HP Mercantile
54 Both parties called in aid certain passages from the judgment of Hill J in HP Mercantile. In that case, HP Mercantile Pty Ltd (the Trustee) was the trustee of The Recoveries Trust (the Trust). As trustee, the Trustee carried on an "enterprise". A question arose whether the Trustee should acquire a series of debts at a price which apparently was less than their face value. The Trustee paid for professional advice as to whether it should do so (due diligence services). Later, after it had acquired the debts, it paid for professional services connected with the recovery of them (debt collection services). The Trustee paid GST that was included in the amounts that it paid for both of the services mentioned, and claimed input tax credits in respect of that GST.
55 The Commissioner denied the full input credits claimed by the Trustee. The Administrative Appeals Tribunal was of the view that the Commissioner's assessments were correct so far as they disallowed the full input tax credits for the amounts paid in connection with the debt collection services.
56 The Trustee appealed to the Full Court from the Tribunal's decision so far as it related to the disallowance of the full input tax credits for the debt collection services.
57 By reason of reg 40-5.09 (see [43]-[45] above), the acquisition of the debts by the Trustee was a financial supply and therefore input taxed. However, the Trustee submitted that its acquisition of the debt collection services did not relate to making a supply that "would be input taxed" (my emphasis) within s 11-15(2)(a), because the supply in question, the acquisition of the debts, had already taken place. The Full Court disagreed, holding that the words "would be input taxed" in s 11-15(2)(a) did not require futurity.
58 In the course of his Honour's discussion of the statutory scheme and the relevant provisions of the Act, Hill J noted that the Australian GST is a value added tax, the genus of which is that there is ordinarily no cascading of tax and the tax payable by each supplier in a chain is only upon the value added by that supplier (at [13]). His Honour stated in relation to financial supplies (at [16]-[17]):
[16] In terms of GST theory, it is generally accepted that there are certain kinds of activities where the basic system of output tax on supplies and input tax credits on acquisitions will not lead to taxation on the value added by each supplier in the chain. The most important example is said to be financial transactions of financial institutions such as, but not confined to, banks, because they constantly borrow and lend and turn over money in a way that amounts, such as interest charged, will not represent the real value added by the financial institutions. Indeed, as the explanatory memorandum distributed with the Bill which, as amended, later became the GST Act (the EM) says in Chapter 1 at [5.140]: "there is no readily agreed identifiable value for supplies consumed by customers of financial services". In such a case, it is the margin or imputed margin that is the real economic subject of the supply. There are other examples where this may be the case, one of which is the leasing of, or other dealings with, residential property (not being new residential property).
[17] By way of what may be seen as a compromise for the difficulties of applying the normal system of value added taxation to financial supplies and other difficult cases, value added taxation design has created a form of supply which is referred to in Australia as an input taxed supply but which, in international value added tax parlance, is referred to as an "exempt supply". An input taxed or exempt supply (and financial supplies made by financial institutions will be the main example) will not, generally speaking, attract output tax, but the entity which makes financial supplies will, likewise, not obtain an input tax credit for the tax payable on acquisitions it makes in the course of its enterprise of making input taxed supplies. …
59 At [21], Hill J observed that it was "perhaps, not unremarkable" that s 11-15 of the Act bears, in its structure, some similarity to the general business deduction provisions of the Australian income tax law, ie, s 51(1) of the Income Tax Assessment Act 1936 (Cth) and s 8-1 of the Income Tax Assessment Act 1997 (Cth). His Honour noted that in both the GST provision and the income tax provisions it is necessary first to satisfy a positive test, and that apportionment is called for where the positive test is only partly satisfied. In both cases also there are negative tests which exclude the allowance of a credit in the GST context or the allowance of a deduction in the income tax context.
60 His Honour discussed at length (at [34]ff) the relationship required by s 11-15(2)(a) between the acquisition and the making of the supplies that would be input taxed. The parties before the Full Court appeared to accept that the relationship had to be "real" and "substantial" and not "trivial" (at [35]).
61 Since the relationship between both the due diligence services and the debt collection services on the one hand and the purchase of the debts on the other was direct, there was no question of an indirect relationship as there is in the present case. However, Hill J made the following pertinent observations relevant to the expression "relates to" (at [35]-[38]):
[35] …It was common ground that the words "relates to" are wide words signifying some connection between two subject matters. The connection or association signified by the words may be direct or indirect, substantial or real. It must be relevant and usually a remote connection would not suffice. The sufficiency of the connection or association will be a matter for judgment which will depend, among other things, upon the subject matter of the enquiry, the legislative history, and the facts of the case. Put simply, the degree of relationship implied by the necessity to find a relationship will depend upon the context in which the words are found. So much appears from the various cases referred to by the Tribunal when discussing the meaning of these words: …
[36] That the relationship contemplated here might be indirect follows, probably from s 11-15(5), which provides that an acquisition will not be treated as relating to supplies that are input taxed where the acquisition relates to making a financial supply which consists of a borrowing and the borrowing relates to the taxpayer making supplies that are not input taxed. Hence, input tax credits will not be disallowed if the acquisition which gives rise to them relates to the taxpayer making a borrowing but the borrowing is used by the taxpayer in making taxable or GST free supplies. In other words, s 11-15(5) would appear to contemplate that an acquisition having an indirect connection with a financial supply would otherwise [fall] within s 11-15(2)(a).
[37] It follows, perhaps more clearly, as well from the requirement of apportionment to be found in the words "to the extent that" which indicate that an acquisition may relate to the making of supplies that are input taxed as well as supplies that are taxable, as would be the case with undifferentiated general overhead outgoings of an entity making both input taxed and taxable supplies (cf, Ronpibon Tin NL v Federal Commissioner of Taxation (1949) 78 CLR 47 at 55-6).
[38] It might be said, as indeed it is by the Trustee, that where the legislature intended to refer to an indirect connection in the GST Act, it did so. This can be seen for example in ss 60-20(1) and (2)(a) as well as s 38-190(2A). With respect, the mere fact that a particular subsection refers to relationships that are direct or indirect does not necessarily reveal that uses of the word "relation" in other subsections will be restricted to direct relationships. Whether that is the case will depend upon context: Clyne v Deputy Commissioner of Taxation (1981) 150 CLR 1 at 10, 15.
62 Finally, his Honour made the following observations in relation to the legislative policy that might inform the construction of s 11-15(2)(a) (at [44]-[46] and [49]-[51]):
[44] It is clear, both having regard to the modern principles of interpretation as enunciated by the High Court in cases such as CIC Insurance Limited v Bankstown Football Club Ltd (1997) 187 CLR 384 and s 15AA of the Acts Interpretation Act 1901 (Cth) that the Court will prefer an interpretation of a statute which would give effect to the legislative purpose, as opposed to one that would not. This requires the Court to identify that purpose, both by reference to the language of the statute itself and also any extrinsic material which the Court is authorised to take into account.
[45] The language of the GST Act, as seen in the context of value added taxation generally, makes it clear that the legislative scheme is that a taxpayer will be entitled to an input tax credit where it is necessary that a credit be given to ensure that output tax payable by the taxpayer is not imposed upon an amount which already includes tax payable at some early stage in the commercial cycle. Where possible, GST is not to be found embedded in the price or consideration on which output tax is calculated when taxable supplies are made. However, in the case of a taxpayer which makes input taxed supplies, while that taxpayer will not be liable to output tax on the supplies it makes which satisfy the description of input taxed supplies, that taxpayer will be denied an input tax credit for the tax payable on acquisitions it makes where the necessary relationship exists.
[46] The language of s 11-15 would suggest that it was not intended that there be a tracing between the subject matter of an acquisition and an actual supply. Such a tracing would be necessary were the language of s 11-15(2)(a) to operate to disallow a credit where there was a relationship between the acquisition and an actual supply which was input taxed. That no doubt explains why the relationship which negates the input tax credit was expressed as being between the acquisition and the making of input taxed supplies, rather than between the acquisition and actual input taxed supplies. However, while it is true that the GST Act does not mandate a system of tracing acquisitions to actual supplies, it does not follow that an entity which has embarked upon an enterprise which consists of the making of input taxed supplies, but in fact makes no supplies, will be entitled to obtain input tax credits. Whether it is will depend upon whether the acquisitions are related to supplies which, if made, would be input taxed. If the acquisitions do not, then a credit will be available.
…
[49] The policy, as expressed by the Trustee, assumes that the system of input taxed supplies is one where inputs will always be able to be traced to particular outputs. As already noted, many acquisitions may involve generalised overhead expenses which relate to different facets of an enterprise. These acquisitions will not directly relate to particular supplies, yet the enterprise will take them into account in pricing outputs. So too, the fact that particular acquisitions may post date supplies, although be related to them, merely requires that outputs of the enterprise will be priced so as to take into account the costs of these acquisitions, at least in a continuing business.
[50] If it be necessary here to state a general policy for the application of the GST to enterprises making input taxed supplies, it would be that, to the extent that an entity carries on an enterprise that consists of making input taxed supplies, it will bear the GST on acquisitions without an input tax credit so that its pricing of outputs, if any are made, will take into account, commercially, all GST it will be required to bear on its inputs.
[51] This must particularly be the case where the financial supply that the enterprise makes consists of an acquisition supply - that is to say, the receipt of a loan, or, as here, the acquisition of debts.