Interim Decision Impact Statement

ATS Pacific Pty Ltd v Commissioner of Taxation

  • A new interim Decision Impact Statement is now available following the Full Federal Court's decision handed down on 27 March 2014.
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Court Citation(s):
[2013] FCA 341
2013 ATC 20-383

Venue: Federal Court
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 Advice

Relevant Rulings/Determinations:

Subject References:
GST
Characterisation of supply
Inbound tour operator
Arranging service
Ancillary or incidental
Discretion to refund overpaid GST

Exclamation 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.

Précis

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[1]).

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[2]

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"[3].

Her Honour stated that there were a number of difficulties associated with the view that the taxpayer supplied arranging or booking services only[4]. 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[5]. 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.[6]

Applying the test in BP Refinery[7], Bennett J found that the contract between the taxpayer and NR travel agents contained an implied term[8] and concluded that[9]:


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[10] (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"[11]; 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[12]

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"[13]. It was concluded that the separate supply of arranging services was GST-free under section 38-190[14].

Pre-1 July 2008 discretion to refund issue

Bennett J referred to KAP Motors[15] (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[16]. 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[17].

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[18])

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[19], 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.

Administrative Treatment

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[20]. 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 on the margin for previous tax periods will be subject to the operation of section 105-65. Further guidance on how to apply for such refunds and the principles and circumstances which the Commissioner will take into account in deciding whether to exercise the discretion to refund the relevant overpaid GST in any given case appears under the heading below: Section 105-65 - application to refunds of overpaid GST .

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

Affected taxpayers

Consistent with the decision of Bennett J[21], 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:

Requirement
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):

refers to a service of arranging supply of the Products or booking the Products; and
requires the ITO to refund the cost of the Products only and not its margin in circumstances where the NR entity pays the ITO for its supply of a promise to provide a Product, but the Product is not supplied by the Australian Provider*

* 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);

3B The ITO:

in its contract with the NR entity (including its web-based or other material if it has no express written agreement with the NR entity) does not refer to a service of arranging supply of the Products or booking the Products; but
can establish that they have a practice of refunding the cost of the Product only and not their margin if the Australian 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[22].

The original version of this DIS noted that the Commissioner was seeking independent legal advice on the application of section 105-65. The Commissioner has since received and reviewed that advice.

Miscellaneous Tax Ruling MT 2010/1 sets out 'guiding principles' that the Commissioner will have regard to in determining whether or not to exercise the section 105-65 discretion in any given case[23]. These principles take into account the legislative intention of section 105-65. In MTAA Superannuation Fund[24], the Administrative Appeals Tribunal said of this intention:


The intention of the legislature in enacting the s 105-65 discretion included preventing windfall gains... and the Commissioner and the Tribunal standing in his shoes are permitted to have regard to this intention in deciding whether that discretion ought to be exercised in a particular circumstance. ... Having regard to the legislative intention, prevention of windfall gains is the principal criterion to be addressed before any exercise of the discretion .

... A practical business approach to administration of the GST laws is not consistent with allowing windfall gains. And to the extent that community standards and expectations have a role to play, those standards and expectations would require denial of windfall gains for two large organisations that do not bear the cost of the overpaid amount [emphasis added]

In considering whether to exercise the section 105-65 discretion in relation to any given ITO, the Commissioner will have regard to all relevant circumstances. We have identified relevant factors as including whether the overpaid amount has been passed on to the recipient of the supply and also the change of ATO view resulting in the ATO requiring that GST be paid on the margin with effect from 1 April 2005. Subject to the relevant facts and circumstances of each case, the Commissioner would generally expect to exercise the discretion to refund overpaid GST on the margin to an ITO if there is evidence which shows that the ITO bore the cost of the GST and did not pass it on to the recipient of the supply.

For ITOs that began operation before 1 April 2005[25], the evidence may take the form of a comparison between their pricing methodology prior to 1 April 2005 (if they treated their margin as GST-free up to this point) and their pricing methodology after this date. If, for example, an ITO determines its price by applying a percentage mark-up to the Products it acquires from an Australian Provider and, for any given Product or Product category, that percentage has remained constant from 1 July 2000 to the present day, this would (all other things being equal) weigh in favour of the exercise of the discretion to refund the overpaid GST on the margin[26]. It would not matter that the ITO's prices would have fluctuated in line with fluctuations in the Australian Provider's prices.

Any ITOs that are seeking refunds for arranging supplies made to non-resident entities that were registered, or (to the best of the ITO's knowledge) were required to be registered, for GST should identify this in their refund application.

Submitting evidence to the ATO

Affected taxpayers may submit any evidence in support of a claim for a refund of GST overpaid for previous tax periods to GSTmail@ato.gov.au or by fax to 1300 139 031 or by mail to:


Australian Taxation Office PO Box 3524

ALBURY NSW 2640

Please include the words "Inbound Tour Operator Refund Request" in the subject heading.

Any queries about the nature of the evidence that needs to be provided can be directed to one of the following officers:


Kevin Burns 08 8208 2039

Michelle Nourse 08 8218 9203

Romeo Barone 08 7422 2556

Claiming the entire refund on one business activity statement (BAS)

If the Commissioner does exercise the discretion under section 105-65 to pay refunds to an ITO, that ITO may, as an alternative to amending previous BASs, claim the one 'aggregate refund' on the next BAS that they lodge. In working out their aggregate refund, the ITO must take into account the four-year time limit which applies to the claiming of GST refunds[27].

Refunds to be returned if the Commissioner is successful in his cross-appeal

If he is successful in his cross-appeal, the Commissioner will seek to recover any refunds of overpaid GST for past periods that he pays out, together with any delayed refund interest that he may have paid.

This is because any refunds would have been paid on the basis that the margin was GST-free. If the Full Court was to find in favour of the Commissioner (that the margin is in fact taxable), there would have been no legislative entitlement to the refunds.

Affected taxpayers therefore have the choice to claim refunds for past periods now (knowing that any refunds they receive may have to be paid back at a later date) or await the outcome of the appeal and cross appeal and submit refund requests at that time (should the Full Court affirm the decision that the margin is GST-free).

Taxpayers that choose to await the outcome of the appeal before they claim refunds may wish to lodge a notification of their entitlement to a refund to ensure they are not disadvantaged by the four-year time limit (see directly below for further information).

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[28].

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.

Legislative References:
A New Tax System (Goods and Services Tax) Act 1999
Section 38-190

Taxation Administration Act 1953
Section 105-65 of Schedule 1

Case References:
BP Refinery (Westernport) Pty Ltd v Hastings Shire Council
(1977) 180 CLR 266

KAP Motors Pty Ltd v Commissioner of Taxation
[2008] 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)


Paragraph 9


At paragraph 71, referring to Saga Holidays Ltd v Commissioner of Taxation [2005] FCA 1892; (2005) 149 FCR 41; Saga Holidays Ltd v Commissioner of Taxation [2006] FCAFC 115; (2006) 152 FCR 461; Travelex v Commissioner of Taxation [2010] HCA 33; (2010) 241 CLR 510.


Paragraph 110


Paragraph 114


Paragraph 114


BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 180 CLR 266


Paragraph 89


Paragraph 166


Paragraph 143


Paragraph 149


Paragraph 149


Paragraph 151


At paragraph 169


KAP Motors Pty Ltd v Commissioner of Taxation [2008] FCA 159; (2008) 168 FCR 319


Paragraph 163


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


MTAA Superannuation Fund (R G Casey Building) Property Pty Ltd and Commissioner of Taxation [2011] AATA 769, at paragraphs 64 and 65


This is the date on which the Commissioner's public view that the margin was taxable took effect


This is assuming that GST is not then imposed on the marked-up amount


In accordance with the four-year time limit in section 105-55 of Schedule 1 to the Taxation Administration Act 1953, an entitlement to a refund of overpaid GST for a tax period which commenced before 1 July 2012 will cease four years from the end of that tax period. Broadly, this is unless, within the four-year period, the ITO lodged a valid section 105-55 notice in relation to the refund.


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

ATS Pacific Pty Ltd v Commissioner of Taxation history
  Date: Version:
  1 July 2013 identified
  11 July 2013 identified
  6 September 2013 identified
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