ATS' characterisation of the supply
99 ATS submits that the following principles are applicable to the identification of the relevant "supply":
As discussed above (at [71]), the starting point in applying the relevant provisions of the GST Act should be the position of the taxpayer and the nature of the enterprise that it conducts (Department of Transport at [40] per Kenny and Dodds-Streeton JJ).
The Court should first look at the contract to identify the relevant supply.
There can be no difference between a contractual analysis and a characterisation of a supply when the supply is entirely contractual. In this proceeding, there is no factual basis for characterisation of the supply other than the contract. The Court cannot identify the supply as having a characteristic other than one which is determined by looking at whether or not the promise exists in the contract.
The only way to characterise the "substance, purpose and commercial reality" of the transactions is to examine the promises contained in the contracts made.
Although in Travelex Ltd v Federal Commissioner of Taxation (2010) 241 CLR 510 at 524 Heydon J spoke of the 'pith and substance of the transaction', there is nothing in that decision that suggests that a transaction can be given a legal characterisation which does not otherwise exist.
100 ATS summarises the service that it provided as follows:
ATS set out and maintained on its website a comprehensive list of Australian Providers and the services they offered that ATS believed would be attractive to its NR Travel Agent clients.
ATS nominated the rates it charged should bookings be made. Specifically, its terms provided that 'Rates include the cost of services and our fee for arranging those services on your behalf'. The fee charged by ATS was calculated to cover its costs in contracting with the nominated Australian Provider and to provide it with what it considered to be an acceptable margin for making that arrangement.
ATS invited NR Travel Agents to make offers for it to book specified services for the specified rates through its website.
Upon receiving an enquiry, ATS sought confirmation of availability (where necessary) from the Australian Provider, totalled the prices and put together a quote for the NR Travel Agents' clients' consideration.
After confirmation of all details from the NR Travel Agents, ATS accepted the NR Travel Agents clients' offers. ATS charged the NR Travel Agents the sum of the individual rates for each of the Products that it undertook to book.
ATS supplied its services to its NR Travel Agent clients immediately, by making the requested bookings with the respective Australian Providers. It liaised with the NR Tourists to ensure that all details were provided as required by the Australian Providers.
ATS was paid its fees prior to the provision of any Products, unless credit terms were agreed. Where an Australian Provider required the payment of a deposit from ATS, ATS would seek its deposit from the NR Travel Agent.
Once ATS had received confirmation that the Australian Provider had provided the Products to the NR Tourists, ATS paid the Australian Provider. ATS contends that this was the service that the Australian Providers provided to ATS.
101 Diagrammatically, ATS set out the arrangements as follows:
102 ATS contends that the nature of its enterprise was not to supply the Products, nor to ensure that the NR Tourist clients of NR Travel Agents were provided with the Products. Rather, ATS contends, the nature of its enterprise was to check availability and price, and then book the requested Products with Australian Providers.
103 ATS submits that the proper analysis of its enterprise and the relevant supply is as follows:
ATS allowed the NR Travel Agents to put together their own tour package as they saw fit from the Tourplan website.
ATS supplied booking/arranging services to its NR Travel Agent clients for the fee charged. That supply was taxable unless GST-free under s 38-190 of the GST Act.
The NR Travel Agents then asked ATS to make the necessary bookings. That is, ATS' NR Travel Agent clients acquired booking/arranging services from ATS.
Neither the NR Travel Agents nor the NR Tourists were in substance interested in ATS. They were interested in the Australian Providers set out on ATS' website.
ATS was not itself equipped to provide the Products, nor did it have any rights to supervise the provision of the Products by the Australian Providers. Moreover, ATS had no discretion and thus no ability to reduce its risk by selecting its own Providers.
ATS says that it was engaged to book the Products, not to provide them and that it did not charge its clients for what was, in effect, an additional performance guarantee. Further, ATS contends, the promise to ensure performance would be an additional supply without consideration by the Australian Providers. Rather, it points out, the Terms and Conditions stated that the 'rates include the cost of services and our fee for arranging those services on your behalf'. This, ATS says, identifies the service provided and merely recites the fact that the cost was included. The invoices drew a similar distinction. ATS says that the recitation of the cost was a convenient and essential bookkeeping record.
The NR Travel Agents' object was to have the Australian Providers that they, rather than ATS, selected, booked by ATS. ATS provided a convenient service to facilitate this object, just as the NR Travel Agents might have provided a similar service in their own countries.
The NR Travel Agent clients made separate supplies to the NR Tourists in accordance with their specific packages of Products put together by the NR Travel Agents with the assistance of ATS' booking/arranging services.
Those NR Travel Agent clients were not required to be registered for GST (following amendments to the GST Act, referred to by Stone J in Saga Full Court at [7]).
The Australian Providers made two separate supplies:
(i) The supply of services (for example, a balloon ride or a hire car) to the NR Tourist for no consideration and for which no tax invoice was given; and
(ii) The supply of services to ATS, being the service of the providing (or promising to provide) services to the NR Tourist, for consideration and for which a tax invoice was given to ATS as the recipient of the supply.
The bulk of ATS' fee was to be passed on to the Australian Providers, leaving it a margin hardly commensurate with the additional risks that such a promise would involve.
104 While the contractual terms are an important part of the characterisation of supply under the GST Act, regard must also be had to the substance, purpose and commercial reality of the transactions, including such aspects of the transactions that are necessary to understand them, as to which the contract is silent. Both parties refer to Saga First Instance and Saga Full Court. Saga, a travel agent in the United Kingdom, contracted with an Australian enterprise AOT Group Pty Ltd (AOT). AOT entered into agreements with Australian providers for the provision of accommodation to Saga's clients. AOT was invoiced by the Australian providers and paid for the accommodation. Justice Conti found that under the contracts Saga agreed to provide accommodation in nominated hotels on nominated dates. Referencing UK authority, his Honour stated (at [113]) that 'a distinction may have to be drawn between the supply of a product or service for instance by a sub-contractor, and the arrangement of the supply of that product or service by the principal, albeit per medium of a third party or parties'. Justice Conti held that 'what falls ultimately to be appraised… [is] a distinct statutory notion of supply', which must be determined in a substantive sense. His Honour commented further that the notion of supply in a statutory GST context 'is conceptually broad, looking at what is to be ultimately supplied to a person exercising the role or function of a consumer of the subject matter of the supply'. His Honour concluded that what was supplied was 'a holiday, an essential part of which included the supply of a right of occupation exercisable over hotel rooms allocated to those same customers during the course of the tour': Saga First Instance at [113]. The Commissioner draws an analogy between the position of AOT and that of ATS and contends that Conti J's reasoning applies to the supply by ATS to the NR Travel Agents.
105 On appeal, Stone J (with whom Gyles and Young JJ agreed) observed (at [29]) that the Court adopts a purposive approach to the interpretation of the GST Act, rejecting strict grammatical analyses in favour of a consideration not only of the syntax but also of the policy and the surrounding legislative context of the relevant provision, and stated that GST is appropriately described as a "practical business tax", as liability to pay the tax arises at various stages of the supply chain. However that does not mean, her Honour said (at [30]), that there is some special canon of construction that should be applied when interpreting the GST Act.
106 Both parties rely upon Stone J's reasoning in Saga Full Court. Her Honour said (at [34]):
The contract between Saga and a tourist was one whereby Saga promised to provide the tourist with certain accommodation. Had the tourist not been supplied with the promised accommodation Saga would have been in breach of this contract. This is true irrespective of the fact that Saga was not in a position to provide the accommodation itself and was relying on its arrangements with AOT to enable it to fulfil its contractual obligations to the tourists. It is also irrelevant to this analysis that the accommodation had not been appropriated to the contract (even by AOT) at the time the contract was made and that, had Saga breached the contract, specific performance would not have been an available remedy. The question remains, was there a supply of real property under the contract?
107 In answering this question, her Honour held that there had been a supply of real property (as defined in the GST Act) which was relevantly connected with Australia because the right to the property, the subject of that right, was situated in Australia. Justice Stone said (at [38]) that the contract between Saga and the tourist could accurately be described as including 'a contractual right exercisable … in relation to land' and that the promise of accommodation in the named hotels gave the tourists a right exercisable 'in relation to land'. Her Honour said that it was not necessary that Saga itself had rights in relation to the relevant land and that the contractually binding promise was sufficient. Her Honour concluded that to the extent that the provision of the actual accommodation by the relevant hotel was a supply by the hotel, it was not a taxable supply because it was made without consideration.
108 Justice Young, who delivered additional reasons, said (at [65]) that the contractual obligation that Saga assumed in making a contractual promise to its tour customers for valuable consideration was that it would provide hotel accommodation in Australia as an integral part of a package tour. His Honour stated that the corresponding contractual right that Saga conferred on its customers fell squarely within s 9-10(2)(d) and (g) as a 'supply' for the purposes of the GST Act. Further, the customer's contractual right fell within paragraph (c) of the definition of "real property" in s 195-1. His Honour also emphasised the broad and flexible language of the GST Act which, together with the nature, policy and surrounding legislative context, indicate that the Court should construe the GST Act in a practical and commonsense way. This does not, his Honour said, conflict with the proposition that the nature of the supply by Saga needed to be 'carefully characterised in order to determine whether it was connected with Australia within the meaning' of the GST Act. This in turn necessitated a careful examination of the contract between Saga and its customers and between Saga and AOT.
109 The present case is also analogous, ATS contends, with the facts in Department of Transport, concerning the operation of the Multi Purpose Taxi Program (MPTP), which provided a 50% subsidy in respect of the metered cab fare for disabled passengers. Participation in the MPTP was a condition attached to the grant of a taxi licence, and taxi-cab operators were obliged to provide transport to MPTP Members in consideration for the 50% fare subsidy paid by the Department of Transport (DOT). The majority of the Full Court found that there were two supplies, being the supply of transport to the MPTP Member and the supply to the DOT of the transport to the MPTP Member. ATS says that it is notable that the Full Court did not find that the taxi-cab operator provided transport to the DOT but that the operator instead provided DOT with the service of transporting the MPTP Member. ATS contends that, similarly, when ATS booked an Australian Provider, ATS did not itself supply those Products to the NR Travel Agent but supplied the service of booking.
110 There are a number of difficulties with ATS' characterisation.
111 ATS says that it was the NR Travel Agents who promised the NR Tourists that the Products would be provided. However, the NR Travel Agents had no contractual or other rights as against the Australian Providers. Such rights were held by ATS, which gave the instructions and made the payments to those Providers. The same logic as set out by Stone J (Saga Full Court at [34]) applies to a promise by ATS to the NR Travel Agent concerning the provision of accommodation to the NR Tourist. By analogy, the NR Travel Agent can promise the NR Tourist that he or she will be provided with accommodation, even if the NR Travel Agent could not itself provide that accommodation.
112 ATS says that it provided its booking/arranging service to the NR Travel Agent immediately after receiving notification from the NR Travel Agent regarding what Products were desired. It says further that its service was to book the specified Product with the Australian Provider for provision to the NR Tourist and that it was 'promised by the Australian Provider' that the Product would be provided to the NR Tourist as specified. ATS was paid by the NR Travel Agent once it had made the specified bookings. However, it only paid the Australian Provider once the Products were provided to the NR Tourist. ATS submits that this involved the Australian Provider fulfilling its promise to ATS and thereby providing its Product to ATS. This characterisation does not, in my view, address the reality of the situation whereby, so far as the Australian Provider was concerned, the Products were provided on ATS' instruction, for the person nominated by ATS and, upon delivery of the Product and notification of that fact to ATS, ATS paid for the Product. All the Australian Providers' dealings were with ATS. While, as ATS emphasises, the Tourplan contract does not provide expressly that ATS would itself provide the Products, or would ensure that they were provided by the Australian Providers, the fact is that the only party able to ensure that provision was ATS.
113 ATS points out that the margin that it charged over the cost of the services was not commensurate with the risk to which it would be exposed if it provided or ensured the supply of the Products. However, it provided no evidence as to the commercial viability (or lack thereof) of a system where ATS only charged a margin on the cost of the Products but was liable for the provision of the booked Products, or as to such matters as frequency of default, or the relationship between ATS and the Australian Providers.
114 Furthermore, although ATS argues that it would be commercially vulnerable if held to have promised to supply the Products, under its characterisation of supply the NR Travel Agent would have received nothing more than an arranging service, which would leave that party in a highly vulnerable commercial position. If there were any failure of consideration or a mistake in the provision of the service, the NR Travel Agent would have no right of action against ATS because ATS had done everything that it was obliged to do under the terms of the contract. The NR Tourist would have a right of action against the NR Travel Agent, which would then have no recourse to ATS if ATS had properly completed the booking. ATS points out that it played no part in the choice of Products, as that was in the hands of the NR Tourist and the NR Travel Agent. ATS also contends that it had no control over the Products which were listed by the Australian Providers, and 'was not equipped to ensure that the Products would be provided at all, or to a particular quality… [and that it has] no discretion… [and] no ability to reduce its risk by selecting its own Providers'. However, this would mean that the NR Travel Agent assumed the risk if there was a default by the Australian Provider, with no recourse other than for a refund by ATS for the cost of the Products not supplied at all, or for a refund of ATS' margin if ATS had failed to arrange for the Products to be made available to the NR Tourist. If there was a complete or partial default by the Australian Provider and the NR Tourist sued the NR Travel Agent, that travel agent would have no recourse against ATS and ATS would be entitled to keep its "booking" fee, the margin. As discussed further below at [116], ATS says that, in such circumstances, the cost component would be zero, as it did not pay for Products until they were supplied, so that component would be refunded. However, neither the Tourplan contract nor the ATS website make specific provision for such refund so, in ATS' case, it is necessary to go beyond the express terms of the contract. Further, the contract's express terms do not extend to situations where there was partial or inadequate supply.
115 As the Commissioner submits, if ATS' characterisation of the transaction were correct, ATS was entitled to retain the margin and cost of the Product in the event that the Australian Provider defaulted. On ATS' construction, neither the NR Tourist nor the NR Travel Agent could recover from ATS. ATS says that the unusual circumstance of a windfall advantage to it where it was paid for Products which were not supplied or inadequately supplied is not sufficient to expose it to the responsibility for default. It is, ATS says, neither reasonable nor necessary for business efficacy and it is not obvious that ATS would be liable in damages for Products arranged for and not provided. ATS says that if the Products were not provided at all, the cost component would be refunded. This also served to minimise risk to ATS.
116 ATS says that in the event of a non-supply of services by the Australian Provider, ATS would be obliged to refund the cost component to the NR Travel Agent, as the "cost" component actually incurred would be nil. ATS would either not have paid the Australian Provider, or would recover from the Australian Provider. ATS draws an analogy with Roxborough v Rothmans (2001) 208 CLR 516 which, while distinguishable on the facts, considered a tax component, calculated by reference to the value of tobacco which had been supplied. Chief Justice Gleeson, with whom Gaudron and Hayne JJ agreed, said (at [17]):
… there are cases, of which the present is an example, where it is possible, both to identify that part of the final agreed sum which is attributable to a cost component, and to conclude that an alteration in circumstances, perhaps involving a failure to incur an expense, has resulted in a failure of a severable part of the consideration. Here, the buyers, the retailers, were required to bear, as a component of the total cost to them of the tobacco products, a part of the licence fees which the seller, the wholesaler, was expected to incur at a future time, and which was referrable to the products being sold. It was in the common interests of the parties that the fees, when so incurred, would be paid to the revenue authorities by the seller, and it was the common intention of the parties (and the revenue authorities) that the cost of the goods would include the fees. In the events that happened, the anticipated licence fees were not incurred by the seller. The state of affairs, which was within the contemplation of the parties as the basis of their dealings, concerning tax liability, altered. And it did so in circumstances which permitted, and required, severance of part of the total amount paid for the goods.
That is, Roxborough suggests that the cost component and the charge for ATS' booking services were severable.
117 However, ATS acknowledges that, under its construction of the contract, it would not be liable for a partial failure of performance by the Australian Providers - that is to say, a situation where the Product supplied to the NR Tourist was of a lower standard or content than the one booked. It was entitled to retain the cost and the margin in the event of default by the Australian Provider. If the "cost" component changed, for example if the hotel provided a cheaper room at a cheaper cost, ATS would have to refund the difference but if a hotel were not provided to the promised standard but the "cost" component remained the same, ATS would not have to compensate the NR Travel Agent or NR Tourist. ATS says that it is not the case that it had somehow promised that the NR Tourist would actually get the room that had been booked and that it had not promised that it would ensure that the Australian Provider provided the correct Product. ATS says that all that it had promised to do was to book or reserve the Product and, provided that no mistake was made in that booking, ATS had performed its function.
118 On neither the construction contended for by ATS nor the construction contended for by the Commissioner would the NR Tourist have contractual rights against the Australian Provider in this situation, although the NR Tourist would have had an action against the NR Travel Agent. A question that arises in the consideration of the nature of the supply by ATS is the consequence of a failure on the part of the Australian Provider to provide the Products, in whole or in part. If the NR Travel Agent could establish negligence in the booking itself against ATS, it would have rights against ATS on either characterisation of the contract. If there was no supply of Products, the NR Travel Agent would only have rights against ATS.
119 ATS acknowledges, and indeed relies on, the fact that there is no evidence of any assignment by ATS to the NR Travel Agents of any licences or contractual rights under ATS' contracts with the Australian Providers, or any promises that ATS would provide any of the Products. It asserts that the NR Travel Agents never acquired any contractual rights against the Australian Providers. At the least, it says, as the NR Travel Agents remained out of Australia, any on-sold rights regarding non-accommodation services would be GST-free. On ATS' analysis, the NR Travel Agent would not have any rights over the Products and, accordingly, would not have a right that could be the subject of a contract between that travel agent and the NR Tourist.
120 In my view, it is not a sufficient answer to say that in the circumstances of a Provider's default or provision of a lower quality Product, ATS could or would refund the cost of the Product. ATS says that it only arranged services and made no promises, express or implied, to the NR Tourists under the Tourplan contracts. This was the case, ATS says, whether or not the NR Travel Agents were making supplies to their clients of personal contractual rights, exercisable against only those NR Travel Agents and whether or not such personal rights extended to what ATS seems to concede were contractual rights exercisable over or in relation to land.
121 ATS' characterisation is, in my view, less realistic than the alternative proposed by the Commissioner. The "neutral" role ATS asserts that it occupied is not necessarily to be inferred. ATS was both the route by which the Products were secured, and the only party with contractual rights against the Australian Provider. It is not realistic that a NR Travel Agent would have been left without recourse where the Product was inadequate, although it remained liable to the NR Tourist.