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Ruling

Subject: Total monetary prizes

Question:

For the purpose of calculating its global GST amounts pursuant to section 126-10 of the A New Tax System (Goods and Services Tax) Act 1999 ('GST Act') for the April 2006 to March 2010 tax periods are you correct to include in 'total monetary prizes' the monetary prizes you were liable to pay (on the outcome of gambling events) to non-resident customers that relate to supplies that are GST-free?

Answer:

No, for the purpose of calculating its global GST amounts pursuant to section 126-10 of the GST Act for the April 2006 to March 2010 tax periods you are not correct to include in 'total monetary prizes' the monetary prizes you were liable to pay (on the outcome of gambling events) to non-resident customers that relate to supplies that are GST-free.

Relevant facts and circumstances:

You carry on the enterprise of online gaming and sports betting. Your customers wager amounts through online or mobile phone facilities on the outcomes of sporting events.

Your non-resident and Australian-resident customers open accounts with you and deposit funds into those accounts. Funds for wagers are withdrawn from those accounts and prize monies are paid into those accounts. Account holders may withdraw all or part of the funds in their accounts at any time.

Notification of entitlement to GST refund:

You notified the ATO of your intention to claim GST refunds for various tax periods as follows:

This claim has not yet been quantified as X has only just become aware of its entitlement to the claim, and due to the volume of transactions involved in the claim it will take some time to quantify.

Furthermore, X has been open and transparent and has taken reasonable care in relation to the making of this claim given that:

3. The circumstances which brought this claim to X's attention was the enactment of Tax Laws Amendment (2009 Administrative Measures) Act 2010. Prior to this time X had been acting in accordance with the Commissioner's administrative practice.

4. The fact that X will, at the time of quantifying its claim, also seek to obtain a private ruling. We note this is the approach recommended by the Australian Taxation Office in the information form in circumstances where there is uncertainty about a legal entitlement to a claim.

Circumstances of the GST refund:

X hereby gives notice of an entitlement to a refund of GST on the basis of an incorrect calculation of its global GST amount under section 126-10 of the GST Act. The calculation of the global GST amount for the relevant tax periods has not taken into account 'total monetary prizes' which are paid or payable to non-resident customers.

You explained the details of the circumstances in which the GST refund arises as follows:

As such, X calculates its GST liability on gambling supplies on the 'global GST amount' which is defined in section 126-10 of the GST Act as the 'total amounts wagered' less the 'total monetary prizes' for each tax period, multiplied by 1/11.

Total amounts wagered:

As the definition of 'total amounts wagered' in subsection 126-10(1) of the GST Act refers (through the definition of 'gambling supplies') to 'taxable supplies, an amount wagered will only be included in this component of the calculation of 'global GST amount' where the requirements set out in section 9-5 of the GST Act are met.

A supply of things other than goods or real property that is for consumption outside Australia is GST-free under section 38-190 of the GST Act. Specifically, under Item 2 in subsection 38-190(1) of the GST Act, a supply will be GST-free where it is made to a non-resident who is not in Australia when the thing supplied is done, and the supply is neither a supply of work physically performed on goods situated in Australia when the work is done nor a supply directly connected with real property situated in Australia.

Alternatively, under Item 3 of subsection 38-190(1) of the GST Act, a supply is GST-free where it is made to a recipient who is not in Australia when the thing supplied is done, and the effective use and enjoyment of that supply takes place outside Australia (except where the supply is a supply of work physically performed on goods situated in Australia when the thing supplied is done, or a supply directly connected with real property situated in Australia).

As such, where an amount is wagered by a non-resident, the supply is GST-free and is not a gambling supply as defined in subsection 126-35(1) of the GST Act. Therefore, any amounts wagered by non-residents which meet the above requirements as set out in subsection 38-190(1) of the GST act are not to be included in 'total amounts wagered' in calculating 'global GST amounts'.

Total monetary prizes:

Paragraph 126-10(1)(a) of the GST Act provides that 'total monetary prizes' includes the amounts payable on the outcome of the 'gambling events'. As the enterprise of X is to accept bets in relation to the outcome of a gambling event, any amounts paid out as a result of the acceptance of such a bet will be a 'monetary prize', including amounts paid out to non-residents.

Further, as provided by subsection 126-10(3), any monetary prizes that are payable in relation to supplies that are GST-free under section 38-270 are to be disregarded from the calculation of 'total monetary prizes'. Section 38-270 of the GST act relates to raffles and bingo conducted by charitable institutions etc.

As the amounts paid or payable as monetary prizes to non-residents are GST-free under section 38-190 of the GST Act, and not 38-270, these prizes are not to be disregarded from the calculation of 'total monetary prizes'.

On this basis, the amounts paid or payable to non-resident customers were incorrectly excluded from the calculation of 'total monetary prizes', resulting in an incorrect calculation of the global GST amount. In this respect, X's global GST amount in each of the relevant tax periods has been overstated, resulting in an overpayment of GST on gambling supplies.

X is therefore entitled to claim a GST refund equal to the difference between the amount of GST reported and paid on gambling supplies during the relevant tax periods, and the amount that should have been reported and paid on gambling supplies had the monetary prizes paid or payable to non-residents been included as 'total monetary prizes' in the calculation of the global GST amount.

Ruling request:

In a subsequent letter you referred to the notification of GST refund and requested a GST private ruling confirming that, for the relevant tax periods, you should include in 'total monetary prizes' the monetary prizes that you were liable to pay to non-resident customers that relate to supplies that are GST-free.

The submissions in support of the ruling request repeated the submissions in the notification of GST refund.

Addendum to GSTR 2002/3A:

On 25 August 2010 the ATO issued Goods and Services Tax Ruling GSTR 2002/3A3 which inserted Paras 188A to 188I into GSTR 2002/3 as follows:

Whether 'total monetary prizes' includes monetary prizes paid in relation to a supply that was not a taxable supply

188A. Under the basic rules of the GST, a supply that meets the positive requirements for a taxable supply (under section 9-5) is not a taxable supply to the extent it is GST-free. As a result, a supply that might otherwise be a gambling supply (a taxable supply) may instead be a GST-free supply. For example:

money wagered by a person outside Australia as a bet on a horse race may be consideration for a supply that is GST-free under section 38-190; or

money a person pays to participate in a game of bingo conducted by a charitable organisation may be consideration for a supply that is GST-free under section 38-270.

188B. The ATO treatment of monetary prizes payable to non-residents overseas in relation to their GST-free bets, is to exclude them from total monetary prizes in the calculation of the global GST amount.

188C. The reason for this is that the definition of total monetary prizes at paragraph (a) in section 126-10 makes reference to 'the gambling supplies'. A gambling supply is by definition a taxable supply. It is therefore considered that monetary prizes that do not relate to a taxable supply are outside the scope of 'total monetary prizes'.

188D. This is consistent with section 126-1 which explains that the global accounting method 'provides for an alternative way of working out your net amounts by incorporating your net profits from taxable supplies involving gambling'. By excluding GST-free wagers and monetary prizes payable in relation to these wagers, the global GST amount reflects the net profits on taxable gambling supplies.

188E. Subsection 126-10(3) as amended by Tax Laws Amendment (2009 GST Administration Measures) Act 2010 provides:

(3) In working out your total monetary prizes for a tax period, disregard any *monetary prizes you are liable to pay, during the tax period, that relate to supplies that are *GST-free.

188F. This provision expressly confirms that monetary prizes relating to GST-free supplies cannot be included in 'total monetary prizes'. As stated at paragraph 1.17 in the Explanatory Memorandum to the Tax Laws Amendment (2009 GST Administration Measures) Bill 2009:

The Board of Taxation in its Review of the Legal Framework for the Administration of the Goods and Services Tax recommended that the current GST treatment of gambling transactions by 'non-residents' be confirmed. The Government accepted this recommendation in its response to the report (then Assistant Treasurer's Media Release No. 042 of 12 May 2009). The amendments provide a general clarification of the GST treatment of prize money that gambling operators are liable to pay out on GST-free supplies. [emphasis added]

What monetary prizes 'relate' to GST-free supplies?

188G. A monetary prize 'relates' to a GST-free supply if the entitlement to the payment of the prize can be traced to the supply that was GST-free. This is done on a case by case basis.

188H. For example, an Australian gambling supply provider (GSP) accepts bets on horseracing and makes supplies to its customers (punters) in Australia that are taxable under section 9-5. The GSP also accepts wagers on horseracing from persons who are outside Australia. The supplies of gambling opportunities the GSP makes to its customers outside Australia will be GST-free in accordance with section 38-190.

188I. In calculating its global GST amount for a tax period, the GSP includes in 'total amounts wagered' the consideration for those gambling supplies it makes to its customers in Australia that are attributable to the tax period. Similarly the GSP includes in 'total monetary prizes' the monetary prizes that became payable to the customers who laid those taxable bets. As for the GST-free bets the GSP accepts from its customers outside Australia, the consideration for those bets does not form part of 'total amounts wagered'. Similarly, any monetary prizes that become payable to the customers who placed those bets, do not form part of 'total monetary prizes' in the GSP's global GST amount.

GSTR 2002/3A3 states that GSTR 2002/3A3 applies both before and after its date of issue, except for the part that deals with subsection 126-10(3) which applies form 24 March 2010.

Reasons for decision

Summary:

An interpretation of paragraph 126-10(1)(a) which includes in 'total monetary prizes' monetary prizes which relate to GST-free supplies is not supported by the words 'whether or not any of those gambling events or the gambling supplies to which the monetary prizes relate, take place during the tax period' in paragraph 126-10(1)(a) which indicate that there must be a connection between a monetary prize and a 'gambling supply' (i.e. a taxable supply) in order for that monetary prize to be included in 'total monetary prizes'. Nor is such an interpretation supported by section 126-1 which states that the global GST amount is intended to incorporate the net profits from taxable supplies involving gambling into an entity's net amount for a tax period. When subsection 126-10(3) is considered in its context it is clear that it was not intended to provide a code as to the amounts that are to be disregarded when working out an entity's 'total monetary prizes' for a tax period. In our view a court would deal with the interpretation of paragraph 126-10(1)(a) in a manner similar to that adopted by the Federal Court in Sterling Guardian Pty Ltd v FCT.

Detailed reasoning:

Section 126-10 - the words used:

The ruling request contained the following submission under the heading 'Application of the law to the facts':

Paragraph 126-10(1)(a) of the GST Act provides that 'total monetary prizes' includes the amounts payable on the outcome of 'gambling events'. Given that X accepts bets in relation to the outcomes of gambling events, any amounts paid out as a result of acceptance of such bets will be 'monetary prizes', including amounts paid out to non-residents.

This submission is based on some, but not all, of the words used in the first part of the 'total monetary prizes' definition in paragraph 126-10(1)(a) of the GST Act:

Total monetary prizes is the sum of:

(a) the monetary prizes you are liable to pay, during the tax period, on the outcome of gambling events (whether or not any of those gambling events or the gambling supplies to which the monetary prizes relate, take place during the tax period);

In Cooper Brookes (Wollongong) Pty Ltd v FCT 81 ATC 4292, 4295 Gibbs CJ stated:

It is an elementary and fundamental principle that the object of the court, in interpreting a statute, 'is to see what is the intention expressed by the words used': River Wear Comers v Adamson (1877) 2 App Cas. 743, 763. It is only by considering the meaning of the words used by the legislature that the court can ascertain its intention. And it is not unduly pedantic to begin with the assumption that words mean what they say: Cody v J H Nelson Pty Ltd (1947) 74 CLR 629, 648. Of course, no part of a statue can be considered in isolation from its context - the whole must be considered. If, when the section in question is read as part of the whole instrument, its meaning is clear and unambiguous, generally speaking 'nothing remains but to give effect to the unqualified words': Metropolitan Gas Co. v Federated Gas Employees' Industrial Union & Aynor (1925) 35 CLR 449, 455.

Examining the words used in section 126-10 in the context of Division 126, we note that section 126-5(1) provides that Division 126 applies only if an entity is liable for GST on a 'gambling supply' (which is defined in subsection 126-35(1) as a taxable supply involving the supply of a ticket in a lottery or similar undertaking or the acceptance of a bet relating to the outcome of a 'gambling event').

Where an entity is liable for GST on a 'gambling supply' then, for the tax period to which the GST on that gambling supply is attributable, subsection 126-5(1) applies for the purpose of calculating the entity's net amount. Subsection 126-5(1) displaces the method set out in section 17-5 of the GST Act which is generally used to calculate the net amount, and substitutes the following formula for calculating the entity's net amount:

Global GST amount + other GST - Input tax credits

Section 126-10 governs calculation of the first component - the Global GST amount. Subsection 126-10(1) states that an entity's global GST amount for a tax period is:

(Total amounts wagered - Total monetary prizes) x 1/11

and states that 'total amounts wagered' is the sum of the consideration for all of the entity's gambling supplies that are attributable to that period. No further clarification is provided as to which gambling supplies are attributable to the relevant tax period. The meaning of 'total amounts wagered' was considered by Gzell J in TAB Ltd v FCT [2005] NSWSC 552 (Para 22):

It is not the gambling event that governs total amounts wagered, but rather the gambling supply and that means the acceptance of bets. Hence total amounts wagered should be the total bets accepted in the relevant tax period irrespective of whether the events to which they relate occur in the relevant tax period or a subsequent one.

In relation to the definition of 'total monetary prizes' paragraph 126-10(1)(a) provides:

Total monetary prizes is the sum of:

(a) the monetary prizes you are liable to pay, during the tax period, on the outcome of gambling events (whether or not any of those gambling events, or the gambling supplies to which the monetary prizes relate, take place during the tax period); and

As noted above, the ruling request focussed on the opening words of paragraph 126-10(1)(a), i.e.

the monetary prizes you are liable to pay, during the tax period, on the outcome of gambling events

and included a submission that any amounts paid out as a result of acceptance of bets on gambling events, including amounts paid out to non-residents, should be included in 'total monetary prizes'. However the opening words of paragraph 126-10(1)(a) are qualified by the words appearing in parenthesis immediately after those opening words:

(whether or not any of those gambling events, or the gambling supplies to which the monetary prizes relate, take place during the tax period);

These words may be intended to clarify which monetary prizes are attributable to the relevant tax period, i.e. make clear that a monetary prize which an entity is liable to pay during the relevant tax period is attributable to that tax period even if the 'gambling event' (e.g. conducting a lottery) or 'gambling supply' (e.g. selling a ticket) to which the monetary prize relates occurred in an earlier tax period. Attribution of monetary prizes to the relevant tax period was in issue in TAB Ltd v FCT where Gzell J rejected the ATO's submission that 'total monetary prizes' included only dividends paid in the relevant tax period and held (Para 68) that 'liable to pay' in paragraph 126-10(1)(a) means a legal obligation to pay and (Para 86) that 'total monetary prizes' therefore includes dividends declared by TAB Ltd during the relevant tax period, whether or not paid during that tax period.

On the other hand, it is possible that the words appearing in parenthesis in paragraph 126-10(1)(a), particularly the words

…the gambling supplies to which the monetary prizes relate

require a connection between a monetary prize and a 'gambling supply' (i.e. a taxable supply) in order for that monetary prize to be included in 'total monetary prizes' and that a monetary prize that relates to GST-free gambling supply is therefore excluded from 'total monetary prizes'. One factor which supports this interpretation of the words appearing in parenthesis in paragraph 126-10(1)(a) is the ordinary meaning of 'relates', which was considered in HP Mercantile Pty Ltd v Commissioner of Taxation 2005 ATC 4571 and held to signify a connection between two subject matters:

It was common ground that the words 'relates to' are wide words signifying some connection between two subject matters. The connection or association signified by the words may be direct or indirect, substantial or real. It must be relevant and usually a remote connection would not suffice. The sufficiency of the connection or association will be a matter for judgment which will depend, among other things, upon the subject matter of the enquiry, the legislative history, and the facts of the case. Put simply, the degree of relationship implied by the necessity to find a relationship will depend upon the context in which the words are found.

Another factor which supports the requirement of a connection between a monetary prize and a gambling supply is that the exclusion of a monetary prize from 'total monetary prizes' where the monetary prize 'relates' to a particular type of supply was used elsewhere in Division 126 during the relevant tax periods - subsection 126-10(3) excluded from 'total monetary prizes:

…any monetary prizes you are liable to pay, during the tax period, that relate to supplies that are GST-free under section 38-270.

Section 38-270 refers to the supply of a raffle ticket or acceptance of a person's participation in a game of bingo by a charitable institution, gift-deductible entity, or a government school. The use of 'relate' in this context suggests that a monetary prize would 'relate' to, for example, the supply of accepting a person's participation in a game of bingo (paragraph 38-270(1)(b)(ii)) if the monetary prize was awarded to that person as a result of that participation. Similarly, for the purposes of paragraph 126-10(1)(a) a monetary prize would 'relate' to a 'gambling supply' if the monetary prize was awarded to a person as a result of the making of a gambling supply (i.e. a taxable supply involving the supply of a ticket or acceptance of a bet) to that person.

We note, however, that the existence of subsection 126-10(3) also appears to undermine the idea that monetary prizes that relate to GST-free gambling supplies are excluded from 'total monetary prizes' because if that interpretation of paragraph 126-10(1)(a) is correct it is unnecessary to have the specific exclusion for monetary prizes that relate to gambling supplies which are GST-free under section 38-270. We discuss subsection 126-10(3) in detail below.

Interpretation of section 126-10 in light of the object of Division 126:

If a consideration of the words used in paragraph 126-10(1)(a) in their context does not provide a clear and unambiguous meaning of those words so as to resolve the issue of whether monetary prizes that relate to GST-free gambling supplies are excluded from 'total monetary prizes' then, applying Cooper Brookes (Wollongong) Pty Ltd, we should consider the purpose or intent of the relevant provision. In CIC Insurance Ltd v Bankstown Football Club Ltd (1995) 187 CLR 384,408 the High Court approved a modern approach to statutory interpretation where context (which includes the objects of the relevant legislation) is considered in the first instance, not merely where ambiguity arises:

…the modern approach to statutory interpretation (a) insists that the context be considered in the first instance, not merely at some later stage when ambiguity might be thought to arise, and (b) uses 'context' in its widest sense to include such things as the existing state of the law and mischief which…the statute was intended to remedy…if the apparently plain words of a provision are read in the light of the mischief which the statute was designed to overcome, and of the objects of the legislation, they may wear a very different appearance.

In HP Mercantile Pty Ltd v FCT 2005 ATC 4571 (FCAFC) Hill J adopted this approach in relation to the construction of the GST Act (Para 44):

It is clear, both having regard to the modern principles of interpretation as enunciated by the High Court in CIC Insurance Ltd v Bankstown Football Club Ltd and section 15AA of the Acts Interpretation Act 1901 (Cth) that the Court will prefer an interpretation of a statue which would give effect to the legislative purpose, as opposed to one that would not. This requires the Court to identify that purpose, both by reference to the language of the statute itself and also any extrinsic material which the Court is authorised to take into account.

In Travelex Ltd v FTC 2009 FCAFC 133 Stone J referred (Para 46) to the description of GST as a 'practical business tax':

The principle that the GST must be approached from a 'practical and business point of view', and the corresponding description of the GST as 'a practical business tax', have found expression in a number of cases involving an interpretation of the GST Act; see for example, Sterling Guardian Pty Ltd v Commissioner of Taxation 2005 ATC 4796 and Saga Holidays Ltd v Commissioner of Taxation (Cth) 2006 ATC 4841. While the expression may be a cliché, like most clichés it has achieved that status because it encapsulates a truth so well accepted that it hardly requires articulation. It reflects the fact that although the policy of the Act is that the burden of the tax should generally be borne by the ultimate consumer, as a practical matter the tax is imposed on business at various stages of the supply chain. The provision of input tax credits is the mechanism by which, generally, the burden of the tax finds its way to the ultimate consumer. Sensitivity to this policy and structure is of assistance in the construction of the provisions of the GST Act however, they are not the only factors to be considered as an aid to construction. In Saga Holidays, in a judgment with which Gyles and Young JJ agreed, I said at [30] in referring to this factor:

This and other aspects of the tax legitimately form part of the context in which the language of the Act is interpreted and explains, at least in part, why the description 'a practical business tax' seems to be appropriate. This does not mean, however, that there is some special canon of construction that should be applied when interpreting the GST Act. The purposive approach to interpretation, of its nature, takes account of the context of the Act and the phrase, 'a practical business tax' is a reference to that context, which as the Full Federal Court observed in Chaudhri v Federal Commissioner of Taxation (2001) 109 FCR 416 at [6] :

'... has the wide meaning which extends to the legislative history, the Parliamentary intention and the mischief to which a particular provision has been directed as well as the narrower meaning which would dictate reading the words to be construed by reference to the immediately surrounding or otherwise related provisions.

The GST Act contains explanatory provisions which may be used to determine the object or purpose of the operative provisions of the GST Act. Division 4 of the GST Act provides:

Division 4 - Status of Guides and other non-operative material

4-1 Non-operative material

In addition to the operative provisions themselves, this Act contains other material to help you identify accurately and quickly the provisions that are relevant to you and to help you understand them.

This other material falls into 2 main categories.

4-5 Explanatory sections

One category is the explanatory section in many Divisions. Under the section heading `'What this Division is about'', a short explanation of the Division appears in boxed text.

Explanatory sections form part of this Act but are not operative provisions. In interpreting an operative provision, explanatory sections may only be considered for limited purposes. They are set out in section 182-10.

Subsection 182-1(1) of the GST Act provides that 'explanatory sections' (defined in paragraph 182-10(1)(a) as any section that is the first section in a Division and that has as its heading 'What this Division is about') form part of the GST Act. Subsection 182-10(2) provides that explanatory sections are not operative provisions and that in interpreting an operative provision an explanatory provision may only be considered:

(b) in determining the purpose or object underlying the provision; or

Division 126 of the GST Act contains an explanatory section - section 126-1:

What this Division is about

Gambling is dealt with under the GST by using a global accounting system that provides for an alternative way of working out your net amounts by incorporating your net profits from taxable supplies involving gambling.

The Macquarie Dictionary defines 'net profit' as:

The amount remaining after deducting all costs from gross receipts

For an entity liable for GST on a taxable supply involving gambling 'all costs' would comprise the prizes paid out in relation to that taxable supply and 'gross receipts' would include all wagers accepted in relation to that taxable supply. Consequently the reference in section 126-1 to an entity's 'net profits from taxable supplies involving gambling' indicates that the purpose or object underlying section 126-10 is to calculate both 'total amounts wagered' and 'total monetary prizes' by reference to taxable supplies only and not by reference to either GST-free supplies or input taxed supplies. By totalling the bets accepted during the relevant tax period in relation to an entity's 'gambling supplies' (i.e. taxable supplies), deducting monetary prizes that relate to 'gambling supplies' which the entity is liable to pay during the relevant tax period, and collecting 1/11^th of the difference as GST, Division 126 ensures that, over time, the entity's net profits from taxable supplies involving gambling are taxed.

In the case of the 'total amounts wagered' definition in subsection126-10(1) this is achieved by referring to the consideration for all of the entity's 'gambling supplies' that are attributable to the relevant tax period as the definition of 'gambling supply' in subsection 126-35(1) refers to a taxable supply. In the case of 'total monetary prizes' the calculation of net profits from taxable supplies is achieved by interpreting the words in paragraph 126-10(1)(a):

(whether or not any of those gambling events, or the gambling supplies to which the monetary prizes relate, take place during the tax period);

as meaning that only monetary prizes which 'relate' to 'gambling supplies' (i.e. taxable supplies) are included in 'total monetary prizes' and that monetary prizes that relate to GST-free gambling supplies are excluded from 'total monetary prizes'.

Accepting the interpretation of 'total monetary prizes' which was suggested in the ruling request, i.e. including monetary prizes in respect of GST-free supplies to recipients overseas, would produce a result contrary to the purpose or object underlying Division 126 as stated in section 126-1 - i.e. incorporating an entity's net profits from taxable supplies involving gambling as the 'total monetary prizes' component would include monetary prizes which relate to GST-free supplies.

Subsection 126-10(3):

The ruling request included the following submission (p. 5):

Further, as provided by subsection 126-10(3), any monetary prizes that are payable in relation to supplies that are GST-free under section 38-270 are to be disregarded from the calculation of 'total monetary prizes'. Section 38-270 of the GST Act relates to raffles and bingo conducted by charitable institutions etc. which is not applicable here.

As the amounts paid or payable as monetary prizes to non-residents are GST-free under section 38-190 of the GST Act, and not 38-270, these prizes are not to be disregarded from the calculation of 'total monetary prizes'.

This submission suggests that subsection 126-10(3) provides a code as to which GST-free monetary prizes are to be disregarded when calculating 'total monetary prizes', i.e. because subsection 126-10(3) refers to section 38-270 but not to section 38-190, monetary prizes to which section 38-190 applies are not disregarded when working out 'total monetary prizes'.

Subsection 126-10(3) is also relevant to the meaning of 'total monetary prizes' in another way - as we stated above, if the words appearing in parenthesis in paragraph 126-10(1)(a) in the 'total monetary prizes' definition exclude monetary prizes that relate to GST-free gambling supplies then, strictly speaking, it is unnecessary to have a specific provision which excludes from 'total monetary prizes' monetary prizes that relate to gambling supplies that are GST-free under section 38-270.

In our view when subsection 126-10(3) is considered in its context, including having regard to legislative history and extrinsic materials, it is not intended to provide a code as to the amounts that are to be disregarded when working out an entity's 'total monetary prizes' for a tax period. Nor does subsection 126-10(3) indicate that monetary prizes which relate to GST-free supplies are included in 'total monetary prizes'.

Section 126-10 appeared in the A New Tax System (Goods and Services Tax) Bill 1998 ('GST Bill') as introduced as follows:

126-10 Global GST amounts

(2) Your global GST amount for a tax period is as follows:



where:

total amounts wagered is the sum of the *consideration for all of your* gambling supplies that are attributable to that tax period.

total monetary prizes is the sum of the *monetary prizes you are liable to pay, during the tax period, on the outcome of *gambling events (whether or not any of those gambling events, or the *gambling supplies to which the monetary prizes relate, took place during the tax period).

For the basic rules on what is attributable to a particular period, see Division 29.

(2) However, your global GST amount is zero for any tax period in which total monetary prizes exceeds total amounts wagered.

(3) Your global GST amount for a tax period may be affected by sections 126-15 and 126-20.

The 'total monetary prizes' definition in the GST Bill as introduced contained the words which now appear in paragraph (a) of the 'total monetary prizes' definition.

Subsection 126-10(3) and section 38-270 were inserted into the GST Bill after it was introduced to implement an agreement between the Commonwealth and the States and Territories that the application of GST to gambling would be revenue neutral, i.e. no net revenue would be raised from the application of GST to gambling. In April 1999 the Commonwealth and the States and Territories executed a revised Intergovernmental Agreement on the Reform of Commonwealth-State Financial relations which provided (clause 5(viii):

The States and Territories will adjust their gambling tax arrangements to take account of the impact of GST on gambling operators.

On 21 April 1999 the Commonwealth Assistant Treasurer (Senator Kemp) stated in the Senate that amendments would be made to the GST Bill (Hansard, Senate, Wednesday 21 April 1999, p. 3985):

The government's expressed intention was that no net revenue would be raised from applying the GST to gambling. This would be achieved by reducing the state and territory taxes by a similar amount to the GST. However, in the case of raffles conducted by charities, no state or territory taxes will be levied. To ensure our policy is achieved in the simplest possible fashion, such raffles and bingo run by charities will be GST-free.

and the Supplementary Explanatory Memorandum to the GST Bill explained the reasons for the two relevant requests for amendments to the GST Bill:

GST-free treatment for charitable raffles and bingo

1.36 Charitable institutions, trustees of charitable funds and gift-deductible entities may run certain gambling events, such as raffles and bingo, in order to raise funds. Currently under the GST Bill, such events are treated the same as gambling generally and are subject to GST under Division 126. However, raffles and bingo conducted by charitable institutions, trustees of charitable funds and gift-deductible entities are not subject to State taxes on gambling.

1.37 Request 31 inserts new subdivision 38-FA to provide that supplies of raffles and bingo by charitable institutions, trustees of charitable funds or gift-deductible entities are GST-free. However, similar events, such as lotteries, which are subject to State taxes on gambling, are not covered by new subdivision 38-FA and are not GST-free.

1.38 The raffle or bingo supplies will only be GST-free if conducting the raffle or bingo does not contravene a State or Territory law. For example, if a State or Territory law requires that a licence be obtained for running a particular raffle, and a licence is not obtained under that law, the supply of the raffle ticket will not be GST-free. [New paragraph 38-270(c)]

[Requests 31 and 67]

On 24 June 1999 the Commonwealth Assistant Treasurer moved requested amendments 31 and 67 to the GST Bill (Hansard, Senate, Thursday 24 June 1999, p. 6389):

Senator Kemp (Victoria-Assistant Treasurer) (9.29 p.m.)-by leave-I move government amendments Nos 31 and 67:

(31) Page 93 (after line 3), after Subdivision 38-

F, insert:

Subdivision 38-FA-Raffles and bingo conducted

by charitable institutions etc.

38-270 Raffles and bingo conducted by

charitable institutions etc.

A supply is GST-free if:

(a) the supplier is a charitable institution,

a trustee of a charitable fund or a *gift-deductible

entity; and

(b) the supply is:

(i) a supply of a ticket in a raffle; or

(ii) an acceptance of a person's participation

in a game of bingo; or

(iii) a *gambling supply of a kind specified

in the regulations; and

(c) the supply does not contravene a *State

law or a *Territory law.

(67) Clause 126-10, page 193 (after line 16),

after subclause (2), insert:

(2A) In working out the total monetary prizes

for a tax period, disregard any *monetary

prizes you are liable to pay, during the

tax period, that relate to supplies that are

*GST- free under Subdivision 38-FA.

When the Senate resumed on 25 June 1999 the Commonwealth Assistant Treasurer stated (Hansard, Senate, Friday 25 June 1999, p. 6449):

Senator Kemp (Victoria-Assistant Treasurer) (9.49 a.m.)-The siren sounded last night as I had just moved the amendments, and I do not think I had completed the explanation of the government's intention here so I will briefly summarise. The government's expressed intention was that no net revenue would be raised from gambling and this would be achieved by reducing state and territory taxes by similar amounts to the GST. However, in the case of raffles conducted by charities, states and territories do not levy gambling taxes and it is not possible to achieve the government's intent merely by reducing state and territory gambling taxes. To ensure that the government's policy is achieved in the simplest possible fashion, we are moving these requests for amendments to make raffles and bingo run by charities GST free.

Fundraising raffles and bingo run by charitable institutions, trustees or charitable funds or gift deductible entities are subject to GST as gambling supplies under division 126. Supplies of raffles and bingo by charitable institutions, trustees of charitable funds or gift deductible entities are not subject to state taxes or gambling. The new subdivision 38- FA will make these supplies GST free.

The government amendments agreed to by the Senate were subsequently dealt with in the House of Representatives. On 29 June 1999, standing orders were suspended, so as to permit all of the amendments to the Bill to be dealt expeditiously.

The Assistant Treasurer's statement makes clear that in order for the application of GST to gambling to be revenue neutral it was also necessary to ensure that the States and Territories did not receive GST revenue on any gambling which was currently exempt from state and territory taxes. Request 31 (subdivision 38FA which subsequently became section 38-270) and Request 67 (subsection 126-10(2A) which subsequently became subsection 126-10(3)) were added to the GST Bill in order to achieve that end - section 38-270 removes the amounts wagered in such gambling from 'total amounts wagered' by making the supply of a ticket etc GST-free (and therefore not a 'gambling supply') and subsection 126-10(3) excludes monetary prizes that relate to such gambling from 'total monetary prizes'.

As such, the object or purpose of subsection 126-10(3) was to ensure revenue neutrality in relation to the supplies specified in section 38-270 and not intended to provide a code as the types of monetary prizes which are to be disregarded when calculating 'total monetary prizes' for a tax period. Consequently we do not consider that because subsection 126-10(3) requires only monetary prizes that relate to supplies that are GST-free under section 38-270 to be disregarded, it should be construed as providing that monetary prizes that are GST-free under section 38-190 are not to be disregarded when working out 'total monetary prizes' for a tax period.

We acknowledge that, on our interpretation of paragraph 126-10(1)(a) (which is identical to the definition of 'total monetary prizes' in the GST Bill as introduced), it was arguably unnecessary to add subsection 126-10(3). This is because supplies that are GST-free under section 38-270 are GST-free and therefore cannot be 'gambling supplies' and any monetary prize that relates to those supplies would not relate to a 'gambling supply' and would not be included in paragraph 126-10(10(a).

In our view at the time section 38-270 and subsection 126-10(3) were inserted into the GST Bill the focus was on implementing a specific commitment to revenue neutrality and the draftsman probably failed to consider the issue of whether subsection 126-10(3) was strictly necessary in light of the 'total monetary prizes' definition. Consequently we do not accept the submission in the ruling request that as monetary prizes paid to non-residents are GST-free under section 38-190 of the GST Act, and not 38-270, these prizes are not to be disregarded from the calculation of 'total monetary prizes'.

Sterling Guardian Pty Ltd v FCT:

Stone J's decision in Sterling Guardian Pty Ltd v FCT 2005 ATC 4796 involved interpretation of section 75-5 of the GST Act which, like Division 126, taxes a GST registered supplier's margin on certain supplies (as opposed to the general scheme in the GST Act of imposing GST on taxable supplies made by the supplier and allowing the supplier to deduct from that GST input tax credits for GST which the supplier pays on business inputs). As Stone J considered whether the taxpayer's contended construction of section 75-5

…is consistent with the legislature's purpose in enacting the margin scheme and with the context of the section in the GST Act

and cited Chaudhri v FCT and Cooper Brookes (Wollongong) Pty Ltd, Stone J's decision provides some guidance as to how a court might approach the construction of paragraph 126-10(1)(a) contended for in the ruling request.

Sterling Guardian considered subsection 75-5(2) of the GST Act which provides:

75-5 Choosing to apply the margin scheme

(1) If you make a taxable supply of real property by:

(a) selling a freehold interest in land; or

(b) selling a stratum unit; or

(c) granting or selling a long-term lease;

you may choose to apply the margin scheme in working out the amount of GST on the supply.

(2) However, you cannot choose to apply the margin scheme if you acquired the freehold interest, stratum unit or long-term lease through a taxable supply on which the GST was worked out without applying the margin scheme.

The taxpayer bought the land for $4 million in March 2000, spent approximately $26.4 million on constructing residential units, claimed approximately $2.4 million input tax credits on construction costs, and between April and September 2002 sold the residential stratum units for a total of $32.7 million. The taxpayer submitted that the taxpayer was entitled to calculate its GST liability using the margin scheme. The taxpayer also submitted that, for the purpose of calculating the margin on each stratum unit sold, the taxpayer could include all of the construction costs incurred in bringing the stratum unit into existence. The taxpayer submitted that, for the purposes of subsection 75-5(2), the taxpayer did not acquire 'the…stratum unit' (i.e. the stratum unit which the taxpayer was selling) 'through a taxable supply on which the GST was worked out without applying the margin scheme' for two reasons (Paras 20 -21):

The applicant submits that the exclusion in section 75-5(2) does not apply because the stratum units were not acquired 'through a taxable supply'. In support of this proposition the applicant makes the following points. First, the only ``real property'' (as defined in the GST Act) that went into the creation of the stratum units was the Camperdown land, which was acquired before the commencement of the GST Act and therefore was not acquired pursuant to a taxable supply; the construction materials used were not real property and therefore it is irrelevant if they were acquired through taxable supplies. As Senior Counsel for the applicant submitted at the hearing of these applications, the property acquired through a taxable supply, namely the materials, was quite different from the property sold by the taxpayer under the taxable supply to which it sought to apply the margin scheme. Second, because the stratum units did not exist until they were created by registration of the Strata Plan, there was not the identity that s 75-5(2) requires between the interest acquired by the taxpayer and the interest supplied by it. According to the applicant's written submissions:

The sub-section only operates where the taxpayer acquired `the freehold interest, stratum unit or long-term lease' through a taxable supply. The word `the' indicates the need for a precise identity between the interest sold under the taxable supply and the interest acquired before the application of the margin scheme is precluded.

The applicant concedes that the construction materials that became fixtures by attachment to the land became real property but, presumably, only after acquisition and, in any event, on registration of the Strata Plan they became entirely different property.

Stone J referred (Para 22) to the submission underlined above based on a literal interpretation of subsection 75-5(2) as the 'identity submission' and stated (Para 33):

…it is necessary to consider whether the applicant's contended construction of s 75-5 is consistent with the legislature's purpose in enacting the margin scheme and with the context of the section in the GST Act. In considering context the observation of the Full Court in Chaudhri v FC of T 2001 ATC 4214 at 4216 is apposite:

... `context' has the wide meaning which extends to the legislative history, the Parliamentary intention and the mischief to which a particular provision has been directed as well as the narrower meaning which would dictate reading the words to be construed by reference to the immediately surrounding or otherwise related provisions.'

Earlier in her judgment Stone J set out the object and purpose of the margin scheme in the context of the GST Act and referred to the Explanatory Memorandum to the GST Bill (Paras 14 - 17):

14. The margin scheme must be understood in the broader context of the GST Act of which it is a part. The underlying policy of the legislation is explained in the Explanatory Memorandum (``EM'') to the Bill that, without relevant amendment, became the GST Act:

Broadly speaking, the GST is a tax on private consumption in Australia. The GST taxes the consumption of most goods, services and anything else in Australia, including things that are imported....

This is generally achieved by:

· imposing tax on supplies made by entities registered for GST; but

· allowing those entities to offset the GST they are liable to pay on supplies they make against input tax credits for the GST that was included in the price they paid for their business inputs.''

15. The offset of the GST an entity is liable to pay against input tax credits means that although suppliers are responsible for remitting the GST they do not bear its burden. The input tax credit reimburses the supplier for the GST paid on acquisition or importation and the GST remitted is included in the price of what they supply. Consumers, that is purchasers who make an acquisition for consideration other than in the course of a business where they are registered (or required to be registered) for GST purposes, do not get input tax credits so they bear the burden of the GST. The imposition of the GST at each step in the supply chain reflects its character of a value-added tax. The provision for reimbursement at each stage prior to acquisition by the consumer ensures that the ultimate consumer bears the tax, which amounts to 10% of the value-added price.

16. The margin scheme is designed to correct what would otherwise be an anomaly in the legislative scheme arising where GST is attracted on the supply of land but no input tax credit is available. This occurs, most usually, where the supplier acquired the land before the commencement of the GST or the vendor was not subject to GST, as for instance, where the vendor occupied the land as a residence. In this case the purchase of the Camperdown land was completed before the commencement of the GST (see [4] above) and, as no GST was included in the purchase price paid by the Trust, no input tax credit arose.

17. It is consistent with the purpose of the margin scheme that it is not available where the land was acquired pursuant to a supply that was taxable and thus gave rise to input tax credits unless that supply was also one to which the margin scheme applied; see s 75-20 set out at [ 12] above. Where the margin scheme is available it allows a taxpayer to pay tax on the ``value added'' by that taxpayer's business, that is on the sale price less the cost of the land sold. The EM gives the following explanation of the margin scheme:

6.98 The margin scheme applies to supplies of real property and premises that are held at 1 July 2000 and subsequent supplies of real property. Under the margin scheme, you calculate GST on the supply as 1/11 of your margin on the sale of real property and premises.

Subsection 75-10(1).

6.99 Generally, your margin is your tax inclusive sale price less your original purchase price. Subsection 75-10(2). However, if you held the real property and premises at 1 July 2000, your margin is the sale price less the value of the real property and premises at 1 July 2000 if:

· you are holding real property and premises when the GST commences (1 July 2000);

· you obtain a valuation of the real property and premises at 1 July 2000; and

· it is the first supply of the real property and premises.

Subsection 75-10(3)

6.100 This will ensure that GST is only payable on the value added after the commencement of the GST system....

6.101 If your original purchase price is less than your sale price, or if the value of the real property and premises held on 1 July 2000 has decreased, there is no GST payable because there is no positive margin - subsections 75-10(2) and (3).

6.102 You should not include the cost of any improvements made since 1 July 2000 to the real property and premises when calculating the original purchase price. You will have already received an input tax credit for GST paid on the improvements. If the value of the improvements was added to the original price or the value of the real property or premises at 1 July 2000, the amount of GST payable would be reduced by an amount equal to the input tax credit available on the improvements. In other words, you would receive a double benefit.

6.103 If you acquired real property that was purchased as a taxable supply on which GST was calculated on the full value of the supply, it cannot be resold under the margin scheme - subsection 75-5(2).

6.104 However, if you purchase real property GST-free you will be able to resell it under the margin scheme. If the real property you acquired GST-free was to be excluded from the margin scheme, the effect would be that tax would be payable on the value added to the land before 1 July 2000.

6.105 If you purchase real property and premises where GST on the supply to you was calculated on the margin, you cannot claim input tax credits on the supply - section 75-20.

Stone J then rejected the taxpayer's 'identity submission' (Paras 39 -40):

39. The explanation given in the EM and quoted at [17] makes it abundantly clear not only that GST is only payable on value added after the GST Act commenced on 1 July 2000 but also that the cost of improvements to the property made since that date could not be taken into account when calculating the original purchase price. The EM ignores the fact that improvements may not only have added to the value of the real property but become, in law, part of the real property. It is not the juridical nature of the improvements that is critical but the fact that they have been brought about pursuant to a taxable supply. The clear thrust of the GST Act, both in its wording and as explained in the EM, is that of a practical business tax imposed with respect to elements of commerce. As Senior Counsel for the respondent pointed out, although in economic terms the burden of the GST is borne by the ultimate consumer, in terms of 'imposition, collection and administration' it is a tax on business. It is for the taxpayer to prepare business activity statements and pay the appropriate GST and in this context abstract propositions about interests in land and the acquisition of a brand new set of rights arising from registration of a strata plan are irrelevant. As the examples set out in [31] show the applicant's submissions are not consistent with this purpose.

40. For these reasons I do not accept the applicant's identity submission. In my view, it therefore follows that unless the margin on which GST is payable is to be calculated without reference to the non-land costs the application of the margin scheme would be precluded by s. 75-5(2) of the GST Act.

Division 126 is another margin scheme which is designed to correct what would otherwise be an anomaly in the GST Act (i.e. if Division 126 did not exist a GST registered entity would pay GST on a taxable supply of either a ticket in a lottery or raffle or acceptance of a bet but would not be entitled to claim an input tax credit for monetary prizes paid out). The Executive Summary in the Explanatory Memorandum to the GST Bill states:

Gambling and lotteries:

GST applies to the operator's margin on these activities, not to the prizes paid out. That is, GST applies to the difference between total ticket sales or bets taken and the value of prizes or winnings paid out.

and Para 6.203 in the Explanatory Memorandum states:

…the GST on gambling is applied to the margin of the person providing the gambling opportunity (for example, the casino operator). Applying the margin to gambling activities achieves the same result as applying GST to individual wagers and allowing input tax credits in relation to prizes paid out.

We consider that a court which was considering the meaning of paragraph 126-10(1)(a) would adopt an approach similar to that taken by Stone J in Sterling Guardian Pty Ltd, i.e. reject an interpretation of paragraph 126-10(1)(a) based on the meaning of the opening words of that provision because such an interpretation would produce a result which, based on a wider context (including section 126-1 and the Explanatory Memorandum to the GST Bill) was not intended by the legislature. We note that Sterling Guardian was upheld on appeal in the Full Federal Court.

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