ATS Pacific Pty Ltd v Commissioner of Taxation

JUDGES: EDMONDS, PAGONE AND DAVIES JJ DATE OF ORDER: 27 MARCH 2014 WHERE MADE: SYDNEY

1. The Appellant's appeals be dismissed.
2. The Respondent's cross-appeals be allowed.
3. The Orders made by the primary judge on 15 May 2013 be set aside.
4. The objection decisions issued by the Respondent to the Appellant for the monthly tax periods commencing 1 July 2007 through to and ending 30 June 2009 be affirmed.
5. The Appellant pay the Respondent's costs both before the primary judge and of the appeals as agreed or taxed. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 991 of 2013

IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 994 of 2013

BETWEEN: STELLA TRAVEL SERVICES (AUSTRALIA) pTY LTD

JUDGES: EDMONDS, PAGONE AND DAVIES JJ DATE: 27 MARCH 2014 PLACE: SYDNEY

INTRODUCTION 1 This is the second time in five or six years that a case has come into this Court involving issues relating to the construction and application of the relevant provisions of A New Tax System (Goods and Services Tax) Act 1999 (Cth) ("GST Act") to a step or component of the way in which inbound tourism to this country is frequently "packaged" by participants, both inside and outside Australia. The first occasion was Saga Holidays Ltd v Commissioner of Taxation (2005) 149 FCR 41 (Conti J); on appeal Saga Holidays Ltd v Commissioner of Taxation (2006) 156 FCR 256 (Gyles, Stone and Young JJ), where the appellant, Saga, a company incorporated in the United Kingdom, sold, in the United Kingdom, holiday package tours of Australia, to persons, mostly United Kingdom residents, who were non-residents of Australia. Saga had neither premises nor employees in Australia. It was, however, registered for the purposes of the GST Act. The Full Court (Stone J delivering the principal judgment, with whom Gyles and Young JJ agreed) held that to the extent that the contract between Saga and each tourist involved the provision of hotel accommodation, it involved a contractual right exercisable in relation to land in Australia and that, in consequence, the contract involved a taxable supply of real property within the meaning of s 9-5 of the GST Act. The Court further held that the accommodation component, while it included various services and facilities as adjuncts to the right to use the room which, generally, were not charged for separately, was properly regarded as a single supply of real property. 2 The present case involves the proper characterisation of a different step or component of the way in which inbound tourism to this country is "packaged", namely, the proper characterisation of the supply by Australian travel agents or tour operators to non-resident travel agents or tour operators (such as Saga) in booking or arranging accommodation, goods and services for the customers of the non-resident travel agents or tour operators namely, the non-resident tourists. 3 The advent of these two cases so early in the life of the GST says something about the difficulty of drafting legislation to give effect to the policy design of the GST, in the factual context of the way in which tours to Australia are packaged and sold to non-resident tourists, where the policy design is, undeniably, that "[g]oods and services consumed by tourists in Australia, such as meals and hotel accommodation are subject to GST under the general rules" (Explanatory Memorandum, A New Tax System (Goods and Services Tax) Bill 1998 (Cth) at 12). For an informed analysis from this perspective, including changes made to the GST Act in 2005, which were intended to confirm Australia's assertion of jurisdiction to tax all consumption in Australia by tourists (see s 9-25(5)(c) which provides that a supply of anything other than goods or real property is connected with Australia if the thing is a right or option to acquire another thing and the supply of the other thing would be connected with Australia), while at the same time allowing partial non-taxation by excluding the value added overseas by non-resident travel agents or tour operators (by not requiring them to register, see: ss 188-15(3)(b) and (c) and 188-20(3)(b) and (c)), see: Professor R Millar, GST on Package Tours to Australia, (2014) Int VAT Mon 16. 4 These are two appeals and cross-appeals from a judgment of a single judge of this Court allowing in part appeals against objection decisions of the respondent ("Commissioner") disallowing objections lodged by the appellants against assessments of "net amounts" (s 17-5 of the GST Act) for a range of monthly tax periods commencing 1 April 2005 through to and ending 30 June 2009 ("relevant tax periods"). 5 For all relevant tax periods until 30 June 2008, ATS Pacific Pty Ltd ("ATS") carried on business as an inbound tour operator. For the remaining tax periods the business was carried on by Travelscene Tickets Pty Ltd ("Travelscene"), but for relevant tax periods commencing 1 July 2007, Stella Travel Services (Australia) Pty Ltd ("Stella") was the head of a GST group that included ATS and Travelscene. Hence the two proceedings, the ATS proceedings relating to objection decisions for relevant tax periods to 30 June 2007 and the Stella proceedings relating to objection decisions for relevant tax periods commencing 1 July 2007. 6 The primary judge used "ATS" to denote the relevant taxpayer for all relevant tax periods, and I shall do likewise. Throughout her reasons for judgment ("R"), the primary judge also used the following terms or expressions which at R [5] she described as follows: "NR Travel Agent" - refers to non-resident travel agent/s with which ATS contracted in the course of its business; "NR Tourist" - refers to non-resident tourist/s who travelled to Australia and ultimately consumed the products provided by Australian Providers; "Australian Provider" - refers to the Australian based provider/s of products such as hotels, transport companies and tour/theme park operators that ultimately provided the products to NR Tourists; and "Product" - refers to the following products and services which were provided by Australian Providers for consumption by the NR Tourists: o accommodation in hotels and serviced apartments; and o transfers, car hire, tours, guides, meals and similar products and services. 7 ATS' business as an inbound tour operator was neutrally and uncontroversially described by the primary judge at R [6] as: In essence … contracting for and making supplies to NR Travel Agents in relation to Products, which were then provided to NR Tourists by Australian Providers. The NR Travel Agents generally selected these Products through a website and software operated by ATS called Tourplan, and then compiled an itinerary for their NR Tourist clients that included the selected Products. Once the selection was made by the NR Travel Agent using Tourplan, ATS would book the requested Product with the Australian Provider, and charge the NR Travel Agent a fee that included the cost of the Product and a margin (the margin). ATS then paid the Australian Provider for the Product. The Product would be supplied by the Australian Provider to, and consumed by, the NR Tourist.

ISSUES 8 There are two fundamental issues raised by the appeals and cross-appeals. Depending on how these fundamental issues are answered, there are potentially at least three other issues, but on the view I take of the fundamental issues, the other issues do not arise.

Fundamental Issue on Appeals 9 The fundamental issue on the appeals is the proper characterisation of ATS' supplies to the NR Travel Agents for the purpose of applying s 38-190 of the GST Act. In the face of the primary judge's conclusion below, the issue here is whether the primary judge erred, as ATS contends her Honour did, in not characterising the supplies made to the NR Travel Agents as a single GST-free supply of "booking or arranging services" in respect of which the consideration received by ATS was wholly attributable.

Fundamental Issue on Cross-Appeals 10 The fundamental issue on the cross-appeals is whether the primary judge erred, as the Commissioner contends her Honour did, in finding that ATS made GST-free supplies of booking and arranging services to NR Travel Agents for the separate consideration of the margin.

THE DECISION OF THE PRIMARY JUDGE 11 In respect of the fundamental issue on the appeals, the primary judge at [122] and [123] concluded. [122] There was no promise or express condition that ATS would ensure that Products were provided to [NR Tourists] when they came to Australia. Equally there is no explicit support for the obligation of arranging a Product. However, when all of the relevant facts and circumstances are considered, the inference is that there was a promise, relevantly, that ATS would ensure that when the NR Tourists came to Australia and, for example, arrived at a hotel, they would be provided with a room which they believed that they had paid for in advance. [123] Accordingly, I accept the Commissioner's submission that in order to fulfil its obligations, ATS supplied the NR Travel Agent with a contractual right or promise that the Australian Providers would provide the Products to the NR Tourist. The critical supply was the supply made by ATS to the NR Travel Agent, which was a component of a packaged tour or a right thereto, which also included a contractual promise to the NR Travel Agent that ATS would ensure that the Products were supplied to the [NR Tourists]. 12 The primary judge went on to hold (R [136]) that, in respect of the accommodation component of the tours, ATS' supply of the promise that it would ensure that the Australian Provider provided the Products, including rooms, to the NR Tourists was a supply of real property as defined in ss 9-10(2)(d) and 195-1 of the GST Act. In doing so, her Honour relied on what was said by Stone J in Saga at [38]. Moreover, this supply did not fall within the scope of the s 38-190 exemption and was accordingly not GST-free. 13 The primary judge further held (R [138] and [139]) that, in respect of the non-accommodation components of the tours, such as car hire or meals, the ATS supply was properly characterised as a supply of goods which were not GST-free (s 38-190(1)), while in respect of tour or land transport, the ATS supplies were properly characterised as supplies of services which were also not GST-free (s 38-190(3)). 14 In respect of the fundamental issue on the cross-appeals, the primary judge, in rejecting the Commissioner's characterisation of the margin as forming part of the consideration for a single supply, concluded that the contract with the NR Travel Agents made 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 Product. The arranging service supplied by ATS was not merely ancillary or incidental to the supply of the Products; the arranging service constituted an object for the NR Travel Agents and a service for its own sake: R [149]; [150].

THE FACTUAL CONTEXT 15 Before the primary judge, the parties filed a statement of agreed facts for each proceeding, relevantly set out at R [14]-[28] and [33]-[52]. Arguably, it is neither utile nor efficient to reproduce these agreed facts. They are not controversial; and, in any event, the primary judge decided the case, not only by reference to the agreed primary facts, but also by reference to the findings of secondary fact her Honour drew from the primary facts as agreed and the factual matrix of the entire arrangements among ATS, the NR Travel Agents, the NR Tourists and the Australian Providers. 16 So much is evident from what her Honour said at R [124]: [F]rom the entirety of the arrangements, the commercial reality of the transactions between the parties as to the supply of, for example, a hotel room can be characterised in context … as follows: • ATS contracted with the Australia Provider and essentially obtained the right to occupy the hotel room for a period of X days. • ATS incurred a contractual liability to pay for the room. • When ATS then confirmed the availability of the room to the NR Travel Agent at the quoted price, it was essentially promising, having paid for and acquired that right, that when the NR Tourist arrived at the hotel, that tourist would be able to stay in that room and that it had already been paid for. • ATS was liable to pay the Australian Provider and the NR Travel Agent paid ATS Pacific in a single figure which represented ATS' cost of securing the accommodation plus a margin which is expressed as being the fees or costs associated in arranging the accommodation. 17 The primary judge then went on to list (R [125]) a number of matters that, in her Honour's view, supported a characterisation of the relevant supply as the supply of a promise that ATS would ensure the provision of the Products. 18 On the hearing of the appeal, there was no real dispute about the existence of any of these matters, only with the conclusion drawn by the primary judge at R [126] that those matters are consistent with a promise made by ATS to the NR Travel Agents that the Australian Providers would provide the Products to the NR Tourists. 19 I analyse below the primary judge's reasoning and the way in which, on the hearing of the appeal, ATS sought to assail her Honour's conclusions, but before doing so, it is relevant to set out the relevant provisions of the GST Act which provide the legislative context in which the fundamental issues of characterisation (on the appeals) and one or two supplies (on the cross-appeals) are to be determined, and the consequential application of s 38-190 of that Act.

LEGISLATIVE CONTEXT 20 Section 9-5 of the GST Act provides: You make a taxable supply if: (a) you make the supply for *consideration; and (b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and (c) the supply is *connected with Australia; and (d) you are *registered, or *required to be registered. However, the supply is not a *taxable supply to the extent that it is *GST‑free or *input taxed. 21 "Supply" is defined in s 9-10 of the GST Act to mean, relevantly: (1) A supply is any form of supply whatsoever. (2) Without limiting subsection (1), supply includes any of these: (a) a supply of goods; (b) a supply of services; … (d) a grant, assignment or surrender of *real property; (e) a creation, grant, transfer, assignment or surrender of any right; … (g) an entry into, or release from, an obligation: (i) to do anything; or (ii) to refrain from an act; or (iii) to tolerate an act or situation; (h) any combination of any 2 or more of the matters referred to in paragraphs (a) to (g). 22 Section 9-25 provides for supplies connected to Australia; relevantly: Supplies of goods wholly within Australia (1) A supply of goods is connected with Australia if the goods are delivered, or made available, in Australia to the *recipient of the supply. Supplies of goods from Australia (2) A supply of goods that involves the goods being removed from Australia is connected with Australia. Supplies of goods to Australia (3) A supply of goods that involves the goods being brought to Australia is connected with Australia if the supplier either: (a) imports the goods into Australia; or (b) installs or assembles the goods in Australia. Supplies of real property (4) A supply of *real property is connected with Australia if the real property, or the land to which the real property relates, is in Australia. Supplies of anything else (5) A supply of anything other than goods or *real property is connected with Australia if: (a) the thing is done in Australia; or (b) the supplier makes the supply through an *enterprise that the supplier *carries on in Australia; or (c) all of the following apply: (i) neither paragraph (a) nor (b) applies in respect of the thing; (ii) the thing is a right or option to acquire another thing; (iii) the supply of the other thing would be connected with Australia. Example: A holiday package for Australia that is supplied overseas might be connected with Australia under paragraph (5)(c). 23 "Goods" is defined in s 195-1 to mean "any form of tangible personal property". 24 "Real property" is defined in s 195-1 to include: (a) any interest in or right over land; or (b) a personal right to call for or be granted any interest in or right over land; or (c) a licence to occupy land or any other contractual right exercisable over or in relation to land. 25 Section 9-15 concerns "consideration" and relevantly provides: (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. 26 "Recipient" is defined in s 195-1 to mean the entity to which the supply was made. 27 Section 9-30(1) provides: GST-free (1) A supply is GST-free if: (a) it is GST-free under Division 38 or under a provision of another Act; or (b) it is a supply of a right to receive a supply that would be GST-free under paragraph (a). 28 The relevant section under which ATS contended that any supplies made by it are GST-free is s 38-190, which provides (relevantly): Supplies of things, other than goods or real property, for consumption outside Australia (1) The third column of this table sets out supplies that are GST-free (except to the extent that they are supplies of goods or *real property): Supplies of things, other than goods or real property, for consumption outside Australia Item Topic These supplies are GST-free (except to the extent that they are supplies of goods or *real property)… 1 Supply connected with property outside Australia a supply that is directly connected with goods or real property situated outside Australia. 2 Supply to *non-resident outside Australia a supply that is made to a *non-resident who is not in Australia when the thing supplied is done, and: (a) the supply is neither a supply of work physically performed on goods situated in Australia when the work is done nor a supply directly connected with *real property situated in Australia; or (b) the *non-resident acquires the thing in *carrying on the non-resident's *enterprise, but is not *registered or *required to be registered. 3 Supplies used or enjoyed outside Australia a supply: (a) that is made to a *recipient who is not in Australia when the thing supplied is done; and (b) the effective use or enjoyment of which takes place outside Australia; other than a supply of work physically performed on goods situated in Australia when the thing supplied is done, or a supply directly connected with *real property situated in Australia. 4 Rights a supply that is made in relation to rights if: (a) the rights are for use outside Australia; or (b) the supply is to an entity that is not an *Australian resident and is outside Australia when the thing supplied is done. 5 Export of services used to repair etc. imported goods a supply that is constituted by the repair, renovation, modification or treatment of goods from outside Australia whose destination is outside Australia.

(2) However, a supply covered by any of items 1 to 5 in the table in subsection (1) is not GST-free if it is the supply of a right or option to acquire something the supply of which would be *connected with Australia and would not be *GST-free. (2A) A supply covered by any of items 2 to 4 in the table in subsection (1) is not *GST-free if the acquisition of the supply relates (whether directly or indirectly, or wholly or partly) to the making of a supply of *real property situated in Australia that would be, wholly or partly, *input taxed under Subdivision 40-B or 40-C. Note: Subdivision 40-B deals with the supply of premises (including a berth at a marina) by way of lease, hire or licence. Subdivision 40-C deals with the sale of residential premises and the supply of residential premises by way of long term lease. (3) Without limiting subsection (2) or (2A), a supply covered by item 2 in that table is not GST-free if: (a) it is a supply under an agreement entered into, whether directly or indirectly, with a *non-resident; and (b) the supply is provided, or the agreement requires it to be provided, to another entity in Australia.

Characterisation of Supply 29 We are not here concerned with whether a supply occurred on entry into a contract (cf., Federal Commissioner of Taxation v Reliance Carpet Co Pty Ltd (2008) 236 CLR 342; Federal Commissioner of Taxation v Qantas Airways Ltd (2012) 247 CLR 286) or even with the characterisation of that supply it if did occur. We are here concerned with the character of a supply made as a result of performance of the terms and conditions of a contract. The terms and conditions are the instrumentality through which the supply is made, but the text of these terms and conditions is not conclusive of the character of the supply that is made; that will depend as much on the manner of performance of those terms and conditions as the text of the terms and conditions themselves; it will also depend on the commercial or business purposes, discerned objectively, of those who have entered into the relevant contract. 30 The primary judge found (at R [80]) that it was not in dispute that the Tourplan contracts did not provide expressly that ATS would itself provide the Products or that ATS would ensure that they were provided by the Australian Providers; there was no such term in the terms and conditions on the web-page linked to the Agent area of the ATS website (defined in R [22] as the "Terms and Conditions"). But the primary judge was of the view (at R [89]) that a term was implied into the contract between ATS and the NR Travel Agents that ATS provided or ensured provision of the Products to the NR Tourists. According to her Honour, such a term fulfilled each of the requirements as set out in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 at 283 to be so implied and reflected the way in which the contracts were performed. 31 On the appeal, ATS assailed the primary judge's view that a term was to be implied into the contract between ATS and the NR Travel Agents that ATS promised the provision of the Products by the Australian Providers to the NR Tourists. It did so on the basis that none of the requirements laid down in BP Refinery were fulfilled - it was not reasonable and equitable; it was not necessary to give business efficacy to the contract; it was not so obvious that "it goes without saying" that ATS would make such a promise; it was not capable of clear and certain expression; and it would be in contradiction of an express term of the contract. 32 I do not think it is necessary for me to decide this particular issue for two reasons. First because, in my view, it was not necessary to the primary judge's conclusion on the characterisation issue; in my view, it was open to the primary judge to come to the characterisation conclusion her Honour did without recourse to an analysis of whether the contract between ATS and the NR Travel Agents contained a term, express or implied, that ATS promised the NR Travel Agents that the Australian Providers would provide the Products to the NR Tourists. At the end of the day, her Honour found, as a fact, and without confinement to the terms of the contract between ATS and the NR Travel Agents, that that was the proper characterisation of the supply. I will endeavour to explain below why I am of the view that it was open to her Honour to find as she did. 33 Secondly, I do not think it is desirable, in the interests of certainty of application of a revenue statute, for the characterisation of a supply made by performance of an executory contract, to depend upon whether or not a term can be implied into the contract, unless it is absolutely essential to give business efficacy to the contract. In this day and age, revenue statutes are inherently complex, and the GST Act is certainly no exception. The concept of a "supply", as defined in s 9-10 of the GST Act, is fundamental to the operation of that Act and has greatly contributed to that uncertainty, both in terms of identifying whether a "taxable supply" has occurred (Qantas Airways Ltd), but more importantly, on the premise that a supply has occurred, in determining how that supply is to be characterised (Travelex Ltd v Federal Commissioner of Taxation (2010) 241 CLR 510). Resort to jurisprudence in contract law to imply a term into a contract does not contribute to an aspirational hope, let alone a confident expectation, of certainty of application going forward. 34 At R [94] the primary judge observed: The Commissioner, perhaps recognising that the contract between ATS and the NR Travel Agents does not contain the additional express term, and contending that the characterisation of the supply is not always answered by a mere contractual analysis, submits that the "substance, purpose and commercial reality of the transactions" was that ATS promised the NR Travel Agents that the NR Tourists would be provided with the Products by the Australian Providers in accordance with the bookings made by ATS. 35 In response to this submission, her Honour observed (at R [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. 36 By way of further response, her Honour observed (at R [112]): 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. 37 In my view, the primary judge was entitled to conclude as her Honour did at R [122] and [123] (see [11] above). Both before the primary judge, and on appeal, ATS sought to assail those conclusions by reference to a perimeter confined to the Terms and Conditions, said to represent the four corners of the contractual relationship between ATS and the NR Travel Agents. Like the primary judge, I reject that submission. The Terms and Conditions clearly did not represent all the terms and conditions of the contract between ATS and NR Travel Agents, and no evidence was adduced by ATS that would lead one to infer, from the manner in which ATS and the NR Travel Agents performed their contractual obligations, nor from the factual matrix constituted by the entirety of the arrangements, that the conclusion of the primary judge did not accord with the commercial reality of the transaction. 38 While the issue of identification of whether or not a supply is made may be a question of law or, perhaps more correctly, a mixed question of fact and law, see the definition of "supply" in s 9-10 of the GST Act in [21] above, the issue of characterisation of the supply in a particular case, in other words the process of deciding what was supplied, is undoubtedly a question of fact. In many cases the task of characterisation will be easy; in others, it will be hard. 39 In determining the character of a supply - what was really supplied? - pursuant to performance of an executory contract, a court is not to be "handcuffed" by the terms embodied in the four corners of the contract, the more so if those terms and conditions do not represent all the terms and conditions of the contract; or where the contract is but one link in a chain of contracts, the performance of each being related to, if not dependent on, performance of the immediately preceding contract; or where, by reference to the factual matrix of the entirety of the arrangements, the commercial or practical reality points to the conferral or provision of a supply which goes beyond the conclusion that might otherwise be drawn from a confined analysis of the terms and conditions of one contract in that chain. 40 Undoubtedly, where the supply is made pursuant to the performance of a stand-alone executory contract between B and C which is totally unrelated to any other contract either B or C has entered into, an analysis of the terms and conditions of that contract will shed considerable light on the character of the supply made between B and C. Where, however, the supply is made pursuant to the performance of an executory contract between B and C which is related to a contract between A and B; to a contract between C and D; and to the consumption by D of what A provided B, it could not, at least in my view, be seriously denied that in determining the character of the supply from B to C one could not have regard to matters standing outside the contract between B and C, in particular, to the terms of the contract between A and B, between C and D and to the consumption by D of the contractual promise from A to B in determining the characterisation of the supply from B to C. 41 As the issue of characterisation is a question of fact, one is reminded of what has been said in other revenue law contexts on questions of determination or characterisation. The determination of the "source" of an item of income has been described as "a practical, hard matter of fact". That is the well-known phrase used by Isaacs J in reading the judgment of the High Court in Nathan v Federal Commissioner of Taxation (1918) 25 CLR 183 at 190. What is less known are the words used by the Court in the passage which immediately preceded that phrase at 189-190: The Legislature in using the word "source" meant, not a legal concept, but something which a practical man would regard as a real source of income. Legal concepts must, of course, enter into the question when we have to consider to whom a given source belongs. But the ascertainment of the actual source of a given income is a practical, hard matter of fact. 42 In the same context, is the following passage from the reasons of Burchett J in a Full Court of this Court in Thorpe Nominees Pty Ltd v Federal Commissioner of Taxation (1988) 19 ATR 1834 at 1846: Practical reality is not a test so much as an attitude of mind in which the court should approach the task of judgment. Reality, like beauty, is often in the eye of the beholder (cf the commens [sic] made by J D Jackson in an article in 51 Mod LR 549 at 557 et seq). What the cases require is that the truth of the matter be sought with an eye focused on practical business affairs, rather than on nice distinctions of the law. For the word "source", in this context, has no precise or technical reference. It expresses only a general conception of origin, leading the mind broadly, by analogy. The true meaning of the word evokes springs in grottos at Delphi, sooner than the incidence of taxes. So the exactness which the lawyer is prone to seek must be consciously set aside; indeed, with respect to a choice between various contributing factors, it cannot be attained. The substance of the matter, metaphorically conveyed when we speak of the source of income, is a large view of the origin of the income - where it came from - as a businessman would perceive it. 43 It is true that the word "supply" is defined in s 9-10 of the GST Act whereas, as Burchett J observed in Thorpe Nominees, the word "source" has no precise or technical reference, but the determination of the characterisation of the supply in a case such as the present is as much a matter of practical or business reality as the determination of the origin of income - where it comes from - in a case of the kind before the Full Court in Thorpe Nominees. 44 Questions of characterisation also arise in determining whether an outgoing is on capital or revenue account. As Sir Owen Dixon, albeit in dissent, said in Hallstroms Pty Ltd v Federal Commissioner of Taxation (Cth) (1946) 72 CLR 634 at 648: What is an outgoing of capital and what is an outgoing on account of revenue depends on what the expenditure is calculated to effect from a practical and business point of view, rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process. 45 Thus, I am of the view that, having regard to the matters listed by the primary judge at R [125], it was open to her Honour to find that the supply made by ATS to the NR Travel Agents was to be properly characterised as a promise by ATS that ATS would ensure that when the NR Tourists came to Australia they would be provided with the Products the NR Tourists had paid for, and that there was no error on the part of her Honour in so finding.

Policy Considerations 46 The primary judge concluded at R [130] that she did not consider the policy considerations advanced by either the Commissioner or ATS sufficiently persuasive to argue against the characterisation adopted by her Honour. I find the reference, in this context, to the policy considerations advanced by the Commissioner, which are set out at R [127], as somewhat odd. They certainly did not seek to persuade her Honour to a characterisation conclusion contrary to that which her Honour reached. 47 On the other hand, ATS' submissions on policy considerations, which are set out at R [128], certainly did seek to persuade her Honour to a contrary conclusion (at R [129]). Her Honour thought there was some merit to ATS' submission that the Commissioner's submissions reflect an a priori, rather than a purposive approach to construction. With respect, I cannot agree. In my view, ATS' submissions on policy considerations had no merit whatsoever, for the following reasons: (1) First, the result contended for by ATS would have run counter to the policy design objective of taxing consumption in Australia: if the contention had been accepted, it would have resulted in unintended non-taxation because ATS would have been entitled to recover the GST charged by the Australian Providers without having any corresponding output tax liability. The NR Travel Agent would therefore incur no GST on its purchase and since it would not be required to register, it would not have to account for GST on the supply to the NR Tourist. (2) Second, ATS' reliance on the 2005 amendments, specifically s 188-15(3)(b) of the GST Act, and the relevant extrinsic material to contend that, by allowing NR Travel Agents to choose whether or not to register, Parliament had accepted that there would be no GST burden on Australian consumption unless the NR Travel Agent chose to register, is disingenuous. This particular amendment represented no more than a compromise, acceptable to the Parliament, between the substantive jurisdiction of taxing consumption in Australia and the enforcement jurisdiction of collecting the GST from non-resident suppliers. That was done by allowing the NR Travel Agents the choice to register. If they were not registered, what was foregone or excluded from the tax base was taxation on the value added outside Australia (the price of the supply by the NR Travel Agents to the NR Tourists minus the price of the supply by ATS to the NR Travel Agents), nothing more. It certainly does not support the characterisation of ATS' supply to the NR Travel Agents contended for by ATS but rejected by the primary judge.

The Application of s 38-190 of the GST Act 48 Having characterised the supply made by ATS to the NR Travel Agents as the supply of a promise that it (ATS) would ensure that the Australian Providers would provide the Products to the NR Tourists when they came to Australia, the primary judge (at R [131]-[143]) turned to consider the application of s 38-190 of the GST Act, specifically, whether the supplies were GST-free pursuant to s 38-190(1); or whether they fell within the parenthetical exception to that section, as supplies of goods or real property and were therefore not GST-free; or fell within the exclusion in s 38-190(2) (applicable to items 1 to 5 of the Table in s 38-190(1)), as the supply of a right or option to acquire something the supply of which would be connected with Australia, and were therefore not GST-free; or fell within the exclusion in s 38-190(3) (applicable to item 2 of the Table in s 38-190(1)), as the supply under an agreement entered into, whether directly or indirectly, with a non-resident and the supply is provided, or the agreement requires it to be provided, to another entity in Australia, and were therefore not GST-free. 49 I have to say that, with the greatest respect, I found the primary judge's reasoning on the aspect difficult to follow. While I agree with the result her Honour arrived at, that none of the promises supplied by ATS, whether they related to accommodation, goods or services, were GST-free under s 38-190(1), there appear to be gaps in her Honour's reasoning in getting to that result. For that reason, I propose to provide my own reasons although where they coincide with the primary judge's reasons, I will indicate that alignment. 50 As to the accommodation component, the finding that ATS supplied the NR Travel Agents with a promise that the hotel proprietors would provide hotel accommodation to the NR Tourists when they came to Australia was enough, in my view, to constitute a "supply of real property" (s 9-10(2)(d)) which includes, as the primary judge pointed out at R [136], "but is not necessarily restricted to, relevantly, 'any contractual right exercisable over or in relation to land'" (see the definition of "real property" in s 195-1). In Saga, Stone J (with whom Gyles and Young JJ agreed) observed at [38] that: So described, the contract does not have to provide a proprietary right, either at the time of its creation or at any later stage. Similarly, it is not necessary that Saga itself has rights in relation to the relevant land; the fact that it has given a contractually binding promise "in relation to land" (that is the hotel accommodation) that is exercisable by the tourist is sufficient. 51 In the present case, it was common ground, or at least not put in issue by ATS, that ATS, unlike Saga did have contractual rights "in relation to land" provided by the hotel proprietors under their contracts with ATS, albeit exercisable by the NR Tourists. Moreover, the characterisation of ATS' supply to the NR Travel Agents, as a promise that the hotel proprietors would provide hotel accommodation to the NR Tourists when they came to Australia, is sufficient to constitute the promise of a supply "in relation to land", and therefore a "supply of real property" within the parenthetical exception to s 38-190(1) of the GST Act, even if the promise was for the benefit of the NR Tourists. 52 It follows, in my view, that insofar as ATS' supplies to the NR Travel Agents are characterised as a promise that the hotel proprietors would provide hotel accommodation to the NR Tourists when they came to Australia, they are not GST-free. 53 Turning to the non-accommodation components, they consist of goods or services. While a promise by B to C that A will provide hotel accommodation to D is sufficient to constitute the promise of a supply "in relation to land" and therefore a "supply of real property", that is because the definition of "real property" in s 195-1 of the GST Act encompasses any contractual right exercisable in relation to land. There is no equivalent definition of "goods" (defined in s 195-1 to mean "any form of tangible personal property") and, unsurprisingly, there is no definition of "services". The fact that B promises C that A will provide certain goods to D will not make the promise by B to C a supply of goods within parenthetical exception to s 38-190(1); and the parenthetical exception to s 38-190(1) does not extend to a supply of services. 54 Accepting then, as a starting point, that the characterisation of ATS' supply to the NR Travel Agents is that of a promise to ensure that the Australian Providers would provide the Products, relevantly goods or services, to the NR Tourists when they came to Australia, will not constitute a supply of goods, the only item of the Table in s 38-190(1) which would seem to be applicable to the GST-free status of the supply is item 2(b), namely, a supply that is made to a non-resident who is not in Australia when the thing supplied is done and the non-resident acquires the thing in carrying on the non-resident's enterprise, but is not registered or required to be registered (see [28] above). 55 As noted in [48] above, there are, however, two exclusions to that item which, if applicable, deny GST-free status to the supply. They are to be found in ss 38-190(2) and (3). Dealing with the latter first, s 38-190(3) would not seem to have any application if the supply by ATS to the NR Travel Agents is characterised as the primary judge found - a promise to ensure that the goods or services would be provided to the NR Tourists when they came to Australia. The exclusion in s 38-190(3) has two limbs: (1) The supply must be under an agreement with a non-resident; and (2) the supply must be provided to another entity in Australia. 56 As a matter of statutory construction, it is indisputable that the supply referred to in the second limb is the supply referred to in the first limb. On the premise that the supply in the first limb is ATS' promise to the NR Travel Agents in the terms found by the primary judge, the second limb is not satisfied. In the context of inbound tourism to this country, the exclusion that is s 38-190(3) would seem to be confined to situations where the Australian Provider contracts directly with NR Travel Agents for the supply of Products to their NR Tourist clients in Australia. 57 Turning to the former exclusion, that is, s 38-190(2), a supply covered by any of items 1 to 5 in the Table in s 38-190(1), thereby including item 2(b), will not be GST-free if it is the supply of a right to acquire something the supply of which would be connected with Australia and would not be GST-free. 58 The supplies of the Products by the Australian Providers to the NR Tourists are all connected with Australia - the hotel accommodation, although not relevant for present purposes, by virtue of s 9-25(4); the goods by virtue of s 9-25(1); and the services by virtue of s 9-25(5). Moreover, none of them are GST-free. It follows that the only remaining issue under this head of exclusion, so far as the goods or services components are concerned, is whether ATS' supply to the NR Travel Agents characterised as the supply of a promise that it (ATS) would ensure that the Australian Providers would provide the goods and services components of the Products to the NR Tourists when they came to Australia, carries with it a right to acquire those goods or services. In my opinion, having regard to the characterisation of the supply made by ATS to the NR Travel Agents and the articulation of the promise constituting that supply, it did carry a right to acquire those goods or services, albeit a right exercisable by or for the benefit of the NR Tourists. It follows, in my view, that insofar as the non-accommodation components are concerned, the exclusion in s 38-190(2) is triggered with respect to ATS' supply of the promise, as articulated by the primary judge, to the NR Travel Agents, and such supplies are not GST-free.

Fundamental Issue on Cross-Appeal 59 At [14] above, I summarised the primary judge's findings and conclusions on the fundamental issue the subject of the Commissioner's cross-appeal. In short, the primary judge found that the contract with NR Travel Agents made a distinction between the Products supplied and ATS' fee for arranging for that supply. The primary judge concluded that, as such, there were two separate supplies: the Products and the supply of ATS' arranging services, and that the consideration for the latter was the margin: R [149]. The primary judge further concluded that the arranging service supplied by ATS was not merely ancillary or incidental to the supply of the Products. The arranging service constituted an object for the NR Travel Agents and a service for its own sake: R [150]. 60 On his cross-appeal, the Commissioner submitted that the primary judge erred in making these findings and drawing the conclusions her Honour did based on these findings. With the greatest respect, I have to agree, although not necessarily for the reasons advanced in the Commissioner's submissions. 61 Fundamentally, it was not open to the primary judge to find or conclude that there were two supplies from ATS to NR Travel Agents, which her Honour characterised as the Products and the supply of ATS' arranging services, when it was not in dispute, either before her Honour or on appeal, that the Australian Providers supplied the Products, not ATS. Moreover, her Honour had already characterised what her Honour described as "[t]he critical supply" by ATS to the NR Travel Agents as being "a contractual promise to the NR Travel Agent that ATS would ensure that the Products were supplied to the tourists": R [123], and it was for that supply, for that promise, that the NR Travel Agents paid the consideration stipulated in ATS' invoice. In short, the dichotomy of supply arrived at by the primary judge was neither sourced in the respective positions of the parties, nor in her Honour's finding on "[t]he critical supply". 62 It is true that the arranging service supplied by ATS was not merely ancillary or incidental to the supply of the Products, but that was because ATS did not supply the Products, not for the reasons given by the primary judge at R [150]. 63 With respect, the question which the primary judge should have asked and addressed was whether there was another non-ancillary, non-incidental supply from ATS to the NR Travel Agents in addition to her Honour's finding on the characterisation of "[t]he critical supply". In my opinion, if her Honour had asked and addressed that question, the answer would have been, clearly there was not. The arranging or packaging of the tour was but a component of "[t]he critical supply" without which that supply would have been three separate supplies of accommodation, goods and services. 64 In my view, the question of whether there is one or two supplies and if there are two, their characterisation, in particular whether one is ancillary or incidental to the other, also has to be approached from a practical and business point of view: see Westley Nominees Pty Ltd v Coles Supermarkets Australia Pty Ltd (2006) 152 FCR 461 at [59], rather than from any separate treatment or quantification in the text of the contract or related tax invoice. Such an approach impels one to the conclusion here that there is one supply - the supply of the promise characterised by the primary judge in the terms referred to in R [122] and [123] (see [11] above) - or if that embodies a supply of arranging services by ATS, it is part and parcel of the promised package for which there is a single indivisible consideration and the further supply is to be regarded as ancillary and incidental to "[t]he critical supply". 65 Such a conclusion better accords with the policy design of taxing such consumption in Australia manifest in the extrinsic material referred to in [3] above, including the 2005 changes which made it clear that Australia asserted jurisdiction to tax the value of the supply from the NR Travel Agents to the NR Tourists but was content to settle for tax on the supply by ATS to NR Travel Agents in order to simplify compliance and administration: under the primary judge's conclusion on the fundamental issue on the cross-appeals, a cost element (ATS' mark-up) of the NR Tourists' consumption of the Products was excluded from the tax base.

CONCLUSION 66 For the foregoing reasons, I am of the view that the appeals should be dismissed and the Commissioner's cross-appeals allowed. I certify that the preceding sixty-six (66) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Edmonds.

Associate: Dated: 27 March 2014 IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 991 of 2013

IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 994 of 2013

BETWEEN: STELLA TRAVEL SERVICES (AUSTRALIA) PTY LTD

JUDGES: EDMONDS, PAGONE and DAVIES JJ DATE: 27 march 2014 PLACE: SYDNEY

REASONS FOR JUDGMENT PAGONE J: 67 I have had the advantage of reading a draft of the judgment of Edmonds J and respectfully agree with his Honour's conclusions and wish to add the following observations. 68 ATS Pacific Pty Ltd and Stella Travel Services (Australia) Pty Ltd (which for convenience were collectively referred to as "ATS") appealed separate decisions raising the same issue, namely, the characterisation of the supply by ATS to non-resident travel agents in respect of components of tours which were to be consumed by non-resident tourists. ATS provided a facility which enables non-resident travel agents to secure products for non-resident tourists when visiting Australia. The Commissioner contended that ATS provided taxable supplies in doing so and that the supply was not GST-free. Her Honour the trial Judge upheld the Commissioner's contentions. 69 The case proceeded at first instance, and on appeal, by reference to an agreed statement of facts supplemented by some additional evidence relied upon by ATS. The facts revealed that ATS made available to non-resident travel agents a facility for the latter to access lists of names of Australian providers of various tourist services and of the products they provided. The non-resident travel agent could request ATS to book selected Australian providers and the products they provided at agreed tariffs for identified non-resident tourists. An example from the materials attached to the agreed statement of facts illustrates the way in which the ATS product operated in practice. The materials included a tax invoice sent by ATS to Virgin Holidays Limited in respect of identified tourists. In that case the tax invoice issued by ATS was sent to Virgin Holidays Limited in West Sussex in the United Kingdom in respect of products obtained by Mr and Mrs V. The products in that case were coach transfers between Brisbane International Airport and the Gold Coast and hotel accommodation at the Sheraton Mirage Gold Coast. The invoice included an ATS reference number which was necessary for other aspects of the tour and which itemised the costs of the coach transfers and accommodation separately. The items in the invoice came to a total of $22,062.00 and was all to be paid to ATS in respect of the enjoyment of the services by Mr and Mrs V when they arrived in Australia. The invoice stated: This invoice covers the cost of supplying the goods and services listed above and our services in arranging these supplies on your behalf. ATS contended that what it supplied was the service of arranging the products of other people and not the goods and services to be enjoyed by Mr and Mrs V upon their arrival in Australia. It was not contended at any stage that ATS would itself provide the coach transfer or would itself provide the accommodation at the Sheraton. 70 GST is payable on taxable supplies: GST Act, s 7-1. Section 9-40 provides that an entity must pay the GST payable on any taxable supply it makes. A taxable supply is defined in s 9-5 as follows: You make a taxable supply if: (a) you make the supply for *consideration; and (b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and (c) the supply is *connected with Australia; and (d) you are *registered or *required to be registered. However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed. Supply is defined broadly in s 9-10(1) to include the supply of services, the grant, assignment or surrender of real property, the creation, grant, transfer, assignment or surrender of any right, and an entry into, or release from, an obligation to do anything, to refrain from an act, to tolerate an act or situation or any combination of the matters in the section. Real property is defined in s 195-1 to include a licence to occupy land or any other contractual right exercisable over or in relation to land. 71 The GST Act is designed to operate in a practical business context and is to be interpreted accordingly: Saga Holidays Ltd v Commissioner of Taxation (2006) 156 FCR 256, [29]-[30] (Stone J), [70] (Young J). That requires attention to the purpose of the transaction rather than to particular content of the rights which may be created. In Travelex Ltd v Federal Commissioner of Taxation (2010) 241 CLR 510 French CJ and Hayne J said at 521 in a joint judgment in respect of the buying and selling of foreign currency: Observing that rights attach to currency, and pass upon negotiation of the currency by delivery, does not constitute any "juristic disaggregation and classification of rights" that fails to reflect "the practical reality of what is in fact supplied". On the contrary, recognising that a sale of foreign currency transfers to the purchaser the rights that attach to the notes does no more than recognise the evident purpose of the transaction. Further classification or identification of the rights that pass, whether as rights against an issuing central bank, or as rights akin to those of the holder of a promissory note, is not necessary. What the Act requires is that there be a supply "in relation to" rights; the operation of the Act does not call for attention to be given to the particular content of the rights. [Footnotes omitted] Heydon J said at 524: The supply of the currency was a supply in relation to the rights it gave because these rights constituted the pith and substance of the transaction. In Federal Commissioner of Taxation v Qantas Airways Limited (2012) 247 CLR 286 Gummow, Hayne, Keifel and Bell JJ in a joint judgment rejected a strictly contractual approach to the application of the GST Act. Thus, in s 9-5(a) it was said that the word "for" in the phrase "the supply for consideration" was not used to adopt contractual principles but required "a connection or relationship between the supply and the consideration": at 292. In that case the court upheld the imposition of GST upon airfares even though the relevant conditions "did not provide an unconditional promise to carry the passenger and baggage on a particular flight": at 299. Although the taxpayers supplied "something less than that" it was sufficient that there was "at least a promise to use best endeavours to carry the passenger and baggage, having regard to the circumstances of the business operations of the airline". In other words, that there was consideration "in relation to" the supply. 72 It is, therefore, not relevant that ATS might not itself provide the products which it may have arranged on behalf of the tourist through the non-resident travel agent. What is relevant, and determinative, is how it has arranged for the services to be provided. ATS has not simply provided a service whereby a non-resident travel agent, or a non-resident tourist, can contract directly with those ultimately providing the service in Australia. Its website describes itself as providing the products which are ultimately to be enjoyed by the tourist. Amongst its promotional materials ATS described its product as providing "a variety of packages including our popular self drive itineraries, maps and information and images". Under a heading "online bookings" ATS stated: This area of our website allows you to create online bookings and quotations and will provide you with a total costing and itinerary for the services selected. If the quotation materialises you can simply convert it to a booking which will then be actioned by our ATS Pacific operations team… Its arranging facilities include meeting foreign inbound tourists with ATS representatives and where appropriate giving the tourists relevant travel documents and travel vouchers. It contracted directly with the provider of the service in Australia but did so on the basis that it would be the tourist who would enjoy the benefit of any contract between ATS and the provider of the service. ATS is essentially the wholesaler of a retail product whose fee to the non-resident travel agent was a composite sum un-dissected as between disbursement and profit margin. 73 ATS contended that the learned primary judge had erred in construing the contractual terms of the rights enjoyed by the tourist (through the non-resident tourist agent) and the Australian providers. It is true that her Honour dealt with the nature of the rights and obligations arising from the products supplied through ATS but did so in response to the contractual arguments raised by ATS in seeking to focus upon the contractual rights in contending that it had supplied only the service of arranging something which was otherwise supplied by others. However her Honour, as was made clear in Qantas, was correct in concluding that the products supplied included the services to be enjoyed by the non-resident tourist in Australia through the ultimate service providers. It was ATS which contracted with the service providers and it was ATS which contracted with the non-resident tourist agent. I certify that the preceding seven (7) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Pagone.

Associate: Dated: 27 March 2014 IN THE FEDERAL COURT OF AUSTRALIA new south wales DISTRICT REGISTRY GENERAL DIVISION NSD 991 of 2013

IN THE FEDERAL COURT OF AUSTRALIA new south wales DISTRICT REGISTRY GENERAL DIVISION NSD 994 of 2013

BETWEEN: STELLA TRAVEL SERVICES (AUSTRALIA) PTY LTD

JUDGES: EDMONDS, PAGONE & DAVIES JJ DATE: 27 MARCH 2014 PLACE: SYDNEY

REASONS FOR JUDGMENT DAVIES J: 74 I have had the benefit of reading the draft reasons and conclusions for judgment of Edmonds J and of Pagone J and agree with their reasons and conclusions. I certify that the preceding one (1) numbered paragraph is a true copy of the Reasons for Judgment herein of the Honourable Justice Davies.