Interim Decision Impact Statement
ATS Pacific Pty Ltd v Commissioner of Taxation
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 FCA 341
2013 ATC 20-383
Venue: Federal Court of Australia
Venue Reference No: NSD 1730 of 2010; NSD 235 of 2011
Judge Name: Bennett J
Judgment date: 15 April 2013
Appeals on foot: Appeal and cross-appeal
Decision Outcome: Partly Favourable
Impacted AdviceRelevant Rulings/Determinations:
- After the appeal and cross-appeal have been decided, the Commissioner will review the impact of the Court's decision on ATO precedential documents including:
- Goods and Services Tax Industry Issues - Land product supplied to non-residents (as principal)
- GSTR 2001/8
- GSTR 2005/6
- GSTR 2006/9
|The ATO will review the impact of this decision on precedential documents and Law Administration Practice Statements when the appeal is decided. A final DIS will be published when the matter is finalised.|
Outlines the ATO's interim response to this case which concerned the characterisation, for GST purposes, of supplies made by an inbound tour operator (ITO) to its non-resident travel agent clients.
Brief summary of facts
The taxpayer entered into contracts with numerous non-resident travel agents ('NR travel agents') relating to the provision, in Australia, of the components of a tour package ('Products') by Australian-based entities ('Australian Providers') to non-resident tourist clients of the NR travel agents ('NR tourists'). The Products included accommodation in hotels and serviced apartments, transfers, car hire, tour guides, meals, and similar products and services.
Many dealings between the taxpayer and the NR travel agents occurred through the taxpayer's website which allowed NR travel agents to (amongst other things):
- review the Products of the Australian Providers that were available for booking by the taxpayer;
- access lists of tariffs, inclusive of the taxpayer's fees, for the Products;
- build a tour package for a NR Tourist by selecting particular Australian Providers and their Products; and
- obtain (in many cases) instant confirmation that the taxpayer was able to book the Products selected
The terms and conditions on the website stated that the amount the taxpayer charged included both the cost of the Products and a fee for arranging the Products.
Once agreement with an NR travel agent had been reached, the taxpayer entered into contracts with Australian Providers relating to the provision of Products to the NR tourists. In doing so, the taxpayer acted as principal, and not as an agent of the NR travel agent. The taxpayer was obliged to pay the Australian Providers and claimed the associated input tax credits.
The GST in dispute related only to dealings the taxpayer had with NR travel agents that it did not have specific written contracts with. The taxpayer had entered into specific written agreements with a small number of NR travel agents, but it sought no refund of GST paid under these agreements.
Issues decided by the court
The primary issue considered by the Court was whether the supply made by the taxpayer to the NR travel agents was properly characterised as:
- supply of arranging or booking services (as the taxpayer contended); or
- supply of the Products or the right to that supply or the promise to provide it (as the Commissioner contended)
It was common ground that:
- if the taxpayer's contended characterisation was correct - the supply would be GST-free;
- if the Commissioner's contended characterisation was correct - the supply would not be GST-free (although the taxpayer did advance a number of arguments in support of the proposition that various components of the supply may be GST-free which were considered but not accepted by the Court).
As it found in favour of the Commissioner on the primary issue, the Court also considered the secondary issue of whether, in addition to supplying the Products or the rights or promises, the taxpayer also supplied an arranging or booking service (for which it charged its margin). It was not in dispute that this separate supply, if it existed, would be GST-free.
The Court also considered whether section 105-65 in Schedule 1 to the Taxation Administration Act 1953 could apply to deny a refund of overpayments of GST made by the taxpayer in relation to tax periods ending on or before 30 June 2008. The taxpayer contended that section 105-65, as it then was, could not apply where a particular supply that a taxpayer treated as having been made by it (supply of the Products or the rights or promises) was, at least to some extent, not made at all and instead a different supply (arranging or booking services) was made. It was common ground that:
- if the taxpayer's contention was correct - the Commissioner would be required to refund the relevant overpayments of GST;
- if the Commissioner's contention was correct (and section 105-65 was not precluded from applying) - the Commissioner would have a discretion to refund the relevant GST overpayments, in which case the appropriate course of action would be for the Court to remit the matter to the Commissioner to consider whether or not to exercise this discretion
A summary of the Court's findings and reasoning follows:
Primary characterisation issue
Bennett J noted, after referring to several previous GST cases, that the proper characterisation of a supply "is not always answered by a mere contractual analysis and must be addressed having regard to the substance, purpose and commercial reality of the transactions".
Her Honour stated that there were a number of difficulties associated with the view that the taxpayer supplied arranging or booking services only. One such difficulty was that, in the event the Australian Provider did not provide the Products, NR tourists would have rights against an NR travel agent. However, the NR travel agent in question would have no rights against the Australian Providers and no recourse to the taxpayer if the taxpayer had properly completed the booking.
The analysis of the entirety of the relationship between [the taxpayer] and the NR Travel Agents makes it clear that ..., [ the taxpayer ] supplied the NR Travel Agents with a contractual right or promise that the Products would be provided to the NR Tourists (our emphasis).
Her Honour further concluded that the supply of the contractual right or promise that the Products would be provided was not GST-free under section 38-190 on the basis that:
- to the extent the supply related to the accommodation components of a tour package - the supply was a supply of real property, as defined in section 195-1, and that it therefore did not fall within the scope of section 38-190
- to the extent the supply related to the non-accommodation components - the supply was the supply of a right to which subsection 38-190(2) would apply (and, as such, the supply would not be GST-free under section 38-190)
Secondary characterisation issue
Bennett J found that, in addition to supplying a promise to provide the Products, the taxpayer made a separate supply of arranging services. Her Honour noted that:
- the contract the taxpayer has with the NR travel agents makes a distinction between the Products supplied and the taxpayer's fee for arranging services and, "[a]s such, there were two separate supplies"; and
- if the Products were not supplied by the Australian Provider, the taxpayer refunded the cost of the Products, but did not refund the margin
Bennett J further stated that the separate supply of arranging services was not "merely ancillary or incidental to the supply of the Products", noting (amongst other things) that the arranging service was a service sought for its own sake, rather than as "a means of better enjoying the principal service". It was concluded that the separate supply of arranging services was GST-free under section 38-190.
Pre-1 July 2008 discretion to refund issue
Bennett J referred to KAP Motors (on which the taxpayer relied) and concluded that it was distinguishable on the basis that, in the present situation, it was the nature of the taxpayer's supply, and not its existence, that was in dispute. From this, her Honour concluded that section 105-65 (as it then was) gave the Commissioner a discretion in relation to the refunds sought by the taxpayer for periods ending on or before 30 June 2008.
ATO view of Decision
Primary characterisation issue
Although this decision relates to specific facts, the Commissioner considers that aspects of her Honour's reasoning would apply to all ITOs which:
- transact as principal (and not as an agent of a NR travel agent);
- are engaged by NR travel agents to enter into contracts with Australian Providers for the provision of Products to NR tourists
In particular, the difficulties that her Honour identified with the alternative arranging or booking services characterisation (such as the one noted above) would seemingly arise in relation to all such ITOs. Accordingly, the Commissioner considers that the supply made by an ITO of this kind to a NR travel agent would (to the extent that the consideration for the supply equates with the price the ITO paid for a particular Product) properly be characterised as the supply of a contractual right or promise that the Product will be provided to the NR tourist. The same characterisation would apply in instances where an ITO is engaged directly by a NR tourist to enter into contracts with Australian providers (as principal) for the provision of Products to the NR tourist.
The supply of the contractual right or promise would be subject to GST, unless there is a specific provision in the GST Act which makes the supply GST-free or input taxed (the supply of a right to, or promise of, accommodation in certain serviced apartments may, for example, be input taxed)
Secondary characterisation issue
Bennett J referred to two factors (noted above) that led to the conclusion that, in addition to supplying a promise to the Products, the taxpayer also supplied an arranging or booking service for which it charged its margin.
On the first factor, the Commissioner respectfully considers that her Honour's comments (when viewed in context) do not provide support for the proposition that, if a contract draws a distinction between two separate supplies, it follows from this alone that there are two separate supplies. Subject to any advice he receives, the Commissioner proposes to submit to the Full Federal Court that the description of an arrangement given by one or both the parties, in the contract or otherwise, is not determinative of whether or not there is a supply, nor is it is determinative of the character of any supply in fact made.
On the second factor, the Commissioner acknowledges that, if it were the case that the taxpayer was entitled to retain its margin in the event that an Australian Provider did not provide the Products, this may support the conclusion that the taxpayer made two separate supplies. However, subject to any advice he may receive, the Commissioner proposes to submit to the Full Court that the available evidence in the matter does not support this finding.
Section 105-65 discretion prior to 1 July 2008
Bennett J's findings are consistent with the Commissioner's views regarding section 105-65, as it existed prior to being amended in 2008.
Implications for ATO precedential documents (Public Rulings & Determinations etc)
Taking into account all relevant circumstances, the Commissioner considers it appropriate to administer the law in the manner outlined below between now and the time the appeal and cross-appeal are decided.
Overview of administrative treatment
During this period, the Commissioner will not make any amended assessments in a manner that is inconsistent with the existing Federal Court decision. Accordingly, taxpayers may lodge returns on the basis of either this decision or the published ATO view, without the Commissioner making amended assessments. However, the Commissioner will make amended assessments where taxpayers lodge on the basis that their entire transaction (and not just the margin) is GST-free.
If the Commissioner is successful in his cross-appeal, he will (subject to further appeal processes being exhausted) amend assessments and seek to recover any unpaid GST on the margin. Similarly, if the Commissioner is not successful in his cross-appeal, but the Full Court's reasoning suggests that only a class of ITOs would be affected by the decision, he will seek to recover any unpaid GST on the margin from ITOs that do not fit within the relevant class.
Claims for refunds of overpaid GST for previous tax periods will be subject to the operation of section 105-65.
The above treatment can be summarised in the following table.
|Scenario||Will the Commissioner amend assessments?|
|1||Taxpayer lodges in accordance with published ATO view||No|
|2||Taxpayer lodges in accordance with Bennett J's decision (margin GST-free)||No|
|3||Taxpayer lodges on basis entire supplies are GST-free||Yes, in line with Bennett J's decision|
|4||Taxpayer lodges in accordance with scenario 2 or 3 above, but also includes claims for refunds for past transactions ( on which it overpaid GST in a previous tax period )||For past transactions:
For other transactions - as per whichever of scenario 2 or 3 above applies.
Consistent with the decision of Bennett J, the administrative treatment outlined above applies to supplies an ITO makes to a non-resident entity (NR entity) if requirements 1 and 2 and either of 3A or 3B in the table below are satisfied:
|1||The ITO is engaged by the NR entity* to enter into contracts with Australian Providers for the provision of Products to a NR tourist or tourists
* The NR entity may be a NR travel agent or a NR tourist that is not in Australia at the time the ITO performs its arranging or booking services.
|2||The ITO transacts as principal (and not as agent for the NR entity) in its dealings with the Australian Providers; and|
|3A||The contract the ITO has with the NR entity (including the ITO's web-based or other material if the ITO has no express written agreement with the NR entity):
* If the contracts are silent in relation to refunds in these circumstances, we accept that this requirement is met if the taxpayer's practices are not inconsistent with this requirement (that is, if the taxpayer does not have a practice of refunding the whole of the price paid by the NR entity if the Provider fails to provide the Product);
The ATO will review this position when the decision of the Full Federal Court is available.
Section 105-65 - application to refunds of overpaid GST
If a taxpayer overpays GST on a supply that it erroneously treats as taxable, section 105-65 says that the Commissioner need not refund the amount overpaid if one or both of the following apply:
- the Commissioner is not satisfied that the taxpayer has reimbursed a corresponding amount to the recipient of the supply;
- the recipient is registered for GST or required to be registered for GST
The Commissioner reads the words "need not" in section 105-65 to mean that, although he would be under no obligation to provide a refund, he has the discretion to do so. The Commissioner is currently seeking independent legal advice on the application of section 105-65. Following receipt and review of this advice, the Commissioner may update this decision impact statement.
Extensions of the four-year time limit on GST refunds
A taxpayer's entitlement to a refund of overpaid GST relating to a tax period commencing before 1 July 2012 will generally expire unless, within four years from the end of that tax period, the taxpayer notifies the Commissioner of their entitlement to the refund.
To preserve any entitlement to refunds for past transactions, taxpayers can notify the ATO (through one of the methods outlined below) of their intention to claim the refund at a later date (for example, as soon as practical after the appeal and cross-appeal have been decided and any further appeal processes are exhausted).
Requirements for a valid refund notification
A valid notification of a refund entitlement must:
- identify the taxpayer that is entitled to the refund
- provide a description of the nature of the entitlement to a refund which is sufficient to bring to the Commissioner's attention the basis for the entitlement (such that when the refund is subsequently claimed, it can reasonably be identified as being covered by the notification). For example, "the taxpayer is an inbound tour operator who, in accordance with the decision in ATS Pacific Pty Ltd v Commissioner of Taxation, has overpaid GST on its supplies of arranging services."
- specify the reporting period or periods that the refund relates to. If the refund relates to a number of consecutive reporting periods, it is sufficient to specify a range only without identifying each period (for example, "the refunds relate to the quarterly tax periods spanning 1 June 2009 to 30 June 2012")
The notification does not need to quantify the amount of the refund. In the circumstances, the Commissioner will not require a taxpayer to take steps to quantify the amount of the refund until after the appeal and cross-appeal have been decided.
Where to send the notification
Notifications of refund entitlements should be sent to:
Australian Taxation Office PO Box 3524
ALBURY NSW 2640;
or faxed to 1300 139 031.
Taxpayers will receive a letter from the ATO acknowledging their notification.
BP Refinery (Westernport) Pty Ltd v Hastings Shire Council
(1977) 180 CLR 266
KAP Motors Pty Ltd v Commissioner of Taxation
 FCA 159
(2008) 168 FCR 319
2008 ATC 20-007
68 ATR 927
In particular, the taxpayer contended that, the supply of the promise was not excluded from being GST-free under subsection 38-190(2) on the basis that it was not the "supply of a right or option to acquire something the supply of which would be connected with Australia and would not be GST-free" (paragraph 140, 3rd dot point)
At paragraph 71, referring to Saga Holidays Ltd v Commissioner of Taxation  FCA 1892; (2005) 149 FCR 41; Saga Holidays Ltd v Commissioner of Taxation  FCAFC 115; (2006) 152 FCR 461; Travelex v Commissioner of Taxation  HCA 33; (2010) 241 CLR 510.
BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 180 CLR 266
At paragraph 169
KAP Motors Pty Ltd v Commissioner of Taxation  FCA 159; (2008) 168 FCR 319
At paragraph 163
In the case of a supply of accommodation in a serviced apartment, subsection 9-30(2) and section 40-35 of the GST Act may apply to render the supply input-taxed
In this case, the supplies in question are the supply of the promise to provide the Products and the supply of the arranging or booking services
That is, the amendments of the 'deemed assessment' that will be taken to be made at the time the taxpayer lodges their GST return (section 155-15 in Schedule 1 to the Taxation Administration Act 1953)
See paragraph 149 in particular
MT 2010/1 sets out the Commissioner's views on the operation of section 105-65 in Schedule 1 to the Taxation Administration Act 1953.
See section 105-55 in Schedule 1 to the Taxation Administration Act 1953. For tax periods starting on or after 1 July 2012, a period of review (generally four years) applies to amending assessments. The period of review cannot be extended by a notification