Commissioner of Taxation v Luxottica Retail Australia Pty Ltd

The legislation 7 Many aspects of the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act) are so well known as to require only the briefest summary here. GST is levied on taxable supplies at the rate of 10% of the value of the supply; s 9-70. It is payable by the supplier; s 9-40. The definition of "supply" is extremely broad, being "any form of supply whatsoever"; s 9-10. A "taxable supply" is one made "for consideration … in the course or furtherance of an enterprise" where the supply is "connected with Australia" and the supplier is "registered, or required to be registered". It does not include a GST-free supply or input tax; s 9-5. 8 The ambit of the definition of taxable supply is expanded by the broad definition of "consideration" which goes well beyond the meaning of the term in the law of contract. The definition includes any payment, act or forbearance which is "in connection with a supply of anything" or "in response to or for the inducement of a supply of anything"; see ss 9-15(a) and (b). 9 "Value" is also defined, depending on context, in a number of sections, relevantly in s 9-75, which deals with the value of wholly taxable supplies, and s 9-80, which deals with supplies which are partly taxable and partly either GST-free or input taxed. The difference between the approach of the Commissioner and that of the respondent stems from their different applications of s 9-80 of the GST Act. Section 9-80 states: (1) If a supply (the actual supply) is: (a) partly a taxable supply; and (b) partly a supply that is GST-free or input taxed; the value of the part of the actual supply that is a taxable supply is the proportion of the value of the actual supply that the taxable supply represents. (2) The value of the actual supply, for the purposes of subsection (1), is as follows: Price of the actual supply x 10 10 + Taxable proportion Where: taxable proportion is the proportion of the value of the actual supply that represents the value of the taxable supply (expressed as a number between 0 and 1). 10 A number of the terms in s 9-80 are defined. In particular, the "value of a taxable supply" and the "price" are defined in s 9-75(1): (1) The value of a taxable supply is as follows: where: price is the sum of: (a) so far as the consideration for the supply is consideration expressed as an amount of money - the amount (without any discount for the amount of GST (if any) payable on the supply); and (b) so far as the consideration is not consideration expressed as an amount of money - the GST inclusive market value of that consideration. 11 Although the value of a taxable supply is to be calculated in accordance with s 9-75(1), the "value of the actual supply" as referred to in s 9-80(1) is not defined. Rather it is to be determined by application of the formula in s 9-80(2).

The notice of appeal 12 At the hearing of the appeal on 23 November 2010 the Commissioner was given leave to file and to rely on an amended notice of appeal which repeated the questions of law set out in the initial notice of appeal filed on 12 February 2010 and added the following grounds of appeal: 1. The Tribunal erred in law and misconstrued the operation of s 9-80 of the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act) by holding that, in a case where the notional prices of the taxable and non-taxable parts of the actual supply are known or have been established: 1.1 absent "tax avoidance or sham" the value of the taxable part of the actual supply is the known or established notional price for the taxable part; and 1.2 it is irrelevant that the purchaser could not purchase the taxable part at that price without also purchasing the non-taxable part of the actual supply for which a single price is paid; and 1.3 the price at which the purchaser could ordinarily separately purchase the taxable part is irrelevant; and 1.4 in such cases "the formula in s 9-80 need not be resorted to". 2. The Tribunal failed to hold in this case where the notional prices of the taxable and non-taxable parts of an actual supply are known or have been established, that the application of s 9-80 of the GST Act to determine the value of the part of the actual supply that is a taxable supply nonetheless involves a valuation exercise in which: 2.1 the value of the taxable and non-taxable parts of the supply must be ascertained for the purpose of calculating the taxable proportion and the value of the actual supply for the purposes of s 9-80(2) of the GST Act: 2.2 the value of the taxable and non-taxable parts of the supply does not necessarily or invariably equate to the known or established notional prices for the taxable and non-taxable parts of the actual supply: 2.3 the fact (if it be a fact) that the purchaser could not purchase the taxable part at that notional price without also purchasing the non-taxable part as part of the actual supply for which a single price is paid is a relevant consideration; and 2.4 the price for which the purchaser could ordinarily separately purchase the taxable part is a relevant consideration. 3. The Tribunal erred in law in determining the value of the taxable part of the actual supply for the purposes of s 9-80 of the GST Act by failing to take into account a relevant consideration, namely that the customer could not purchase the taxable part (the frames) at the known or established notional price without also purchasing the non-taxable part (the lenses) as part of the actual supply (the supply of spectacles) for which a single price is paid. 4. The Tribunal erred in law in determining the value of the taxable part of the actual supply for the purposes of s 9-80 of the GST Act by failing to take into account a relevant consideration, namely the price at which the purchaser could ordinarily separately purchase the taxable part. 5. The Tribunal erred in law in determining the value of the taxable and non-taxable parts of the actual supply for the purposes of s 9-80 of the GST Act by taking into account an irrelevant consideration, namely that there were sound commercial reasons for discounting the price of the taxable part of the actual supply (the frames) but not the price of the non-taxable part (the lenses).

One supply or two supplies? 13 An initial question is whether the sale of spectacles (comprising a frame with the lenses fitted) is a single supply (as the Commissioner contends) or two supplies, being a supply of the frame and a supply of the lenses. The Tribunal at [34] had this to say: We are inclined to the view that the Applicant made one supply, which could perhaps be described as a pair of spectacles, comprising two components, the frame and a pair of lenses. That seems to us to be the more commonsense outcome, and one which sits more comfortably with the "practical business tax" approach to GST which has been favoured by the Federal Court: Sterling Guardian Pty Limited v Commissioner of Taxation [2005] FCA 1166; (2005) 220 ALR 550 and Saga provide but two examples of this approach. The alternative characterisation of the transaction as two supplies - a frame, on the one hand, and a pair of lenses, on the other - must necessarily require there to be a third supply (although one without consideration), being the service of fitting the lenses to the frame. Why a commonplace transaction such as this would need to be disaggregated in this way is not readily apparent. 14 Despite finding that the sale of spectacles was a single supply the Tribunal observed that this was not a particularly critical issue and that "the same result would be reached on the alternative scenario involving two supplies, and valuation under s 9-75". 15 We agree with the Tribunal that the sale of the spectacles was a single supply. While "Supply" is defined broadly, it nevertheless invites a commonsense, practical approach to characterisation. An automobile has many parts which are fitted together to make a single vehicle. Although, for instance, the motor, or indeed the tyres, might be purchased separately there can be little doubt that the sale of the completed vehicle is a single supply. Like a motor vehicle, spectacles are customarily bought as a completed article and in such circumstances are treated as such by the purchaser. The fact that either the frame or the lenses may be purchased separately is not to the point. Similarly the fact that one component, the lenses, is GST-free or that one component is subject to a discount, does not alter the characterisation. 16 In providing for the valuation of an actual supply that is "partly a taxable supply" and "partly a supply that is GST-free …" s 9-80 recognises that a single supply may be comprised of components that are classified differently for GST purposes; the sale of spectacles is just such a case. For that distinction to be meaningful the amount of GST payable in respect of that supply (actual supply) must reflect the proportion that the taxable component bears to the whole of the supply. 17 Section 9-80(2) addresses the problem of determining the amount of GST payable in respect of the actual supply. The section requires one to determine first, the value of the taxable supply that is incorporated in the actual supply (taxable value), second, the proportion of the value of the actual supply that the taxable value represents (Proportion), and third, the value of the actual supply by applying the formula in s 9-80. The amount of GST is then to be determined in accordance with s 9-70. 18 As both parties recognised, the difficulty with the equation in s 9-80 is that it uses the concept of the "value of the actual supply" on both sides of the equation. It is this value that the formula is designed to yield. However, to determine the Proportion one needs to know the value of the actual supply. Prima facie, the equation is circular and therefore not solvable. The Commissioner submitted that the difficulty, apparent when the section is read in isolation, is overcome if the section is read contextually with subsection (1) and in the light of the history of the enactment. 19 The problem that s 9-80 is designed to solve is tolerably clear. It is necessary to ascertain the value of a taxable supply in order to calculate the GST payable in respect of that supply. This is comparatively simple in the case of a pure taxable supply. However, in calculating the value of a bundled supply of taxable and non-taxable supplies (whether GST-free or input taxed) it is necessary to ensure that the non-taxable component of the bundled supply does not contribute to the value. It is for this purpose that the concept of Proportion is utilised. 20 When the GST Act was originally enacted in 1999, s 9-80 did not contain a second subsection and was in the following form: If a supply (the actual supply) is: (a) partly a taxable supply; and (b) partly a supply that is GST-free or input taxed; the value of the part of the actual supply that is a taxable supply is the proportion of the value of the actual supply (worked out as if it were solely a taxable supply) that the taxable supply represents. [Underlining added] 21 The Indirect Tax Legislation Amendment Act 2000 (Cth), item 4A of Schedule 11 omitted the clause in parentheses (which we have underlined) and, by item 4B added subsection 2. As is pointed out in the Commissioner's written submissions, the approach of s 9-80, as originally enacted, "was to 'strip out' GST from the total consideration for the bundled supply ("price" as defined) in ascertaining the value of the actual supply for GST purposes". The problem with this approach is that failing to differentiate between the taxable element of the actual supply and the non-taxable element distorts the value. 22 The Commissioner's written submissions at [20] recognise the difficulty but do not grapple with its implications. They make the following comments: Difficult though the formula in s 9-80(2) may be, it is tolerably clear that its purpose is to "strip out" the GST from the total consideration having regard to the proportion of value that the taxable supply represents; … The difficulty with the formula is that read in isolation, it appears to use "value of the actual supply" on both sides of the equation. However, that difficulty is overcome if the section is read contextually with subsection (1), and in light of the enactment history. So read, taxable proportion is worked out first, as a composite element without reference to the formula, by dividing the value of the taxable supply by the value of the total supply. The presence of GST in one component, and its absence from the other, is dealt with in the next step, the application of the formula. Then, in applying the formula to calculate the "value of the actual supply for the purposes of subsection (1)" the other element is the price of the actual supply, that is the total consideration. In ascertaining under s 9-80 the value of the taxable component of a supply that is partly a taxable supply and is partly GST-free, it is necessary to identify the whole consideration for the bundled supply, apportion the respective values of the two components, then strip out GST in an amount reflective of the taxable proportion, which is the function performed by the formula. 23 The Commissioner's submission as to the purpose of s 9-80(2) may be accepted but the comment that the formula "appears" to use the concept of value of the actual supply on both sides of the equation is unnecessarily coy; it is not a matter of appearance but of mathematical truth. Assuming that "total supply" is the same as the actual supply, the suggestion that the taxable proportion is worked out "by dividing the value of the taxable supply by the value of the total supply" suffers from the same defect as the formula. 24 There is no avoiding the fact that "Proportion" is a mathematical concept referring to the fraction that the relevant component is of the whole, the whole in this case being the value of the actual supply. The equation in s 9-80 contains three elements, the price of the actual supply, the taxable proportion and the value of the actual supply. Given any two of these elements it is straightforward to determine the third but one cannot solve a single equation in two unknowns. In this case both the taxable proportion and the value of the actual supply are unknown. The taxable proportion being a fraction of the value of the actual supply cannot be determined with reference to the value of the actual supply as that element is also unknown. Recasting the equation in s 9-80 illustrates the problem: If: v = value of the actual supply t = Taxable proportion P = price of the actual supply, then: 25 In most cases P will be known, but neither v nor t is known. The equation therefore cannot be solved. It is tempting to think that t (Taxable proportion) is known because it is defined in s 9-80; but the definition only says that it is an unspecified proportion of the value of the actual supply. Once again, the mathematical notation is illuminating. If t is some unknown proportion of v, it may be written: t = k × v where 0 ≤ k ≤1 , which gives: 26 Stripping away the verbiage in the Act, this restatement shows that, even after applying the definition of taxable proportion, there remain two unknowns: v and k. This leads one back to the basic problem: one cannot solve an equation in two unknowns. It follows that the formula in s 9-80(2) cannot be made to work. It justifies the Tribunal's reference to it as "impenetrably circular". 27 If, however, a value could be ascribed to the proportion then the formula would be comparatively simple to apply. As senior counsel for the respondent, Mr Cordara, observed in oral submissions. [W]hatever view one takes of the meaning of the word "price" or "value" in 9-80, one is ultimately forced through the eye of the needle, namely, the word "proportion" in s 9-80(2) and it appears quite clear that the section leaves one entirely [on] one's own or leaves the Commissioner or the courts entirely on their own to work out in any particular case how to approach the ascertainment of that proportion. Once one has done the hard work and done that, then the section proposes a mathematical formula which in itself is not very challenging. 28 The problem of a statutory provision that cannot be made to work is not a new one. In IAC (Finance) Pty Limited v Courtenay (1963) 110 CLR 550 the High Court had to consider a provision that was unworkable. At 572 Kitto J remarked that this conclusion as to the operation of the provision was not reached by a process of interpretation and added, "It is a conclusion not as to the meaning of the section but as to the way it works". Justice Taylor was similarly at a loss as to the meaning and said, at 583-4, "Read literally [it] accomplishes nothing. … It is however, not unreasonable to assume that the section was intended to achieve some object". 29 In IAC (Finance) Pty Limited v Courtenay, although Kitto J and Taylor J each expressed a different view as to the operation of s 43A of the Real Property Act 1900 (NSW), their Honours had similar approaches. Each appreciated that the section was intended to provide some protection to an unregistered purchaser in certain circumstances. Each understood that the purpose of the provision was to fill the gap that the settled law had left in relation to such circumstances. Their Honours' conclusions as to the operation of the section drew on that understanding. 30 As noted above the object of s 9-80 is tolerably clear. It is also not in contention that the GST payable in respect of an actual supply is calculated with reference to the value of that supply. However, that value cannot be determined by application of the formula in s 9-80(2). Similarly the value of the taxable part of the actual supply is, pursuant to s 9-80(1), a proportion of the value of the actual supply. 31 The solution to this problem proposed by the Commissioner in the first sentence of the second paragraph quoted at [22] above does not resolve the difficulty. It involves construing the section as if the definition of Taxable proportion were as follows: Taxable proportion is the proportion of the value of the actual supply that represents the value of the taxable supply (expressed as a number between 0 and 1) where the value of the actual supply is worked out as if the actual supply were solely a taxable supply. The Commissioner's suggestion would read back into the section the words that were deleted by the amendment referred to in [21]. It is difficult to justify such an approach. 32 The respondent adopts a quite different approach. The respondent notes that s 9-75 and s 9-80 both rely on the concepts of 'price' and 'value' in the calculation of GST. In its written submissions the respondent argues: When ss 9-75 and 9-80 are read together, it is evident that the fundamental concept underlying value is price: that is, the actual price agreed by the parties to the supply. Section 9-75 directly connects the value of a supply with its price, while the basic 'building block' used by s 9-80(2) to determine the value of the actual supply is the price of the actual supply. The definition of taxable proportion requires a determination of the taxable part of the actual supply, again by reference to the "value" of each of those integers. The value of the actual supply turns on its price, so the value of the taxable supply ought also to depend on its price. "Price" is defined in s 9-75 to be the consideration for the supply. In this case, the consideration for the supply of the frames is the discounted price agreed by the parties to the transaction. It follows that where s9-80 applies, and the parties have agreed a price for the taxable part of the "actual supply", the provision uses that agreed price as a basis for the value of the taxable part. That is hardly surprising; it is consistent with the approach taken by s 9-75 (headed "The value of taxable supplies"), and it results in the GST liability being calculated by reference to the actual consideration the parties have agreed for the taxable supply. 33 Common to the submissions of both the Commissioner and the respondent is the emphasis they place on price. The difference is that the Commissioner focuses on each price for which the frames and lenses are sold separately as "a fair and reasonable measure of their value" when sold as a complete pair of spectacles. The respondent focuses on the price agreed between the parties to the relevant transaction. 34 In rejecting the price of the frame as agreed between the parties the Commissioner points to the fact that the frame is only available at the discounted price if the customer also purchases the lenses. The Commissioner claims that the respondent confuses 'price' and 'value' and submits that, "Where the frames are not separately available at the discounted price, the market price at which they were separately available was the only relevant evidence of their value that was before the Tribunal … that is, the market value of the frame". 35 The Commissioner submits that the Tribunal's approach involves a misconstruction and a misapplication of s 9-80 and states: The section turns upon the total bundled price, and the proportionate value of the components, not upon a price notionally assigned to one of the components, being a price which if tendered by a customer would not be accepted by the respondent for that component. 36 The difficulty with that submission is that the approach advocated by the Commissioner would do precisely what is criticised in the Tribunal's approach. In basing the value of the frame on the price at which it would have been sold separately the Commissioner ascribes both to it and to the lenses a price which was never agreed between the parties; it is itself a notional price. The Commissioner asserts that this price is a fair and reasonable measure of the value but there is no explanation of why it is a better measure of the value of the taxable supply than that stipulated by the vendor and accepted by the purchaser. Apart from characterising the discounted price of the frame as "notional" the Commissioner does not explain why the price of each component when sold together should be rejected as a fair and reasonable measure of its value. 37 The value of a thing (including a supply) is generally a matter of fact not of law. Where a statutory method of calculating the value is prescribed, as in s 9-75 or s 9-80, then it would be an error of law for the Tribunal to determine value other than in accordance with that method. For reasons given above an element of the formula in s 9-80, the proportion, must be determined by the decision maker taking into account the relevant circumstances of the particular case. In doing so the decision maker must reach a conclusion as to value and the relationship it has to the price of the supply in question. 38 The price of a pair of prescription spectacles is an aggregate of the price of the lenses and the price of the frame and will vary as each component varies. Presumably the price of lenses varies with the complexity of the optical prescription rather than by the choice of the consumer although the Tribunal does not refer to any evidence to this effect. In any event, the evidence before the Tribunal showed that the frames have increasingly become fashion accessories and not just the means of holding lenses in place. They may vary considerably in price and the ultimate cost of the spectacles will depend on the consumer's choice of frame. 39 Promotions that offer lower prices or greater value subject to conditions are common practice in many, if not every, arena of retail sale. The offer may be "two for the price of one", or "buy one, get one free", or, as here, a reduction in the price of the frame on condition that the lenses are purchased at the same time. How a promotion is structured is a matter for the commercial judgment of the seller. In the present case it has clearly been decided that the discount offered should be applied to the price of the frames rather than the lenses. 40 As Hely J commented in Kmart Australia Ltd v Commissioner of Taxation of the Commonwealth of Australia (2001) 114 FCR 353 at 357, where that which is to be valued is one of two elements which form an integrated whole, "apportionment must be undertaken as a matter of practical common sense". Justice Hely's comment was made in the context of s 45 of the Sales Tax Assessment Act 1992 (Cth) which, as Downes J remarked in Re Food Supplier and Commissioner of Taxation [2007] AATA 1550 at [23], is a "not dissimilar section". The Tribunal here has adopted a similar approach and, in the absence of any other measure of value, regarded value as commensurate with price. It said: In the context of this case, commonsense dictates that the taxable proportion is to be calculated by dividing the discounted frame price (less GST) by the actual selling price of the complete pair of spectacles (less GST). … We reject the Commissioner's submission that the undiscounted frame price (sometimes referred to in the hearing as "yesterday's price") has any role to play in the calculation of the taxable proportion. This is because the undiscounted frame price, yesterday's price, is just that; a price which would have been applicable but for the promotion and it would no doubt be the price if the customer purchased the frame alone. But the customer does not on our example purchase the frame alone and the fact that he could do so is not relevant. We come to this view, as to the method of calculating the taxable proportion, on the basis of the following findings, derived from the unchallenged evidence given on behalf of the Applicant: (a) there are sound commercial reasons for the discounting of frames; (b) there is no commercial imperative for the discounting of lenses; (c) there is nothing contrived or artificial about the pricing methodology adopted by the Applicant in its promotional arrangements. 41 The Tribunal added that the fact that the discounted price was conditional on the purchase of the lenses "does not undermine the reasonableness of the calculation of the taxable proportion in this way". 42 The above shows that the Tribunal made a considered decision as to the value of the taxable supply based on findings of fact that it was entitled to make. Any error made by the Tribunal in determining the value would be an error of fact, not of law, and as such does not give rise to a question of law enlivening the jurisdiction of this Court. The Commissioner's position amounts to a disagreement with the factual basis of the Tribunal's decision. As a matter of fact the Commissioner would prefer that the price of the frames sold as a separate item be the basis for determining value. There is no error of law in the Tribunal adopting a different approach to this factual question. The Commissioner's appeal must be dismissed.

Notice of Contention 43 Paragraph 2 of the Notice of Contention follows from the above in that it alleges that the value of the taxable supply of the frames must be determined under s 9-75(2) of the GST Act. For reasons given above we have rejected this proposition and have held that s 9-80 is the relevant section. We agree with the following comments of the Tribunal at [35] concerning this issue: Ultimately, though, we do not think that this question as to whether there is one supply or two is particularly critical to the resolution of the issue before us. It would be a surprising, and perhaps a capricious, outcome if the GST payable on a transaction were to turn on such an esoteric enquiry. And so, although we prefer the view that there is one supply, and that as a result s 9-80 is the relevant valuation provision, we agree with the parties that the same result would be reached on the alternative scenario involving two supplies, and valuation under s 9-75. 44 For these reasons the Notice of Contention must be dismissed. I certify that the preceding forty-four (44) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Ryan, Stone and Jagot.