indirect method

• 111. Byron manufactures cosmetics including perfume, shampoo and SPF 30+ sunscreen. Perfume and shampoo are taxable, and the sunscreen is GST-free. Byron supplies one bottle of each item in a clear plastic package to wholesalers. He chooses to use an indirect method based on the cost and usual profit margin of each item to apportion the consideration for the supply. This method is reasonable in the circumstances.

Methods of apportionment that are not reasonable

• 112. Some methods may not result in a reasonable apportionment of the consideration for a mixed supply. For example, in some cases, it may not be reasonable to apportion the consideration solely on the basis of the cost of the supply to you. This would be the case if your mark-up varies from part to part. Variations in mark-ups prevent this method from being a reasonable apportionment of the consideration for the supply.
• 113. Also, in some circumstances it may not be reasonable to apportion consideration using 'historical cost' and 'residual value' methods. These amounts often are used for accounting purposes and may not reflect an appropriate apportionment of the consideration for a supply.⁵⁶

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ATC 3218

Calculating the GST payable on the taxable part of a mixed supply

• 114. GST is calculated as 10% of the value of the taxable supply.⁵⁷ Section 9-75 links the value of the taxable supply to its price so that the value of a supply is 10/11 of its price. This also means that the GST payable on a taxable supply is equivalent to 1/11 of the price (or consideration) of the supply.
• 115. However, because a mixed supply includes non-taxable parts, you need to work out the value or price of the taxable part, or the proportion of the value of the actual supply that the taxable part represents, so that you can determine the correct amount of GST is payable.
• 116. When you have apportioned the consideration for a mixed supply, you can calculate the GST payable as either:
  • • 10% of the value of the taxable part; or
  • • 1/11 of the price (or consideration) for the taxable part.

Valuing the taxable part of a mixed supply where the non-taxable parts are GST-free or input taxed

• 117. Section 9-80 provides the method for working out the value of the taxable part of a mixed supply that consists only of taxable and GST-free or input taxed parts. The section refers to such a supply as the actual supply. It also provides a formula to work out the value of the actual supply.⁵⁸
• 118. However, in analysing the actual supply that is a mixed supply, you apportion the consideration for the supply and work out the consideration for the taxable part. The value of that part is simply calculated as 10/11 of its price (or consideration).

Valuing the taxable part of a mixed supply where the non-taxable parts are not GST-free or input taxed

• 119. Section 9-75 applies to work out the value of the taxable part of a mixed supply consisting of taxable and non-taxable parts that are either dealt with in specific provisions of the GST Act or do not meet the requirements of paragraphs 9-5(a) to (d). The consideration that is allocated to the taxable part is the price of the taxable part referred to in section 9-75. The value of that part is simply calculated as 10/11 of its price (or consideration)."

22. In conclusion, in respect of this Part D, we include s 105-65 in Schedule 1 to the TAA in the form in which it was enacted in relation to tax periods prior to 1 July 2008 as follows:

" 105-65 Restriction on refunds

• (1) The Commissioner need not give you a refund to which this section applies, or apply an amount under Division 3 or 3A of Part IIB to which this section applies, if:
  • (a) you overpaid the amount, or the amount was not refunded to you, because a *supply was treated as a *taxable supply to any extent; and
  • (b) the supply is not a taxable supply to that extent (for example, because it is *GST-free); and
  • (c) one of the following applies:
    • (i) the Commissioner is not satisfied that you have reimbursed a corresponding amount to the recipient of the supply;
    • (ii) the recipient is *registered or *required to be registered.
• Note: Divisions 3 and 3A of Part IIB deal with payments, credits and RBA surpluses.
• (2) This section applies to:
  • (a) so much of any *net amount or amount of *indirect tax as you have overpaid; or
  • (b) so much of any net amount that is payable to you under section 35-5 of the *GST Act as the Commissioner has not paid to you or applied under Division 3 of Part IIB of this Act.
• Note: Division 3 of Part IIB deals with payments, credits and RBA surpluses."

23. As will be seen, the most relevant GST statutory provisions are ss 9-75 and 9-80 of the GST Act, and for different reasons, s 105-65 in Schedule 1 to the TAA is also significant.

Part E - Case law and commentary

24. It is likely that what the customer wanted was a pair of spectacles, and indeed the Commissioner makes it clear in RS that he contends that there is relevantly one supply by the Applicant, and that is a supply of spectacles. There does not appear to be any dispute as to

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ATC 3219

the fact that almost 80 percent of the Applicant's customers buy complete spectacles. However, what the customer wants does not answer the question as to what is being supplied for GST purposes.

25. In
Saga Holidays Ltd v Commissioner of Taxation 2006 ATC 4841; (2006) 156 FCR 256, in the Full Court, Stone J (with whom Gyles and Young JJ agreed) said at [52]:

"If I may say so, with respect, it is entirely appropriate to consider the purpose of a grant of power when determining the ambit of that power. That, however, is not the issue here and, in my view, Saga's submission is misconceived. Whilst the purpose of the tour may well be sightseeing, s 96-5 is not concerned with the purpose of the contract but with the 'supply' made under the contract. It is directed to an analysis of the supplies made, in circumstances where part of the 'actual supply' is connected with Australia and part is not so connected. Saga, however, does not supply 'sightseeing' except, arguably, in very limited situations. The tourist's purpose may be the reason for entering into the contract but it is not what is supplied under the contract."

26. In
Travelex Ltd v Federal Commissioner of Taxation 2009 ATC ¶20-133; (2009) 178 FCR 434, once again in the Full Court, Stone J said at [54]:

"This emphasis on the predominant aspect of the supply should not be confused with a statement about the purpose of the supply. The fact that Mr Urquhart's purpose in entering into the Fijian Currency Transaction was to obtain currency for use in Fiji is no more in doubt than the fact that the purpose in buying a book is generally to be able to handle it, deal with it and read it. The GST Act directs attention to what is supplied not why it is supplied."

27. We refer also to
Commissioner of Taxation v Reliance Carpet Co Pty Limited 2008 ATC ¶20-028; (2008) 236 CLR 342, where at [33] the High Court said:

"First, as to the consideration. The payment of the deposit by the purchaser to the taxpayer was 'in connection with' a supply by the taxpayer, within the meaning of the definition of 'consideration' in s 9-15(1)(a) of the Act. That connection is readily seen from the circumstance that, with the receipt of the written notice of the exercise of the option by the purchaser, and by force of cl 5 of the Option Agreement, the payment of the deposit obliged the parties to enter into the mutual legal relations with the executory obligations and rights laid out in the Contract. Those legal relations were directed to the completion of the Contract by conveyance of the property to the purchaser by the taxpayer upon payment by the purchaser. But, as to the requirement for 'consideration', that is not the end of the matter."

28. Mr Wigney argued in conclusion, although not altogether consistently with his prior argument, that there was one single supply of the spectacles, so that to characterise the transaction as two separate supplies - being a supply of the frame (taxable) and a supply of the lenses (GST-free) - would not be correct.

29. The Ruling in its terms refers to mixed supplies and to composite supplies, although neither of these terms is referred to in the legislation proper. (The Ruling also contains detailed suggestions as to how to apportion in respect of a mixed supply; see in particular paragraph 92 which provides that any reasonable method can be utilised.) It seems clear enough that a single contract can involve a number of supplies rather than one single supply. Thus in Saga (supra) it was held that although the contract in question was referable to a tourist package, the accommodation component constituted a single supply which could be characterised as a supply of real property. See [43] of Saga as follows:

"I agree with his Honour, the primary judge, that
Beynon [2005] 1 WLR 86, which was concerned with whether, for the purposes of the VAT, a doctor administering a drug to a patient supplied goods, namely drugs (which were zero rated for VAT) or a medical service (which would be input taxed), with the drugs incidental to the service, is of little assistance on this point. I am conscious of the High Court's comment in
Avon Products Pty Ltd v Commissioner of

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ATC 3220

Taxation (2006) 80 ALJR 1161; 227 ALR 398 at [28] about the considerable caution that must be exercised before relying on international authorities that deal with different statutory regimes. The warning is particularly apt in the present circumstances since the details of the GST Act are significantly different from those of the equivalent legislation in the UK and other countries. In any event, I do not regard the facts of
Beynon [2005] 1 WLR 86 as analogous to the present circumstances. Nevertheless, in so far as Lord Hoffman focused on the 'social and economic reality' of the transaction I regard his approach as relevant. In my view the accommodation component is a single supply which is properly characterised as a supply of real property."

30. The case law also establishes that as a general rule, and absent tax avoidance or sham (and there is no suggestion of any such elements in this case) the courts will generally accept that the price contractually agreed between the parties will be determinative of the value for taxation purposes. See in particular in this context the judgment by the House of Lords in
Lex Services plc v Commissioners of Customs and Excise [2003] UKHL 67; [2004] STC 73 at [18]:

"The expression 'subjective value', to be understood in the sense described above, has been repeated in many later cases before the ECJ, including
Argos Distributors Limited v Customs & Excise Commissioners [1996] ECR I-5311, para 16, and the other cases cited in that paragraph. Nevertheless the expression continues to cause some difficulty, partly because it naturally suggests a value which is chosen as a matter of individual discretion, and might therefore be expected to be more vague, labile and difficult to ascertain than one determined by objective criteria. But any such impression would be mistaken and would overlook one of the basic strengths of the VAT system. It is a system which is intended to be self-policing in the sense of operating automatically on the economic activities of registered taxpayers and final consumers, with the least possible need for VAT authorities to undertake independent investigation of the facts. In a straightforward case the 'subjective value' of non-monetary consideration means the value overtly agreed and adopted by the parties to the transaction in question, just as the price overtly agreed and adopted by the parties is (in most cases) conclusive as to the quantum of monetary consideration. So far from introducing an element of vagueness or obscurity, the concept of subjective value (correctly understood) achieves legal certainty and ease of administration of the VAT system (just as a subjective apportionment of the consideration for a package of taxable goods and exempt services may achieve those results: see
C R Smith Glaziers (Dunfermline) Ltd v Customs & Excise Commissioners [2003] STC 419, especially the speech of my noble and learned friend Lord Hoffmann at p 426, para 21)."

31. We also note that s 72-70 of the GST Act (which deals with the value of supplies for "inadequate" consideration), restricted in its operation to specified supplies between "associates", can have no application here.

32.
Re Food Supplier and Commissioner of Taxation [2007] AATA 1550; 2007 ATC 157 (on which the Commissioner relied) will be dealt with separately later in these reasons.

Part F - One supply or two?

33. One of the points of contention between the parties is as to whether the Applicant, in providing frames with lenses fitted, was making one supply or two. It seems from the parties' approach to the hearing that they expected the answer to this question to provide the pointer to the relevant valuation provision - s 9-80 if (as the Commissioner contended) the Applicant made one supply; s 9-75 if (as the Applicant contended) the Applicant made two supplies. The parties both argued that either valuation provision should provide the same answer, although, as we have noted, the Commissioner recognised that his valuation was more difficult to support under s 9-75 than under s 9-80.

34. We are inclined to the view that the Applicant made one supply, which could perhaps be described as a pair of spectacles, comprising two components, the frame and a

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ATC 3221

pair of lenses. That seems to us to be the more commonsense outcome, and one which sits more comfortably with the "practical business tax" approach to GST which has been favoured by the Federal Court:
Sterling Guardian Pty Limited v Commissioner of Taxation 2005 ATC 4796; [2005] FCA 1166; (2005) 220 ALR 550 and Saga provide but two examples of this approach. The alternative characterisation of the transaction as two supplies - a frame, on the one hand, and a pair of lenses, on the other - must necessarily require there to be a third supply (although one without consideration), being the service of fitting the lenses to the frame. Why a commonplace transaction such as this would need to be disaggregated in this way is not readily apparent.

35. Ultimately, though, we do not think that this question as to whether there is one supply or two is particularly critical to the resolution of the issue before us. It would be a surprising, and perhaps a capricious, outcome if the GST payable on a transaction were to turn on such an esoteric enquiry. And so, although we prefer the view that there is one supply, and that as a result s 9-80 is the relevant valuation provision, we agree with the parties that the same result would be reached on the alternative scenario involving two supplies, and valuation under s 9-75. We will attempt to explain why this is so.

Part G - Section 9-80 of the GST Act

36. Section 9-80 has been described as a "fiendish" provision:
ETO Pty Ltd v Idameneo (No 123) Pty Ltd 2004 ATC 5080; [2004] NSWCA 368; (2004) 215 ALR 152. It is easy to see why. There is something counterintuitive about the notion that one supply (the "actual supply") can contain two supplies - but that is the premise on which s 9-80(1) is based. The "actual supply" must be "partly a taxable supply" and "partly a supply that is GST-free or input taxed", and yet it is still only one supply.

37. To work out the GST payable on such a supply, it is necessary to determine "the value of the part of the actual supply that is a taxable supply". That is strange language. In this context, it must be a reference to the value of the part of the actual supply that is represented by the notional supply of the frame. We say "notional" because, on our analysis, there is no actual supply of a frame, as such, any more than there is an actual supply of a motor, as such, when a car dealer supplies a motor vehicle to a customer.

38. What is mandated by s 9-80(1) is the determination of "the proportion of the value of the actual supply that the taxable supply represents". Taken literally, in calling for the determination of a relationship between a "value" and a "supply", the subsection is not comparing like with like. Nevertheless, and putting that to one side, the determination of that proportion requires an identification of the "value of the actual supply". This is where s 9-80(2) comes into play. It provides a formula by which the "value of the actual supply" is calculated. However, one of the elements of that formula is "taxable proportion", itself defined as "the proportion of the value of the actual supply that represents the value of the taxable supply". That, at least, invites a comparison of like with like, but we regret to say that we find the enquiry in s 9-80(1) and (2) to be almost impenetrably circular.

39. In the context of this case, commonsense dictates that the taxable proportion is to be calculated by dividing the discounted frame price (less GST) by the actual selling price of the complete pair of spectacles (less GST). In other words, and reverting to the example in attachment 1 to RS (Part C of these reasons), the taxable proportion is 100 divided by 189, and the GST payable is $10.00. We reject the Commissioner's submission that the undiscounted frame price (sometimes referred to in the hearing as "yesterday's price") has any role to play in the calculation of the taxable proportion. This is because the undiscounted frame price, yesterday's price, is just that; a price which would have been applicable but for the promotion and it would no doubt be the price if the customer purchased the frame alone. But the customer does not on our example purchase the frame alone and the fact that he could do so is not relevant.

40. We come to this view, as to the method of calculating the taxable proportion, on the basis of the following findings, derived from the unchallenged evidence given on behalf of the Applicant:

• (a) there are sound commercial reasons for the discounting of frames;

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  ATC 3222

  (b) there is no commercial imperative for the discounting of lenses;
• (c) there is nothing contrived or artificial about the pricing methodology adopted by the Applicant in its promotional arrangements.

41. We also consider that the conditionality issue does not undermine the reasonableness of the calculation of the taxable proportion in this way.

42. Mr Wigney argued, and strenuously, that the conditionality issue brings about the result for which the Commissioner contends but he did not explain why this conclusion follows, and we do not accept that it is so. Mr Wigney was not able to demonstrate why or on what basis the conditionality issue has this effect. There was never any suggestion that the conditionality issue resulted in some form of (presumably) non-monetary consideration. During the course of the hearing mention was made of "loss leading". Assume by way of example that a store has an excess of clocks of a certain make. It advertises that it will sell those clocks at a substantial discount (compared to its previously advertised price) to anyone who will purchase other goods costing not less than $100. We can see no reason why, absent tax avoidance or sham, the price for the other goods and also the price for the clock is not for GST purposes the discounted price for the clock and the list prices for the other items purchased.

43. During the hearing there was considerable discussion of an example posed by the Tribunal. Assume that a car supplier supplies a car which in the ordinary way will cost $40,000 but advertises that it will sell the car for $5 if the customer buys a bottle of water for $39,995. In the opinion of the Tribunal such a transaction will quite clearly be contrived and will not be given credence by a court.

44. We have one final comment to make about s 9-80. Where the prices of the taxable and non-taxable components are known, the formula in s 9-80(2) presents an unnecessary complication, for, once the taxable proportion is calculated from the known prices, the remaining arithmetic in the formula necessarily leads to the striking of a value of the taxable part of the supply which is equivalent to ten-elevenths of its price. This tends to suggest that the formula in s 9-80 need not be resorted to in cases where the prices of the components have been separately established (subject always to the qualification that there is no suggestion of tax avoidance or sham). We note that the corresponding valuation provision in the former sales tax law, s 95 of the Sales Tax Assessment Act 1992, contained the introductory words "If there is a need to know the price for which particular goods were sold, but the parties have not allocated a particular amount to those goods …". There is a good deal of logic in reading that same qualification into s 9-80, although we decline to express a final view on that question.

Part H - Section 9-75 of the GST Act

45. On the alternative analysis, namely that the Applicant made two supplies, the GST issue concerns the value of the frame under s 9-75 of the GST Act. Unquestionably, the customer paid an agreed discounted amount for the frame and an agreed undiscounted amount for the lenses. On the basis that s 9-75 applies, the Applicant's arguments as to value must succeed. The price for the frame is clearly the discounted price and the price for the lenses is clearly the undiscounted price.

46. On the facts of this case, a customer purchases a frame at a discount, and this is so whether or not the customer was attracted by a promotion. As between the Applicant and its customer there is a discounted amount payable in respect of the frame just as there is an undiscounted amount in respect of the lenses. In its terms, s 9-75 of the GST Act provides that the value of a taxable supply is 10/11ths of the price, where price is the amount paid exclusive of the discount for any amount of GST. It is clear then that the concepts of "price" and "value of the taxable supply" are inextricably linked.

47. The "price" of the frame is calculated under s 9-75 as the sum of:

• "(a) so far as the consideration for the supply is consideration expressed as an amount of money - the amount (without any discount for the amount of GST (if any) payable on the supply); and
• (b) so far as the consideration is not consideration expressed as an amount of money - the GST inclusive market value of that consideration."

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  ATC 3223

48. As far as paragraph (a) is concerned, and using once again the example in attachment 1 of RS, the only "consideration expressed as an amount of money" for the frames is $110. As for paragraph (b), Mr Wigney did not argue that there was any further (non-monetary) consideration to be added to that monetary amount of $110. He did not, for example, suggest (and nor do we) that there is any non-monetary consideration to be identified in the "conditionality issue" by which the discounted frame price is available only if the customer purchases lenses as well. It must follow that the price of the frame is $110, and its value for GST purposes is ten-elevenths of that amount, namely $100.

Part I - Food supplier

49. Mr Wigney concluded that this case is no different from Food Supplier (supra), a case decided by the President of this Tribunal, the Hon. Justice Downes.

50. Food Supplier was referred to at such length and so often that it is desirable that we refer to it in some detail: paragraphs 5 to 10 of the decision by the President read as follows:

" Composite and Mixed Supplies

• 5. Some GST cases dealing with packaged items involve the question whether a supply is a 'composite supply' or a 'mixed supply'. In a composite supply, items which are integral, ancillary or incidental to the main item may be treated for GST purposes in the same way as the main item. An example might be a paper serviette supplied with food. In a composite supply, where the main item is GST-free (usually when it is food), no GST will be payable. A mixed supply, on the other hand, is a supply of separate items together. The present supply is a mixed supply. The promotion items have intrinsic value, will not be consumed with the food and are mostly unconnected with the food. This is so even when, for example, the main item is a jar of coffee and the promotion item is a mug in which coffee might be served. This particular example was given in the Further Supplementary Explanatory Memorandum addressing the introduction of the food subdivision of the GST Bill in the Senate (para 1.58). Where items are supplied together in a mixed supply, the supply will attract GST if the supply of one or more of the items is a taxable supply.
• 6. The present case is not determined by whether there is a composite or mixed supply. The issue in the present case is whether the promotion item is supplied for consideration. If there is no consideration there is no taxable supply.

Supplies for consideration

• 7. The following matters need formally to be addressed. With respect to each transaction, was there a 'supply'? Was each supply made for 'consideration'? If both elements are present there will be a 'taxable supply' except 'to the extent that it is GST-free' (s 9-5). Supply 'includes… a supply of goods' (s 9-10(2)(a)). Plainly, each transaction involved a supply. However, 'a supply of food is GST-free' (s 38-2). The taxpayer submits that the consideration was confined to the supply of food. There was no consideration for the promotion items. They were free. They were not taxable supplies and attracted no GST. Because the supply of the food was GST-free, no GST was payable.
• 8. The promotion items could only be acquired in packages with the food products. The taxpayer would not supply them free of charge alone. That suggests to me that there was consideration for the supply of the packaged product as a whole, including the promotion item. The consideration for the supply of the two items was the single price paid for the two of them. The purchaser makes a payment 'in connection with' the supply as a whole (s 9-15(1)(a)). Words such as 'in connection with' have a wide meaning (
  HP Mercantile Pty Limited v Commissioner of Taxation (2005) 143 FCR 553 at 563). Alternatively, payment is made 'in response to or for the inducement of' the supply (s 9-15(1)(b)).
• 9. The word 'consideration' in taxing statutes is generally 'not to be read as requiring identification of the consideration sufficient to support a contract' (
  Chief Commissioner of State Revenue v Dick Smith Electronics Holding Pty Limited (2005) 221 CLR 496 at 518). This wide meaning of 'consideration' in the GST Act is supported by the Explanatory Memorandum accompanying the Bill. However, it seems to me that the result in the present case will be the same however the word is construed.

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  ATC 3224

  10. It does not seem to me to matter that the food product is simultaneously sold separately for the same price. On my analysis the food product included in the package is actually being sold at a discount. If the profit earned by the taxpayer on the food product exceeds the cost to it of the promotion item, the transaction will be profitable. If the profit is less, the cost of supplying the promotion item will still be offset to some extent by the proceeds from the supply."

51. In Food Supplier there were two items sold for one composite price. The distinction between Food Supplier and this case is that in this case there were two items or components and in respect of each of those components there was an agreed price which was in no way artificial or contrived. By contrast, in Food Supplier there was one undissected price in respect of the supply of two items. It follows that Food Supplier is distinguishable.

52. On this basis the Applicant is entitled to succeed in respect of the main issue, and as a result the Applicant has overpaid the amounts in dispute in relation to each of the earlier period and the later period. It follows that there can be no issue as to penalty in respect of the earlier period but only in relation to the actual amount agreed to be in dispute in relation to the earlier period and as to which see [14]. As noted in [14] there is no penalty issue in relation to the later period.

Part J - Section 105-65 in Schedule 1 to the TAA

53. It is common cause between the parties that if the Applicant succeeds on the valuation issue (as it does), a refund must be made in respect of the amount of $82,544 referable to the later period.

54. Mr Wigney contended that in respect of the earlier period, the position is different in that paragraphs (a), (b) and (c)(i) of s 105-65(1) apply (the latter because the Applicant did not reimburse any amount to its customers). On this basis, Mr Wigney argued that the refund should not be paid, although we understood him to have agreed that the words "need not give you a refund" indicate that the section provides for a residual discretion to pay the refund even if the criteria in subsection (1) are met.

55. It is convenient to start our analysis of s 105-65 with a consideration of the kinds of amounts to which the section applies. Relevantly, subparagraph (2)(a)(i) talks of "so much of any net amount … as you have overpaid". Strictly speaking, there must be some doubt as to whether an amount can ever meet that description, since the amount overpaid, by definition, will not form part of a taxpayer's net amount. Assume a taxpayer, whose net amount for a tax period is x, but who mistakenly thinks it is x+y, which he pays. Of course, the overpaid amount, y, does not form any part of the net amount, which is and always was x. But that simple analysis, unimpeachable as it seems to be, would render the relevant words in subparagraph (2)(a)(i) meaningless. The words must be taken to encompass any payment in excess of the true net amount, and we approach our consideration of the remainder of the section on that basis.

56. The Applicant contends in [49] of AR that the criterion in paragraph (b) is not met, because there is an equivalence between the "extent" to which the supply was treated as a taxable supply (paragraph (a)) and the extent to which it was, in fact, a taxable supply. The argument is disarmingly simple: the supply was taxable to the extent of the frame, and that is exactly the extent to which it was treated as taxable. The Commissioner's approach to paragraph (b), in contrast, is based on the mathematics involved in the calculation of the GST payable: in practical terms, the Applicant calculated a higher "taxable proportion" (for the purposes of the formula in s 9-80) than the one we have found to be correct, and so it follows, according to the Commissioner, that the Applicant "treated" the supply as taxable to a greater extent than it should have. We incline to the view that the Commissioner's analysis is, in this particular regard and as to paragraph (b), to be preferred.

57.

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ATC 3225

As to paragraph (c), and accepting of course that subparagraph (ii) cannot apply, it is a fact that the customer has not been "reimbursed" to the extent of the overpayment. The question then becomes whether, in these circumstances, the residual discretion to pay the refund to the Applicant should be exercised. We think it should.

58. The reason for this is quite straightforward. A reimbursement to the customer would, of course, have the effect of reducing the selling price of the spectacles. The customer would walk away from the transaction having paid, in net terms, less than he or she contracted with the Applicant to pay. The amount reimbursed would also need to be allocated, in some way, to the separate components of the supply - the frame and the lenses. Unless it were allocated solely to the lenses (and we can see no justification for that approach), the act of reimbursement would necessarily cause an adjustment to the price (and, hence, the value) of the frame component, with a consequent adjustment to the GST amount payable on the transaction. This, in turn, would lead to a need for a further reimbursement, despite our having found that the GST payable should be calculated on the contracted selling price. Such a process of reiterating prices, values and GST payable has no place in a taxpayer's compliance with GST as a "practical business tax".

59. We also note the comment of Emmett J in
KAP Motors Pty Ltd v Commissioner of Taxation 2008 ATC ¶20-007; (2008) 168 FCR 319 at [33]:

"Section 105-65 should not be given an expansive construction. While its object may be commendable, in seeking to avoid windfall gains for taxpayers, it is, in a sense, a paternalistic interference with the rights of taxpayers. It proceeds on the basis that GST that should not have been paid has been paid by a taxpayer. Its operation is to ensure that the Commissioner receives a windfall rather than a taxpayer."

60. On the Commissioner's approach in this case, the windfall would flow to the undeserving customer. That is not the right outcome.

61. This is quintessentially a case where the Tribunal should exercise its residual discretion, not only as agreed in respect of the later period, but also in respect of the earlier period so that the Applicant is entitled to a refund of the amounts in dispute in respect of each of the earlier period and the later period. It is true that in respect of the later period, the Applicant accounted in the manner for which the Commissioner contends but then it also did so originally in respect of the earlier period and prior to the refund referred to in paragraphs 8 and 9 of the Respondent's Combined Statement of Facts, Issues and Contentions (and see [13] of these reasons). We can see no reason in principle why the two periods should be treated differently.

Part K - Conclusion

62. It follows that in respect of each of the earlier period and the later period, the objection decisions under review are set aside but only to the extent of $50,126 in respect of the earlier period and $82,544 in respect of the later period. In respect of the earlier period and as set out earlier in these reasons the penalty issue falls away, but only as to the amount agreed to be in dispute.

63. In respect of each of the earlier period and the later period, the residual discretion contained in s 105-65 in Schedule 1 to the TAA should be exercised in favour of the Applicant who must receive the refund of the amounts referred to in [62] and amounting in total to $132,670. We again note that in respect of the later period, the Commissioner conceded that the refund should be made if the Applicant's contentions succeeded.

64. The matters are remitted to the Commissioner to take whatever action is necessary to implement, in accordance with these reasons, the decisions we have made, including the refund to the Applicant of the amounts specified.