• The impact of this case on ATO policy is discussed in Decision Impact Statement: TT-Line Company Ltd v Commissioner of Taxation (Published 1 September 2011).

TT-LINE COMPANY PTY LTD v FC of T

Judges: Emmett J

Edmonds J
Perram J

Court:
Full Federal Court, Sydney

MEDIA NEUTRAL CITATION: [2009] FCAFC 178

Judgment date: 18 December 2009

---

Edmonds J

26. This is an appeal from a judge of this Court dismissing an application for declaratory relief that the appellant was not liable to pay Goods and Services Tax ( " GST " ) under A New Tax System (Goods and Services Tax) Act 1999 (Cth) ( " the GST Act " ) in respect of the payment by the Commonwealth of Australia to the appellant of a claim for reimbursement under the Bass Strait Passenger Vehicle Equalisation Scheme ( " the Scheme " ).

27. The issue before the primary judge and this Court on appeal is whether the appellant is liable to pay GST on transport services supplied by it by reference to:

• 1. The amount it actually receives from its fare-paying customers for those services; or
• 2. that amount together with the amount paid by the Commonwealth under the Scheme in respect of those services.

28. The outcome to that issue turns upon the answer to two questions:

• 3. Q1: Whether an amount received by the appellant from the Commonwealth by way of reimbursement under the Scheme in connection with the supply of transport services to a customer is consideration within the meaning of s 9-15(1) of the GST Act for the supply of those services; if, and only if, that question is answered in the affirmative -
• 4. Q2: Whether an amount received by the appellant from the Commonwealth by way of reimbursement under the Scheme is " a payment made by a government related entity to another government related entity … specifically covered by an appropriation under an Australian law " , so as not to be the provision of consideration by virtue of s 9-15(3)(c) of the GST Act.

29. The primary judge answered the first question in the affirmative and the second question in the negative, with the result that her Honour dismissed the application.

Factual context

30. The facts in respect of which the declaration claimed was sought are set out in the agreed statement of facts filed by the parties prior to the hearing before the primary judge. They are paraphrased in the reasons of the primary judge at [ 3 ] - [ 6 ] inclusive.

Background

31. The appellant is incorporated under the Corporations (Tasmania) Act 1990 (Tas) and is wholly owned by the State of Tasmania. It operates a passenger, vehicle and freight ferry service between Tasmania and the Australian mainland trading under the name " Spirit of Tasmania " .

The Scheme

32. The Commonwealth Government established the Scheme in September 1996. The Scheme is operated under Ministerial Directions approved by the then Minister for Transport and Regional Services dated 1 September 2002 ( " Ministerial Directions " ).

33. The stated aim of the Scheme in the Ministerial Directions is " to reduce the cost of seagoing travel for eligible passengers " (cl 2.1). An " eligible passenger " is defined in the Ministerial Directions to mean (relevantly) " a passenger accompanied by an eligible passenger vehicle on a Bass Strait Service being the driver of that passenger vehicle " (cl 1.1(m)). An " eligible passenger vehicle " is defined to mean (relevantly) " a passenger vehicle which accompanies an eligible passenger on a Bass Strait Service " (cl 1.1(o)). A " Bass Strait Service " is, in turn, defined to mean " a commercial shipping service engaged in the carriage of passengers and/or passenger vehicles on a Bass Strait crossing " (cl 1.1(d)).

34. The Ministerial Directions create two alternative mechanisms by which to achieve its stated aim, namely:

• (1) By provision of a rebate by the Commonwealth to the " Service Operator " for a reduction in the " eligible passenger ' s " vehicle fare at the time of the booking of the travel by him or her (cl 7, Ministerial Directions). A " Service Operator " is (relevantly) a person operating a " Bass Strait Service " (cl 1.1(aa)). The " Service Operator " makes a monthly claim for reimbursement to the Department of Transport and Regional Services ( " the Department " ); or
• (2) by a rebate direct to an " eligible passenger " where the " eligible passenger " has not received a reduction in his or her fare from the " Service Operator " upon application by the " eligible passenger " to the Department (cl 8, Ministerial Directions).

In practice, and relevantly for the present case, the Scheme operates by the Commonwealth reimbursing the appellant.

35. Funding for the Scheme is conferred by the Appropriation Act (No. 1) 2007 - 2008 (Cth) ( " the Appropriation Act " ), of which the Scheme is listed as an " Administered programme " of the Department in accordance with the Portfolio Budget Statements for 2007 - 2008.

Mr J Egan

36. The application before the primary judge adopted as a vehicle to resolve the broader issues identified above the transport services provided by the appellant to Mr J Egan of Hoppers Crossing, Victoria ( " Mr Egan " ) and a companion in May 2008, being transport from Melbourne to Devonport on 6 May 2008 for two adults and one motor car on board the " Spirit of Tasmania " and a return voyage on 17 May 2008 ( " Mr Egan ' s travel " ).

37. When making the booking, Mr Egan confirmed that he had read and accepted the Fee Conditions and the Terms and Conditions of carriage by checking the relevant box on the internet booking form. These conditions made no mention of the Scheme, however, the standard car fares page of the site stated that the listed prices included the deduction of the Scheme rebate of $ 168 each way for a standard car. A reservation confirmation sent on completion of the booking confirmed the details of the reservation and the total price of $ 574 (including GST).

38. On 27 May 2008, the appellant made a claim for reimbursement under the Scheme for the period 28 April 2008 to 25 May 2008 in the amount of $ 1,958,729. That amount included $ 336 in respect of Mr Egan ' s travel. On 4 June 2008, the appellant received from the Commonwealth payment of $ 1,958,729, which included $ 336 in respect of Mr Egan ' s travel.

Other factual matters

39. On the hearing of the appeal, the appellant drew the Court ' s attention to the following further matters:

• (1) Pursuant to ss 6 and 14 and Schedule 1 to the Appropriation Act, an amount of $ 846.5 million was appropriated to fund departmental and administered expenses of the Transport and Regional Services Portfolio. Of this $ 477.8 million was appropriated to administered expenses of the Department, including under ' Outcome 1 - Fostering an efficient sustainable competitive safe and secure transport system ' an amount of $ 264.7 million in administered expenses. The Portfolio Budget statements in respect of the Appropriation Act nominated under Outcome 1, in Output Group 1.4.1, Maritime and land transport including the Scheme.
• (2) The intended and principal recipient of payments under the scheme is the appellant, upon whose vessel the scheme was launched and by reference to whose charges the subsidy payments are calculated. Some 99.9 % of all payments made by the Commonwealth under cl 9 of the Ministerial Directions are made to the appellant.

Question 1 - whether reimbursement under the Scheme to the appellant is consideration for a supply by the appellant of transport services to an " eligible passenger "

The legislative scheme

40. Relevantly, the words of the statute provide:

" 9-15 Consideration

• (1) Consideration includes:
  • (a) any payment, or any act or forbearance, in connection with a supply of anything; and
  • (b) any payment, or any act or forbearance, in response to or for the inducement of a supply of anything.
• (2) It does not matter whether the payment, act or forbearance was voluntary, or whether it was by the * recipient of the supply. "

The primary judge

41. As indicated at [ 29 ] above, the primary judge answered this question in the affirmative. Her Honour ' s reasoning on this question is encapsulated in the following passage:

" [ 28 ] The supply in question is the supply by the applicant of travel services to the eligible passenger. The reimbursement of the deduction allowed to Mr Egan was payment made under the Scheme the express purpose of which was to reduce the cost of such travel services. It was clearly a payment ' in connection with ' the supply of the travel services to Mr Egan and might also be described as having been made ' in response to or for the inducement of ' the supply of travel services to Mr Egan. That being so, the fact the consideration for the supply of services to Mr Egan flowed in part from the third party (the Commonwealth) and that Mr Egan was never under any obligation to pay the full (unrebated) amount is not to the point. Similarly, I do not think it is necessary to resort, as the Commissioner did in submissions, to the concept of a practical business relationship between the reimbursement paid to the applicant and the travel services supplied to Mr Egan, although I accept that there was such a relationship. It is sufficient to note that the circumstances of the payment made in the context of the Scheme fall squarely within the words of the Statute. "

The Commissioner ' s submissions

42. The Commissioner submitted that her Honour ' s conclusion on this question was plainly correct. According to the Commissioner it was fortified, as her Honour noted at [ 33 ] of her reasons, by the fact that the appellant ' s right to retain any payment it received under the Scheme in relation to Mr Egan ' s travel was contingent upon its supply of those travel services to him. If it had failed to supply those services, the appellant was liable to repay any reimbursement it received in connection with them.

43. The Commissioner further observed by way of submission that the primary judge was satisfied that there was a " practical business relationship " between the reimbursement paid to the appellant under the Scheme and Mr Egan ' s travel although her Honour found it unnecessary to resort to that concept to reach her conclusion. The reference to " practical business relationship " is derived from the judgment of Kitto J in
Berry v Federal Commissioner of Taxation (1953) 89 CLR 653 . That case concerned s 84 (repealed) of the Income Tax Assessment Act 1936 (Cth) which included in a taxpayer ' s assessable income a " premium " which was defined as " any consideration in the nature of a premium, fine or foregift payable to any person for or in connection with the grant or assignment by him of a lease … " . Kitto J considered that the words " in connection with " in that provision were satisfied if there was a " substantial relation, in a practical business sense " between the payment on the one hand, and the grant or assignment of the lease, on the other hand (at 659).

The appellant ' s submissions

44. The appellant submitted that payments pursuant to an appropriation, that are not expressed to be in connection with any supply, cannot, by definition, be " consideration " because there is no nexus with any supply. This submission was further developed in the following way. While acknowledging that the payment would not be made if no supply of transport services occurred, the appellant submitted that the supply gives rise to no entitlement to receipt of the payment. According to the appellant, payments are made by the Commonwealth under a scheme which is designed to give effect to Government policy, as a subsidy and by way of gratuity, not as a matter of obligation.

45. The appellant made a parallel submission that the Commonwealth payment is made, not relevantly " in connection with " the supply of transportation services, but as a subsidy " in connection with " the Scheme. There was, according to the appellant, a novus actus interveniens , to use the words of Emmett J in
American Express International Inc v Commissioner of Taxation 2009 ATC ¶ 20-113 ; (2009) 73 ATR 173 at [ 57 ] , breaking the nexus required by s 9-15(1).

Analysis and Conclusion

46. In my view, there are difficulties in the way of the scope of the term " consideration " for which the appellant contends, namely, that it does not extend to payments where there is no enforceable entitlement to receive the payment ( [ 44 ] above) or by reason that there has been some intervening act which has broken the nexus between the payment and the supply ( [ 45 ] above).

47. As to the first, the fact that the appellant had no enforceable entitlement to receive any payment under the Scheme even if it provided transport services to Mr Egan is rendered irrelevant to the question of whether a payment is consideration for the purposes of the GST Act by the express words of section 9-15(2).

48. As to the second, there is no intervening act, as was found by Emmett J in American Express in the form of the non-compliance by the cardholder of his or her contractual obligations, which breaks the nexus between the payment and the supply.

49. In any event, as the primary judge concluded at [ 28 ] of her reasons, the payment might also be described as one made " in response to or for the inducement of the supply of travel service to Mr Egan " and thus falls within s 9-15(1)(b) of the GST Act. On the hearing of the appeal, the appellant did not put this conclusion in issue.

50. The payment by the Commonwealth to the appellant in respect of the appellant ' s supply of the transport services to Mr Egan needs to be understood for what it is: reimbursement of the rebate the appellant provided Mr Egan at the time he purchased his ticket. The consideration for the supply of the transport services to Mr Egan included not only what he paid, but the amount of the rebate he was granted by the appellant, which rebate was paid by the Commonwealth to the appellant by way of reimbursement.

51. So understood, I am of the view that, statutory exclusions aside, there is no error in the primary judge ' s conclusion that the Commonwealth ' s payment to the appellant in respect of the appellant ' s supply of the transport services to Mr Egan is part of the consideration for that supply.

Question 2: whether reimbursement under the scheme to the appellant is " a payment made by a government related entity to another government related entity … specifically covered by an appropriation under an Australian law ' " within the meaning of s 9-15(3)(c) of the GST Act

Legislative scheme

52. GST is imposed on a " taxable supply " by a registered taxpayer (the transport services supplied to Mr Egan was a taxable supply for GST purposes and the appellant is a registered taxpayer) by reference to the amount of the consideration for the supply. " Consideration " is defined in s 9-15(1) to mean, inter alia , a payment in connection with a supply, but subject to s 9-15(3)(c):

" 9-15(3) However:

• …
• (c) a payment made by a government related entity to another government related entity is not the provision of consideration if the payment is specifically covered by an appropriation under an Australian law.

53. There is no issue that the payment of a reimbursement under the Scheme to the appellant is " a payment by one government related entity " (namely, the Department) to another " government related entity " (namely, the appellant). What is in issue is whether the payment by the Department to the appellant of a reimbursement under the Scheme is a payment that is " specifically covered by an appropriation " .

The primary judge

54. The primary judge ' s reasoning is comprised in the following passages:

• " [ 16 ] It only remains to consider whether the payment of the rebate is ' specifically covered by an appropriation under an Australian law ' . The parties accept that the Scheme is funded under the [ Appropriation Act ] … The issue then is whether it is ' specifically ' covered by this appropriation. … Considering the context of ' specifically ' in s 9-15(3)(c) and the need for it to add something to the meaning of the requirement of the subsection, I am of the opinion that it means ' expressly ' or ' explicitly ' . The payment to the government related entity must be expressly or explicitly covered by the appropriation.
• …
• [ 23 ] While it may be that the Scheme is specifically covered by the Appropriation Act these references are not sufficient to establish that payments under the Scheme are specifically covered. Under the Scheme, payments may be made to any Service Operator which transports eligible passengers on the Bass Strait crossings or to the individual passengers. The Scheme operates generally, not specifically. It does not require that the recipient of the payments be a government related entity. I note, however, that the subsection, in referring to the payment that must be specifically covered, uses the definite article. It is the payment that is made to the government related entity that must be specifically covered. It is not sufficient for the payment to be consistent with a specified purpose. …
• [ 24 ] … It is clear from the words of subsection (c) that it is not sufficient for payment merely to be made by one government related entity to another. In order for such payment to be specifically covered by an appropriation it would, at the very least, be necessary for payments to be limited to government related entities. [ The ] fact that the Scheme allows for payment to a non-government related entity indicates that the appropriation is limited to a purpose not to a payee or class of payees. … "

The Commissioner ' s submissions

55. The Commissioner submitted that the primary judge was correct to conclude that s 9-15(3)(c) did not apply in this case. In the Commissioner ' s submission, s 9-15(3)(c) only applies where the purpose of the appropriation pursuant to which the payment is made is to appropriate money for payments specifically to government related entities. The circumstance that the recipient of the payment is a government related entity is not, on the Commissioner ' s argument, sufficient to attract the benefit of the provision if the appropriation, pursuant to which the payment is made, would permit payment to a non-government related entity albeit for the same purpose. See too the primary judge ' s reasons at [ 24 ] . It is common ground that the appropriation in the present case would permit payment to a non-government related entity for the purposes of the Scheme.

56. The Commissioner submitted that such a construction is consistent with the overall intention of the GST legislation in its application to government and that the primary judge recognised this at [ 34 ] of her reasons. According to the Commissioner, that intention was that the Commonwealth, State and local government and their instrumentalities should be subject to the GST Act in the same way as non-government organisations, but that appropriations for general government activities or for grants from one level of government to another should be exempt from GST. The Commissioner submitted that s 9-15(3)(c) gives effect to this intention by creating a limited exception to the general subjection of government to GST which applies in the case of payments appropriated for the specific purpose of being made to government related entities. For this, the Commissioner relied on para [ 17 ] of the Intergovernmental Agreement which appears as Schedule 2 to the A New Tax System (Commonwealth-State Financial Arrangements) Act 1999 (Cth) and the Explanatory Memorandum to the Bill which introduced s 9-15(3)(c) into the GST Act.

The appellant ' s submissions

57. The appellant submitted that the qualification supplied by the word " specifically " varies according to the context in which it is used. In the context of s 9-15(3)(c), and of the structure of the Appropriation Acts to which it refers, as elucidated in the judgments in
Combet v Commonwealth (2005) 224 CLR 494 , e.g. per Gleeson CJ at 525, the word " specifically " , according to the appellant, denotes a requirement that the appropriation covering the payments in issue be one which distinguishes and identifies the appropriation for that purpose in particular, rather than one where it is subsumed in the generality of an " outcome " . Thus a payment made to a government entity under authority of the appropriation for Output 1.1.2 - " Safety " would not be " specifically covered by an appropriation " , but the payment to the appellant under the appropriation under Output 1.4.1 to the Scheme, quantified at $ 32 million, is ' specifically covered by an appropriation ' .

58. In the context in which it appears - " the payment is specifically covered by an appropriation " - the appellant submitted that the requirement of specificity relates to the appropriation, not to the payment. The requirement is not that the specific payment be identified - either as to amount or as to recipient - by the appropriation, but that the appropriation be sufficiently specific to ' cover ' the payment claimed to attract GST as " consideration " . According to the appellant, the notion imported by " cover " is wider than that imported by " nominated in " or " specified in " . The narrower criterion preferred by the primary judge would more aptly have been met by words such as " specified in " or " specifically mentioned in " ; the construction adopted by her Honour leaves no room for or work to be done by the wider meaning of " covered " .

59. The appellant submitted that the essential error in the judgment below lies in an assumption made in [ 23 ] of the primary judge ' s reasons: that there is a requirement that the appropriation , rather than the payment taken outside the scope of the GST, be limited to a government related entity. To fall within para (c) a payment must (i) be made between government related entities, and (ii) be " specifically covered by an appropriation " . But the second criterion - " specifically covered by an appropriation " - does not, the appellant submitted, import any element of the first; it is a second and independent criterion for exclusion from the category of ' consideration ' . The use of the definite article does not import the first criterion into the second: rather, it serves to identify as the same the payment which must meet both criteria in the paragraph in order to be excluded. According to the appellant, nothing in the text or context of the paragraph supports the crucial step in the primary judge ' s reasoning, that for such payment to be specifically covered by an appropriation it would, at the very least, be necessary for payments to be limited to government related entities.

Analysis and conclusion

60. The essential issue raised by this question is whether the criterion of specificity of coverage in s 9-15(3)(c) necessitates reference in the appropriation to a nominated government related entity or, if not a nominated government related entity, a generic reference in the appropriation to such an entity, as the recipient of the payment, as the Commissioner contended or whether, as the appellant contended, it is sufficient that the recipient is a government related entity in fact and the specificity of coverage in the appropriation in respect of which the payment is made is not concerned with the identity of the payee but only whether the appropriation is quantified in amount and identified by reference to a particular purpose.

61. There is undoubted force in the submission of the appellant. A payment to an entity that is not a government related entity could never qualify for the exclusion, so what is the utility in requiring the specificity of coverage of the appropriation to nominate a government related entity in name or, generally by reference to the phrase? Why, in that circumstance, is the specificity of coverage requirement not satisfied by reference to quantification of the amount and identification of the particular purpose?

62. Not without some hesitation, I think the answer to this question lies in the policy underlying the application and scope of the GST, namely that, generally, it is to apply to government related entities, organisations and instrumentalities - Commonwealth, State and local - in the same way as it does to non-government entities and the like: see [ 56 ] above. So understood, there is created as between government related entities and non-government entities supplying the same services a " level playing field " . A payment, pursuant to an appropriation, for a supply of services which can, under the terms of the appropriation, be supplied by a government related entity or a non-government entity should be subject to the same tax treatment; in other words, as taxable supplies irrespective of the status of the supplier. On the other hand, the potentiality for discrimination between government related and non-government entities does not exist where, by the terms of the appropriation, the services can only be supplied by a government related entity. The exclusion created by s 9-15(3)(c) is only intended to operate in this limited class of case; it is not intended to extend to payments, pursuant to an appropriation, for a supply of services which can, under the terms of the appropriation, be supplied by a government related entity or a non-government related entity (even if the appropriation is otherwise specific as to amount and its particular purpose) because that would discriminate in favour of the government related entity contrary to the general policy underlying the application and scope of the GST Act.

63. So understood, it is not a giant leap to adopt a construction of s 9-15(3)(c) which confines it to payments pursuant to an appropriation the terms of which specify the government related entity by name or, generically, to those entities having that status. That is the minimum specificity of coverage that is required to be found in the terms of the appropriation for the exclusion to apply; whether it is sufficient, is something with which I need not be concerned because clearly, in the present case, the minimum specificity of coverage is not met.

64. The appeal must be dismissed. For the reasons referred to at [ 36 ] of the primary judge ' s reasons, there will be no order as to costs.