Edited version of your private ruling

Authorisation Number: 1012591057997

Ruling

Subject: Whether supply made pursuant to a Supply and Throughput Agreement is a composite supply that is GST-free pursuant to subsection 38-185(1) of the GST Act

Question

Is the supply made by A to B of a Product and of Logistics Services referred to in a Supply and Throughput Agreement (Agreement) a composite supply which is a supply of aircraft's stores for use or consumption on an aircraft on a flight that has a destination outside Australia, whether or not part of the flight has a destination outside Australia, within the meaning of item 5 in subsection 38-185(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes, the supply by A to B of the Product and the Logistics Services referred to in the Agreement is a composite supply which is a supply of aircraft's stores for use or consumption on an aircraft on a flight that has a destination outside Australia, whether or not part of the flight has a destination outside Australia, within the meaning of item 5 in subsection 38-185(1) of the GST Act.

Relevant facts and circumstances

The Applicant:

A operates in the Australian market, specialising in the supply of the Product.

Supply and Throughput Agreement:

A has entered into a Supply and Throughput Agreement (Agreement) with B.

A recital to the Agreement states that A has Product available, has secured storage and throughput rights at the X storage terminal, and wishes to utilise the Product and throughput rights to allow B to continue a program which involves supply of Product into the Y Pipeline for B's own use.

Another recital to the Agreement states that A is willing to commit to supply Product to B, to receive Product ex-vessel into tanks under A's control at the X terminal, to store the Product and to deliver the Product to B in the Y Pipeline on the terms set out in the Agreement.

The Agreement states that, subject to the provisions of the Agreement, A agrees to provide the Logistics Services in Schedule 1 and that B will pay the Logistics Charges specified in Schedule 1. Schedule 1 refers to a charge for basic storage rental and product handling, a fee for additional product handling for all volume greater than a stipulated amount per annum, an increase in storage rental to reflect any plant and equipment modifications, a fixed fee for storage losses, a proportion of the total monthly X Pipeline Access Charge, and a monthly charge for quality and inspection services.

The Agreement obliges A to ensure that Product is delivered into the Y Pipeline per a transfer plan notified to A.

Schedule 2 to the Agreement sets out the General Terms and Conditions of Annual Sale, including Product quantity (a minimum and maximum amount during each 12 month period) and quality; requiring delivery into the Y Pipeline with title to the Product passing from A to B as the Product passes the permanent flange connecting the X Pipeline extension to the Y Pipeline; requiring B to nominate a monthly volume on the 20th day of the month two months prior to the delivery month; and setting a price per metric tonne of Product. The Agreement states that delivery of Product to B shall be deemed to have been made and title to and the risk of loss shall pass from A to B as the Product passes the permanent flange connecting the X Pipeline to the Y Pipeline.

The Agreement states that the quality of the Product to be ordered and supplied shall be as specified in Schedule 2 and that A is responsible for all Product quality, quality control and operational issues prior to Delivery.

The Agreement states that B shall pay A the Logistics Charges and that B shall pay A the Product costs. Logistics Charges are payable to A on the 5^th day of each following month throughout the term of the Agreement and charges for Product are due five Business Days after completion of discharge into the Y Pipeline.

Order Form:

The ruling request stated that the Product will be consumed by B only on international flights out of Australia as 'aircraft's stores' within the meaning of item 5 in subsection 38-185(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) and that A has treated the supply of the Product to B as a GST-free supply on that basis. A advised that the Order Form issued to A by B pursuant to the Agreement states:

The nominated volume is for international use.

Submissions made in the ruling request:

The ruling request referred to Goods and Services Tax Ruling GSTR 2001/8 which states that an identification of the essential character of what is supplied may inform whether (and to what extent) a particular transaction falls within the terms of a particular statutory provision and that all the circumstances of a transaction must be considered in order to ascertain the transaction's essential character (Para 19A).

The ruling request then referred to AGR Joint Venture v FCT [2007] ATC 2692 where the AAT rejected the taxpayer's submission that the relevant transaction involved two separate supplies, i.e. the supply of precious metal (GST-free) and the supply of the service of fabricating the precious metal into coin blanks (taxable). The AAT stated that the essence of the transaction was the delivery of coin blanks (Para 39) and that the real purpose of the dealing was the supply of coin blanks Para 40). The ruling request also referred to Travelex Ltd v Commissioner of Taxation [2010] HCA 33 where a majority of the High Court focused on the 'purpose of the transaction' (Para 32). Reference was also made to FCT v Luxottica Retail Australia Pty Ltd 79 ATR 768 where the Full Federal Court stated that, whilst 'supply' was defined broadly, it nevertheless invites a commonsense, practical approach to characterisation (Para 15).

It was submitted that a recital to the Agreement indicates that a number of steps are carried out by A in order to supply the Product to B, but to divide these steps into three separate supplies (i.e. supply of the Product, supply of tankage services, supply of storage services) would be contrary to the principles established in AGR Joint Venture, Travelex, and Luxottica. Applying the 'essence of the transaction' test in AGR Joint Venture, it was submitted that the essence of the transaction between A and B is the supply of delivered Product because the Logistic Services are essentially steps carried out to effect the delivery of the Product rather than a series of independent steps. Applying the Travelex principle, it was submitted that the 'purpose of the transaction' is the delivery of Product to B. Referring to the commonsense, practical approach to characterisation in Luxottica, it was submitted that while the Product and the Logistic Services theoretically could be purchased separately, customers customarily purchase the Product where logistics and handling services are supplied only if the Product is purchased.

The ruling request then referred to the discussion of 'mixed supply' in GSTR 2001/8, i.e. a supply that has to be separated or unbundled as it contains separately identifiable taxable and non-taxable parts that need to be individually recognised, and to Food Supplier v Commissioner of Taxation [2007] AATA 1550 where it was held that a supply of GST-free food and promotional items was a mixed supply because the promotional items had intrinsic value and were not consumed with the food. It was submitted that the supply of the Product should not be treated as a mixed supply. Reference was made to paragraph 52 of GSTR 2001/8 (i.e. a supply has separately identifiable parts where the parts require individual recognition and retention as separate parts, due to their relative significance in the supply) and it was submitted that the ATO considers that the existence of a mixed supply depends upon the separately identifiable parts being 'relatively significant' to the supply. Applying the Food Supplier criteria, it was submitted that, although the value of the Logistics Services was significant per se, it was not significant relative to the value of the Product supplied, and that the Logistics Services are consumed or used along with the Product.

It was submitted that A makes a composite supply of delivered Product as defined in GSTR 2001/8, i.e. a supply that contains a dominant part and includes something that is integral, ancillary or incidental to that part and which is to be treated as a supply of a single thing and not apportioned. Reference was made to a statement in Customs and Excise Commissioners v British Telecommunications [1999] 3 All ER 961 and to Card Protection Plan v Commissioners of Customs and Excise [1999] STC 270 where the taxpayer submitted that the single fee paid for a credit card protection plan was consideration for a number of separate supplies, including the supply of insurance (which was exempt from VAT), but the Commissioners considered that there was a single supply of services. The European Court of Justice stated that a service must be regarded as ancillary to a principal service if it does not constitute for customers an end in itself but a means of better enjoying the principal service supplied.

The ruling request then referred to the tests set out in Goods and Services Tax Ruling GSTR 2001/8 which indicate that a part of a supply is integral, ancillary or incidental (Para 59):

You would reasonably conclude that it is a means of better enjoying the dominant thing supplied, rather than constituting for customers an aim in itself; or

It represents a marginal proportion of the total value of the package compared to the dominant part; or

It is necessary or contributes to the supply as a whole, but cannot be identified as the dominant part of the supply; or

It contributes to the proper performance of the contract to supply the dominant part.

and to Paras 60 and 61 of GSTR 2001/8:

As a means of minimising compliance costs, you may treat something (or things taken together) as being integral, ancillary or incidental if the consideration that would be apportioned to it (if it were part of a mixed supply) does not exceed the lesser of:

· $3.00; or

· 20% of the consideration of the total supply.

61. You may use this approach to treat a supply as a composite supply, although it might otherwise be considered as a mixed supply. However, if the consideration for a part exceeds the lesser of $3.00 or 20% of the consideration for the total supply, it does not necessarily mean that the part is not integral, ancillary or incidental.

Citing British Telecom, it was submitted that the fact that the Agreement provides separate charges for the supply of Product and the supply of Logistics Services does not prevent the latter supply being characterised as either integral, ancillary or incidental. It was submitted that, per the first factor in paragraph 59 of GSTR 2001/8, the Logistics Services are a better means of enjoying the Product rather than constituting an aim in themselves for B because the Logistics Services serve a number of purposes, i.e. enable the efficient flow of the Product from A to B, enable A to store and handle the Product properly and maintain quality and quantity. It was submitted that the Logistics Services are therefore supplied so that B can better enjoy the Product, that it would be unreasonable to conclude that the Logistics Services are an aim in themselves, that the only reason A and B entered into an agreement concerning Logistics Services is for B to obtain the Product in an efficient manner, and that from an aviation industry perspective the Logistics Services cannot be purchased separately and are only supplied with the purchase of Product.

In relation to the second factor in paragraph 59 of GSTR 2001/8 (i.e. whether the Logistics Services represent a marginal proportion of the total value of the package) it was submitted that, for the 2013 year the consideration for Logistics Services supplied by A to B was 3.16% of the consideration for Product supplied by A to B. In relation to the third factor in paragraph 59 of GSTR 2001/8 (i.e. whether the supply of the Logistics Services is necessary or contributes to the supply of Product but cannot be identified as the dominant part of the supply), it was submitted that without the Logistics Services the Product could not be delivered by A to B, that the Logistics Services are necessary to effect the supply of delivered Product, and that application of the first two factors in paragraph 59 of GSTR 2001/8 indicates that the Logistics Services are not the dominant part of the supply.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999, subsection 38-185(1)

Reasons for decision

Summary

We consider that the first two factors listed in paragraph 59 of Goods and Services Tax Ruling GSTR 2001/8 indicate that the supply of Logistics Services are ancillary or incidental to the dominant supply of Product. In addition the reasoning in Commissioners of Customs and Excise v British Telecommunications plc [1999] 3 All ER 961 supports the view that there is a single composite supply, a view which is also supported by Goods and Services Tax Determination GSTD 2002/3

Detailed reasoning

Essential character of what is supplied:

Goods and Services Tax Ruling GSTR 2001/8, which deals with mixed and composite supplies, states:

19A. An identification of the essential character of what is supplied may inform whether (and to which extent) a particular transaction falls within the terms of a specific statutory provision. You must consider all of the circumstances of the transaction to ascertain its essential character.

19B. Having regard to the essential character and with regard to the statutory provision in issue, you can then determine whether the transaction is a mixed supply because it has separately identifiable parts that the GST Act treats as taxable and non-taxable, or whether it is a composite supply because one part of the supply should be regarded as being the dominant part, with the other parts being integral, ancillary or incidental to that dominant part.

In the present case the statutory provision in issue is item 5 in the table in subsection 38-185(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), i.e. a supply of aircraft's stores for use, consumption or sale on an aircraft on a flight that has a destination outside Australia, whether or not part of the flight or voyage involves a journey between places in Australia. Section 195-1 of the GST Act states that 'aircraft's stores' has the meaning given by section 130C of the Customs Act 1901 (Cth) (i.e. stores for the use of the passengers or crew of an aircraft or for the service of an aircraft). Goods and Services Tax Ruling GSTR 2003/4 indicates that a supply of aircraft's stores is a supply of goods:

8. Section 38-185 covers the GST treatment of supplies of goods that are to be exported. The table in subsection 38-185(1) lists the supplies of goods that are GST-free.

9. Item 5 provides for GST-free supplies of stores or spare parts for use, sale or consumption on flights and voyages with a destination outside Australia.

…

11. Aircraft's stores means stores for the use of the passengers or crew of an aircraft, or for the service of an aircraft…

12. The term 'stores' includes all consumable goods such as food, water and beverages intended for consumption on board an aircraft or ship, and any goods taken on board to be sold, such as souvenirs, photographic film, confectionery and tobacco products. 'Stores' also includes consumables necessary for the operation and maintenance of an aircraft or ship, such as fuel and lubricants

It was submitted in the ruling request that, based on a recital to the Agreement, the essential character of what is supplied by A is delivered Product and that steps such as receiving the Product into tankage, storing it, redelivering it, and providing various logistics and handling services are essentially steps taken to effect the supply of delivered Product.

Paragraph 19A of GSTR 2001/8 requires consideration of all the circumstances of the transaction in order to determine its essential character. The operative provisions of the Agreement provide separately for A to supply the Logistic Services and to supply goods which are aircraft's stores, i.e. deliver Product into the Y Pipeline in accordance with any Order received from B, that the Logistic Services in Schedule 1 to the Agreement extend beyond storage and handling and include quality and quantity inspection, and that B is obliged to pay separately and on different dates for delivered Product and for Logistics Services. Consequently we do not agree with the submission that, based on the recital to the Agreement, the essential character of what is supplied is delivered Product.

Factors listed in paragraph 59 of Goods and Services Tax Ruling GSTR 2001/8:

Paragraph 19A was inserted into GSTR 2001/8 in May 2013 by Goods and Services Tax Ruling 2001/8A5 -Addendum to take account of the High Court decision in Commissioner of Taxation v. Qantas Airways Ltd [2012] HCA 41 (Qantas) which considered the GST treatment of fares received for flights booked but not undertaken by prospective passengers. Paragraph 6 of that Addendum also inserted paragraph 31B into GSTR 2001/8 which states:

While the decision of the High Court in Qantas does not disturb the approach to mixed and composite supplies established by prior court decisions, it illustrates that it is not necessary to always characterise a supply on the basis of the 'mixed' or 'composite' analysis. Rather, the mixed/composite analysis is only relevant where it is necessary to determine whether (and to what extent) the supply meets the description in a particular statutory provision that may be in issue. Even then, the High Court decision illustrates the importance of undertaking the mixed/composite analysis in a manner that is consistent with the object and purpose of the provision.

Given the ATO's view that Qantas does not disturb the approach to mixed and composite supplies established by prior court decisions, it is appropriate to consider the factors listed in paragraph 59 of Goods and Services Tax Ruling GSTR 2001/8 which may determine whether a part of a supply is integral, ancillary or incidental to the dominant part of the supply and which are based on the United Kingdom court decisions referred to in GSTR 2001/8.

The first two factors listed in paragraph 59 of GSTR 2001/8, i.e. a part may be integral, ancillary or incidental include where:

you would reasonably conclude that it is a means of better enjoying the dominant thing supplied, rather than constituting for customers an aim in itself; or

it represents a marginal proportion of the total value of the package compared to the dominant part;

were considered by the European Court of Justice in Customs & Excise Commissioners v Madgett [1988] STC 1189 (Madgett). In Madgett a hotel owner supplied a holiday package to customers which included transporting those customers to Devon from the north of England, half-board accommodation and a day excursion by coach. The hotel owner purchased the transport to the hotel and the day excursion from a bus operator. The Commissioners of Customs and Excise considered that the hotel owner was obliged to apply the Tour Operators' Margin Scheme pursuant to Article 26 of the Sixth Directive (which required the total consideration received by a 'tour operator' or 'travel agent' to be apportioned between services acquired from third parties and in-house services by reference to the actual cost of each) to calculate the VAT payable on the supply of the holiday package.

It was submitted on behalf of the hotel owner that the hotel owner was not a 'tour operator' or a 'travel agent' but a hotelier, that the hotel owner's activity differed from that of a tour operator or travel agent (which typically purchases accommodation and transport from numerous third parties) because the purchase of travel services from a third party (i.e. the bus operator) was merely ancillary to that hotelier activity, and that the hotel owner therefore was not obliged to apply Article 26.

The VAT Tribunal held that Article 26 did not apply to the hotel owner, the Customs and Excise Commissioners appealed to the High Court, and the High Court stayed the proceedings and referred to the European Court of Justice (ECJ) the question whether Article 26 applied to a hotel owner who supplied to customers at a single inclusive charge a week's stay at a hotel in the south of England, transport by coach from points in the north of England and a local sightseeing trip. The ECJ held that Article 26 did apply to the hotel owner, i.e. the supply of transport was not ancillary:

1. It must therefore be held that the scheme under Article 26 of the Sixth Directive applies to traders who organise travel or tour packages in their own name and entrust other taxable persons with the supply of the services generally associated with that kind of activity, even if they are not, formally speaking, travel agents or tour operators.

1. However, as the Advocate General notes in point 36 of his Opinion, traders such as hoteliers who provide services habitually associated with travel frequently make use of services bought in from third parties which take up a small proportion of the package price compared to the accommodation and are among the tasks traditionally entrusted to such traders. Those bought-in services do not therefore constitute for customers an aim in itself, but a means of better enjoying the principal service supplied by the trader.

1. In such circumstances the services bought in from third parties remain purely ancillary in relation to the in-house services, and the trader should not be taxed under Article 26 of the Sixth Directive.

2. Where, however, a hotelier habitually offers his customers, in addition to accommodation, services which go beyond the tasks traditionally entrusted to hoteliers, and which cannot be carried out without a substantial effect on the package price charged, such as travel to the hotel from distant pick-up points, such services are not to be equated with purely ancillary services.

3. In view of the foregoing, the answer to the questions referred by the High Court of Justice must be that Article 26 of the Sixth Directive applies to a hotelier who, in return for a package price, habitually offers his customers, in addition to accommodation, return transport between certain distant pick-up points and the hotel and a coach excursion during their stay, those transport services being bought in from third parties.

The first factor referred to in paragraph 59 of GSTR 2001/8, i.e.

you would reasonably conclude that it is a means of better enjoying the dominant thing supplied, rather than constituting for customers an aim in itself;

was also considered by the ECJ in Card Protection Plan Ltd v Customs & Excise Commissioners [1999] 2 AC 601, 627 (Paras 29 and 30):

…first, that it follows from article 2(1) of the Sixth directive that every supply of a service must normally be regarded as distinct and independent and, secondly, that a supply which comprises a single service from an economic point of view should not be artificially split, so as to distort the functioning of the VAT system, the essential features of the transaction must be ascertained in order to determine whether the taxable person is supplying the customer, being a typical consumer, with several distinct principal services or with a distinct single service.

There is a single supply in particular cases where one or more elements are to be regarded as constituting the principal services, whilst one or more elements are to be regarded, by contrast, as ancillary services which share the tax treatment of the principal service. A service must be regarded as ancillary to a principal service if it does not constitute for customers an aim in itself, but a better means of enjoying the principal service.

Applying the principles approved by the ECJ, it was held by the House of Lords in Card Protection Plan v Customs & Excise Commissioners [2001] UKHL 4 that the essential feature or principal purpose of the card protection plan was financial protection against loss, i.e. insurance cover against loss arising from misuse of credit cards (Para 25). Of the fifteen reasons for joining the card protection plan as set out in a key document, Slynn LJ held that seven provided for either insurance or 'assistance for persons who get into difficulties while travelling' as described in a First Council Directive on the coordination of laws relating to direct insurance, but that the other reasons (i.e. maintaining a computer record of all cards held by a cardholder, notifying all card issuers of any change in the cardholder's address, providing the cardholder with an annual printout of card details to check) did not provide for insurance (Para 23). Slynn LJ then stated (Para 28):

In so far as there are services which are not independently to be categorised as insurance they are in my view ancillary and in some cases minor features of the plan. They were, as Card Protection Plan contends, preconditions to the client making a claim for cash indemnity or assistance or a precondition of the furnishing of insurance cover. I doubt whether they can in any event be regarded as sufficiently coherent as to be treated as one separate supply but even if they can it is ancillary to the provision of insurance.

In ATS Pacific Pty Ltd v FCT [2013] ATC 20-383 (ATS), on the other hand, the Federal Court held that a service was not a better means of enjoying the principal service supplied. Bennett J held that, pursuant to certain Terms and Conditions, the taxpayer (ATS) supplied to a non-resident travel agent a contractual right or promise that 'Australian Providers' would provide 'Products' (e.g. a hotel room and a tour in Australia) to a non-resident tourist when that non-resident tourist arrived in Australia (Para 124) ATS was liable to pay the Australian Provider and the non-resident travel agent paid ATS a single figure which the Terms and Condition described as covering the cost of services and ATS' fee for arranging those services. Bennett J found that, to the extent that the promise supplied by ATS related to accommodation or goods it was not GST-free pursuant to section 38-190 of the GST Act (Paras 136 and 138) and to the extent that the promise related to services section 38-190(3) applied as those services were provided to the non-resident tourist (Para 139).

ATS submitted (in the alternative) that ATS made two supplies - the supply of the contractual right or promise and the supply of arranging services - and that a portion (referred to as the 'margin') of the single payment made to ATS by a non-resident travel agent was consideration for the supply of arranging services which was a GST-free supply (Paras 145 - 147). The ATO submitted that if there was a supply of arranging services, that supply was ancillary or incidental to the supply of the contractual right or promise (Para 148). Bennett J rejected the ATO's submission:

149. I reject the Commissioner's submissions as to the characterisation of the margin. The contract with the NR Travel Agents makes a distinction between the Products supplied and ATS' fee for arranging for that supply. As such, there were two separate supplies: the Products and the supply of ATS' arranging services. The consideration for the latter was the margin. That fee was not consideration for the supply of the Products. It is clear that ATS charged an independent percentage margin for arranging for the Products. If the Products were not supplied by the Australian Provider, ATS refunded the cost of the Products. It did not refund the margin.

150. The arranging service supplied by ATS was not merely ancillary or incidental to the supply of the Products. The NR Travel Agents contracted expressly with ATS on the basis that they were obtaining the arranging services supplied by ATS in addition to the Products supplied to their clients. The arranging service constituted an object for the NR Travel Agents and a service for its own sake. It does not contribute to the proper performance of the Products.

151. Here, the service of booking the Products with the Australian Providers was a service sought for its own sake, rather than as 'a means of better enjoying the principal service' (Customs and Excise Commissioners v Madgett & Anor (t/a Howden Court Hotel) [1998] BTC 5,441 at [24]).

In the present case it was submitted in relation to the first factor in paragraph 59 of GSTR 2001/8 that B acquires the Logistics Services solely as a better means of enjoying the Product rather than constituting an aim in themselves for B because the Logistics Services enable the efficient flow of the Product from A to B, the proper storage and handling of the Product, and maintenance of quality of the Product. In Madgett a distinction was made between tasks 'traditionally entrusted' to the supplier and services which 'go beyond tasks traditionally entrusted' to a supplier (Paras 24 and 26). In our view it would not be unusual for a supplier which has Product available, has secured storage and throughput rights, and has agreed to supply a considerable volume of Product to a customer to also supply services such as storage, handling, access to infrastructure and quantity and quality inspection services, i.e. such tasks would be 'traditionally entrusted' to such a supplier. In ATS the reason why arranging services were not treated as ancillary or incidental to the supply of the contractual right or promise was that the consideration for the arranging service (i.e. the margin) was not refunded even where the Products were not supplied. In the present case one charge for Logistic Services supplied by A under the Agreement appears to be fixed (i.e. the Basic Storage Rental Charge and Product Handling Charge) whereas the other charges appear to be calculated by and dependent upon the actual volume of Product delivered (i.e. the Additional Product Handling Fee (per litre through the tankage at the X terminal), storage losses (calculated by reference to throughput volume as measured by the Y meter) and B's proportion of the Y Pipeline Access Charge. However Schedule 1 to the Agreement suggests that the fixed monthly charge for Basic Storage Rental and Product Handling is premised on all of the Product stored by A at the X terminal being supplied to B. On that basis, the reasoning applied in ATS is distinguishable. We therefore consider that application of the first factor listed in paragraph 59 of GSTR 2001/8 suggests that the supply of the Logistics Services is ancillary or incidental to the dominant supply of the Product.

In relation to the second factor in paragraph 59 of GSTR 2001/8 (i.e. a part of a supply is ancillary or incidental where it represents a marginal proportion of the total value of the package) it was pointed out in the ruling request that fees for Logistics Services represent approximately 3% of total payments made by B during the relevant period. Adopting the language used in Madgett (Para 24) the fees for Logistics Services represent a 'small proportion of the package price' and support the view that the supply of Logistics Services are ancillary or incidental to the dominant supply of Product.

Commissioners of Customs and Excise v British Telecommunications plc

The ruling request referred to Commissioners of Customs and Excise v British Telecommunications plc [1999] 3 All ER 961 (British Telecom) as an example of where a transaction involving the supply and delivery of a product pursuant to a single contract which provided a separate consideration for the delivery involved a single composite supply.

In British Telecom it was held by the House of Lords that the supply of transport and delivery of vehicles to British Telecommunications plc (BT) was incidental and ancillary to the supply of the vehicles to BT. BT entered into six contracts with the manufacturers of vehicles for those manufacturers to supply vehicles to BT. All of the contracts permitted BT to order vehicles and obliged the manufacturer to deliver the ordered vehicles to BT. In four of the contracts delivery and other charges were separately stated. Two contracts did not specify a separate delivery charge but invoices issued by the manufacturer included a separate delivery charge. In practice the vehicles were delivered by transport companies engaged by the manufacturer either to BT's premises or another place specified by BT and no intermediate vehicle wholesaler or dealer was involved.

If there was a separate supply of the vehicle and of transport and delivery BT was entitled to claim an input tax credit for the VAT paid on the second supply. If there was a single supply of a delivered car, BT could not claim an input tax credit because article 7 of VAT (Input Tax) Order 1992 SI1992/3222 (Order) stated that VAT 'charged on…the supply to a taxable person…of a motor' car shall be excluded from any input tax credit.

The VAT Tribunal ((1996) VAT Decision 14072) accepted BT's submission that there were two supplies on the grounds that there was a separate charge for delivery even where the relevant contract did not provide for such a separate charge and that delivery was a physically and economically distinct supply which was, as a matter of convenience, supplied by the manufacturer but could be provided by BT. Consequently the Order did not apply to the supply of transport and delivery services and BT could claim an input tax credit for the VAT charged on transport and delivery. The Supreme Court allowed the Commissioners' appeal on different grounds (British Telecommunications plc v Customs and Excise Commissioners [1997] STC 475), but BT successfully appealed to the Court of Appeal (British Telecommunications plc v Customs and Excise Commissioners [1998] STC 544).

In the House of Lords Slynn LJ noted that in Card Protection Plan v Commissioners of Customs and Excise 1999 the European Court of Justice did not refer to the 'physically and economically dissociable' test and stated that where the transaction in question comprises a bundle of features and acts regard must first be had to all the circumstances in which the transaction occurs (Para 28), and that in Madgett the European Court of Justice held that services were ancillary, and stated (p. 968):

The question is thus in my opinion whether the delivery is ancillary or incidental to the supply of the car or is it a distinct supply.

Slynn LJ stated that the fact that separate charges are identified in a contract or on an invoice does not, on consideration of all the circumstances, prevent the various supplies from constituting one composite transaction or prevent one supply from being ancillary to another dominant supply (p. 968). Slynn LJ noted that under two of the relevant contracts risk passed on delivery of a vehicle and property passed when full payment was made. Under the third contract risk passed on delivery and property probably also passed on delivery. On that basis Slynn LJ considered that, as a matter of commercial reality, there was one contract for a delivered car (p. 969):

…it is artificial to split the various parts of the transaction into different supplies for VAT purposes. What BT wanted was a delivered car; the delivery was incidental or ancillary to the supply of the car and it was only on or after delivery that property in the car passed. The fact that delivery could have been arranged differently under a separate contract between BT and the transporter or by BT collecting the car itself does not mean that when there is a contract for a delivered car the two supplies must be kept separate. Of course BT had the option to make other arrangements as is argued but the fact is that BT did it this way as part of one contract and in my view as part of one supply. The fact that individuals buying a car or small companies buying a few cars cannot have the same arrangement which BT has and may have to buy from a dealer does not make the arrangement with BT so different that the supply must, like the provision of long distance pick up in Customs and Excise Commissioners v Madgett and Baldwin, be regarded as not ancillary but a distinct supply.

One result of this approach is that BT is in the same position in regard to VAT as companies buying a small number of cars from a dealer. They could not recover the input tax because of the provisions of the 1992 order. If BT's argument is right BT would have a considerable tax advantage over such other traders. That discrimination of this kind would be avoided may not be a reason for arriving at the conclusion which I have reached but the fact that such a result is not discriminatory may be some indication that it is right.

Hope LJ stated (p. 971):

In the present case the essential feature which can be seen in each of the sample transactions is the purchase by BT from the manufacturer of a delivered motor car. Property and risk were to remain with the manufacturer until the point of delivery. BT could have gone to the factory to take delivery of the motor car, but it was more convenient to get the manufacturer to deliver the car to BT. This seems to me to be a good example of the kind of case, in the context of a transaction which involves the supply of both goods and services, which the Court of Justice had in mind when it referred in Card Protection Plan Ltd v Customs and Excise Commissioners to a service which did not constitute for customers 'an aim in itself, but a means of better enjoying the principal service supplied'.

In this case, because of the volume of their purchasing power, BT were able to deal directly with the manufacturer instead of, as others do, who buy cars for their businesses, purchasing their cars through dealers in motor cars. The sole purpose of obtaining and paying for the transport and delivery services was to enable BT to complete the purchase transaction by taking physical delivery of the cars at a place of their own choosing which was more convenient for them than the factory. The commercial reality was that they were, by this means, obtaining the equivalent of what they would have got had they purchased the cars from an authorised dealer who had obtained the cars from the manufacturer and made them available for sale on its premises. The dealer would have recovered from them the cost of transporting the and delivering the cars to its premises from the factory, together with the price paid to the manufacturer, all as part of the cost of the supply of the motor cars to the customer. In that case there would plainly have been only one transaction, not two. The substance and reality of the matter is that that also is true of the transactions which were entered into between BT and the manufacturers.

In the present case the Agreement states that title to and risk of loss passes from A to B as the Product passes the permanent flange connecting the X Pipeline to the Y Pipeline. The Agreement obliges A to deliver Product 'into the Y Pipeline' and by that time the Product will have been inspected for quality (as Schedule 2 provides for inspection prior to discharge from vessel) and quantity will have been determined (as Schedule 2 also provides for invoices to be raised using the meter on ingress to the Y Pipeline). Adopting Slynn LJ's reasoning in British Telecom, this suggests that the supplies made by A pursuant to the Agreement should not be treated as separate supplies of Product and Logistics Services because what B wants pursuant to the Agreement is delivered Product which satisfies the quantity and quality requirements set out in the Agreement. We therefore consider that British Telecom supports the view that the supply of Logistics Services is ancillary or incidental to the dominant supply of Product.

Goods and Services Tax Determination GSTD 2002/3:

Goods and Services Tax Determination GSTR 2002/3 deals with whether delivery services associated with the supply of goods involves two separate supplies, a mixed supply, or a composite supply.

GSTD 2002/3 first discusses a mixed supply of goods and delivery services. The ATO considers that delivery is a separate identifiable part of a mixed supply where delivery is significant and could realistically be made as a separate supply (Para 2). A delivery service is significant where it is an aim in itself, i.e. under the relevant contract the recipient has a genuine choice as to whether the supplier delivers the goods. Such a genuine choice is indicated where the recipient is not obliged to use the supplier's delivery service and the supplier provides reasonable access, at no extra charge, to recipients who chooses to make their own arrangements to collect the goods. The ATO accepts that a delivery service may form part of a mixed supply even where the supplier does not charge separately for delivery (Para 2) and that importers and wholesalers may supply goods 'ex store', i.e. supply goods from their premises and offer delivery as an additional service (Para 3).

GSTD 2002/3 then discusses 'supplies of delivered goods' i.e. where the supplier supplies goods and the delivery of those goods by the supplier is ancillary or incidental to the supply of the goods so that there is a composite supply. GSTD 2002/3 states (Para 4):

In these cases, you contract to supply delivered goods only, and not a delivery service in addition to the goods. The delivery is necessary for your customer to enjoy the goods. It is not an end in itself, but merely contributes to the proper performance of the contract to supply the goods. That is, to fulfil the contract for the supply of the goods, the supplier has to deliver them and remains responsible for them until they are delivered. Identifying a separate charge for delivery does not, by itself, mean that the delivery is a significant part of the supply.

GSTD 2002/3 accepts that some manufacturers, importers and wholesalers make an integrated supply of delivered goods that includes the selection, packing and delivery of the customer's order. These aspects of the supply are not optional. While convenient for the recipient, the selection, packing and delivery are not considered to be of such significance that they are separately identifiable parts of the supply and are instead integral, ancillary or incidental to the composite supply of delivered goods (Para 5).

Although GSTD 2002/3 was not referred to in the ruling request, we consider that in the present case A has agreed to supply delivered Product, not Product and delivery services. In order to fulfil the obligation to supply the Product to Qantas A is obliged by the Agreement to deliver the Product into the Y Pipeline, before or by which time A will have supplied most of the Logistics Services required pursuant to the Agreement.