HP Mercantile Pty Limited v Commissioner of Taxation

The facts 4 The factual background is not complicated. The Trustee, in its capacity as trustee of the Trust, carried on an "enterprise", as that expression is defined in s 9-20 of the GST Act. There may well have been room for a finding that it was not, at least in 2001 when it entered into an arrangement with Stratford Capital Corporation ("Stratford"), carrying on an enterprise. It seems that at the time it entered into that arrangement the Trustee was in the course of considering whether to commence an enterprise by engaging Stratford to undertake a "due diligence assessment" by way of a feasibility study to determine whether it should acquire from "M", a series of debts at a price which, presumably, was less than the face value of those debts (cf definition of "carrying on" an enterprise in s 195-1 of the GST Act). Be that as it may, the feasibility study was, apparently, favourable and in the result, the Trustee acquired the debts. 5 It seems that the debts arose in connection with certain agricultural tax avoidance schemes, but nothing turns upon the nature of the debts. The total purchase consideration for the acquisition of the debts was $160,000. It was to be payable as to $10,000 on execution of the agreement when title to the debts passed to the Trustee, with the balance being payable, subject to certain conditions, by two instalments of $100,000 and $50,000 respectively. The amount which the Trustee paid to Stratford for the due diligence assessment was $150,000. The fact that this figure almost equalled the consideration for the debts might have attracted curiosity, but the parties were in agreement that nothing turned upon this for present purposes. 6 Upon acquiring the debts, the Trustee set about recovering them. It engaged a firm of solicitors to assist it in recovering the debts and also engaged Stratford to "manage" the recovery. In addition, it incurred, as the Tribunal recorded, some expenses of a minor nature, such as payments to Australia Post and to Kwik Kopy. 7 The Trustee, in its Business Activity Statement for the relevant GST periods (these being the periods ending 31 December 2001, 31 March 2002 and 30 June 2002) claimed to be entitled to input tax credits in the amounts of $6,115, $2,777 and $10,582 respectively. These amounts were, relevantly, the GST included in the consideration which the Trustee paid Stratford for the due diligence assessment and, presumably, the solicitors (as well as the minor amounts incurred to other parties and referred to above) for their respective services of managing the collection of the debts which the Trustee acquired and incidental services related thereto. 8 The Commissioner, in assessments made by him in respect of the tax periods in question, denied the full input credits claimed, although, in respect of the amounts which the Trustee paid for services supplied to it in relation to the collection of the debts, the Commissioner allowed reduced input tax credits, under Division 70 of the GST Act and reg 70-5.02, equivalent to 75 per cent of the input tax credits claimed. The Trustee objected against those assessments and, when the objections were disallowed, referred the objection decisions to the Tribunal for review. 9 The Tribunal was of the view that the Commissioner's assessments were correct, so far as they disallowed the full input tax credit for amounts paid for the services in connection with the collection of debts but not so far as they disallowed full input tax credits for the amounts of GST paid for the due diligence assessment. From the Tribunal's decision, so far as it related to the disallowance of the full input tax credits for the debt collection services, the Trustee appealed to this Court. The Commissioner cross-appealed in respect of the allowance of full input tax credits for the services relating to the due diligence assessment. These are the appeals and cross-appeals now before the Court.

The statutory scheme and relevant provisions 10 The Australian GST is an indirect tax. Indirect taxes may be single stage taxes, for example, a tax on retail sales found in many countries in the world, or a bed tax as imposed in New South Wales in respect of hotel accommodation. They may also, if taxing the consumption of goods, operate at multiple stages in the course of goods being manufactured or imported until such time as they go into consumption, such as the wholesale sales tax in operation in Australia until the commencement of the GST. 11 Where there is a multi stage tax which operates with a number of taxing points, a problem, generally known as "cascading" will arise. If nothing is done to avoid cascading, the tax levied at each taxing point will be imposed on a value which already will have included tax payable at the previous taxing point or points. Cascading was, at least partly, avoided by the Australian wholesale sales tax by a system of quotation of certificates, so that in its operation, the tax was payable on the last wholesale sale or, if there was no such wholesale sale, on an assumed value calculated as a proxy for the last wholesale sale: Brayson Motors Pty Ltd (In liq) v Federal Commissioner of Taxation (1998) 156 CLR 651 at 657. 12 However, even though cascading was generally avoided in the Australian wholesale sales tax system, there was a problem that some inputs at least, attracted tax which was included in the amount upon which the tax was calculated and further, that there was no mechanism which enabled all inputs to be refunded in the event that the goods were exported. Arguably, therefore, Australian exporters might have been disadvantaged in competing with exporters from other countries which had taxing systems, such as value added taxation, which permitted the total tax payable to be identified and refunded to an exporter. 13 The genius of a system of value added taxation, of which the GST is an example, is that while tax is generally payable at each stage of commercial dealings ("supplies") with goods, services or other "things", there is allowed to an entity which acquires those goods, services or other things as a result of a taxable supply made to it, a credit for the tax borne by that entity by reference to the output tax payable as a result of the taxable supply. That credit, known as an input tax credit, will be available, generally speaking, so long as the acquirer and the supply to it (assuming it was a "taxable supply") satisfied certain conditions, the most important of which, for present purposes, is that the acquirer make the acquisition in the course of carrying on an enterprise and thus, not as a consumer. The system of input tax credits thus ensures that while GST is a multi-stage tax, there will ordinarily be no cascading of tax. It ensures also that the tax will be payable, by each supplier in a chain, only upon the value added by that supplier. 14 In ACP Publishing Pty Ltd v Commissioner of Taxation [2005] FCAFC 57 at [2], I described the characteristics of the Australian GST as follows: "The GST is, in essence, the tax known in most countries as value added tax, a name which, perhaps, best describes the essence of the tax. The characteristics of a value added tax were aptly described by the European Court of Justice in Dansk Denkavit ApS v Skatteministeriet [1994] 2 CMLR 377 at 394-5 as being that it 'applies generally to transactions relating to goods or services; it is proportional to the price of those goods or services; it is charged at each stage of the production and distribution process; and finally it is imposed on the added value of goods and services, since the tax payable on a transaction is calculated after deducting the tax paid on the previous transaction.'" 15 I continued at [3]: "These characteristics are displayed in the Australian legislation by the tax 'output tax' being levied, in effect, upon substantially all supplies (referred to in the GST Act as 'taxable supplies') being generally, although not exclusively, supplies of goods or services made by a registered person, or person required to be registered, for consideration… and the deduction referred to in Dansk (popularly known as an 'input tax credit') being given to a registered person, or person required to be registered, who makes a creditable acquisition, as that expression is defined." 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 [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. This is subject to a unique Australian invention that certain kinds of activities, being, generally speaking, those which might be outsourced by entities making financial supplies and are in aid of making such supplies will, albeit that those activities might be defined as financial supplies, attract a reduced input tax credit of 75 per cent of the credit otherwise available. An example relevant to the present facts is debt collection activities - see reg 70-5.02 (Item 17) of the A New Tax System (Goods and Services Tax) Regulations 1999 (Cth)("the Regulations"). 18 A definition of what constitutes an input taxed supply is to be found in Division 40 of the Act. The table of subdivisions for that Division refers to the following kinds of supplies as being input taxed, namely: financial supplies, residential rent, residential premises, precious metals, school tuckshops and canteens and fund-raising events conducted by charitable institutions. 19 A financial supply will be one which falls within the meaning of that expression in reg 40. It is unnecessary to discuss that definition in any detail, save in one respect. There will be a financial supply where there is the provision, acquisition or disposal of an interest recognised at law or in equity as property in any form, provided that provision, acquisition or disposal is for consideration and in the course of, or furtherance of, an enterprise, has the necessary connection with Australia and the supplier is a financial supply provider as defined in the Regulations: see reg 40-5.09. Perhaps counter-intuitively therefore, a financial supply will include something that is not a supply but an acquisition. An interest in a debt is, by virtue of Item 2 to the table to reg 40-5.09, a relevant interest, which if acquired will, in a case such as the present, result in the acquirer of the debt being taken to have made a financial supply. The definition of "financial supply" is fleshed out by examples in the Regulations and in schedules to the Regulations, which need no reference here. It suffices to say that it is common ground in the present case that the activity of the Trustee in acquiring the debts in the course of its enterprise will be an input taxed supply. This accepts that the Regulations have both the effect of rendering an acquisition a supply and further, as requiring that a supply made includes an acquisition received. This rather strange use of the regulation making power compounds confusion in the present case. It may raise at some stage a question of the validity of the Regulations themselves. However, that is not an issue which is before us. 20 The provisions dealing with the entitlement to input tax credits are to be found in Division 11 of the GST Act. Section 11-20 provides for there to be an entitlement to an input tax credit for any "creditable acquisition" made by a taxpayer. The expression "creditable acquisition" is defined in s 11-5. Relevantly, there must be an acquisition which is solely or partly for a creditable purpose: s 11-5(a). The acquisition must arise from a supply to the taxpayer which is a taxable supply: s 11-5(b). What a creditable purpose is will be found from s 11-15. Relevantly, that section provides: "(1) You acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise. (2) However, you do not acquire the thing for a creditable purpose to the extent that: (a) the acquisition relates to making supplies that would be input taxed; or (b) the acquisition is of a private or domestic nature. (3) An acquisition is not treated, for the purpose of paragraph (2)(a), as relating to making supplies that would be input taxed to the extent that the supply is made through an enterprise, or a part of an enterprise, that you carry on outside Australia. (4) … (5) An acquisition is not treated, for the purposes of paragraph (2(a), as relating to making supplies that would be input taxed to the extent that: a. the acquisition relates to making a financial supply consisting of a borrowing; and b. the borrowing relates to you making supplies that are not input taxed." 21 It is, perhaps, not unremarkable that s 11-15 of the GST 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). In both the GST provision and the income tax provisions, there is a need to pass first through a positive test. In the case of GST, the positive test is the requirement that the acquisition has been in whole or in part acquired in carrying on an enterprise. In the income tax context, there is the need to find that the loss or outgoing be incurred in gaining or producing assessable income, or in carrying on a business. In both cases apportionment arises where the positive test is only partly satisfied. Next, both require consideration of negative tests which exclude the allowance of a credit in the GST context or the allowance of a deduction in the income tax context. In the GST context the negative tests are those set out in s 11-15(2) of acquisitions relating to supplies that would be input taxed or acquisitions of a private and domestic nature. In the income tax context, the negative tests also involve the case where the loss or outgoing is of a private and domestic nature as well as where it is capital or of a capital nature. In both cases, a question of apportionment arises where the negative tests only partly apply. 22 The legislature might have followed the value added tax model applicable in the United Kingdom, which for present purposes can be said to allow an input tax credit where the acquisition is one that relates to the making of taxable supplies (including within that expression, supplies which in Australian GST parlance are GST free, called, in European countries, zero rated supplies). If that model had applied there is no doubt that the Trustee would not be entitled to an input tax credit. None of the acquisitions it made, whether for the feasibility study or for debt collection services, would have related to any taxable supply it made. The Trustee made no supply taxable or otherwise other than the financial supply. It merely collected money payable on the debts it acquired. 23 However, that is not the model which Parliament adopted in the GST Act. The question is whether the language of the GST Act reveals an intention to adopt a different approach which would permit the Trustee to obtain an input tax credit for the relevant acquisitions it made on the basis that they were wholly acquired in carrying on the Trust enterprise (this is agreed) and did not relate to making supplies that would be input taxed, which for present purposes, can be taken to mean the acquisition by the Trustee of the debts which were the subject of the feasibility study and the debt collection services, as the case may be.

The Tribunal's decision 24 The Tribunal dealt first with the debt collection services. After discussing the statutory scheme relevant to the allowance of input tax credits and the relevant statutory provisions, the Tribunal noted the argument for the Trustee that the provisions of s 11-15(2)(a), which operate to disallow input tax credits so far as they relate to making supplies that would be input taxed, imported "conditional futurity". It was submitted, and it would seem this was the only submission put on this aspect of the case, that the paragraph required there to be identified a moment of time at which an acquisition occurred. Having identified this moment, it was necessary, it was submitted, to ask whether the acquisition would be followed by a related input taxed supply. 25 The Tribunal rejected the submission, both because, in its view, the words of the GST Act did not require a person applying it to address a particular moment (the GST Act contains no timeof supply rules although it does contain attribution rules, see s 29) and because as a matter of syntax, while the word "would" could connote futurity, it might, depending upon context, merely indicate "certainty" or "conditionality." The Tribunal was of the view that this was the meaning of the word "would" in the context of s 11-15(2)(a) of the GST Act. The Tribunal noted that the EM gave, by way of an example, a case where the acquisition did precede the making of a related input taxed supply. While this was, as the Tribunal noted, the "conventional sequential process", the Tribunal was not of the opinion that the EM was addressing the matter involved in the Trustee's submission. The Tribunal said that the view it took was one which "promote[d] the purpose or object of the legislation in accordance with s 15AA of the Acts Interpretation Act 1901". The Tribunal added that it was of the view that its interpretation was supported by reg 70-5.02 (Item 17), which included among the items listing services entitled to a reduced input tax credit, certain "debt collection services". 26 The Tribunal's consideration of the issue of the allowance of input tax credits for amounts paid for the due diligence advice, ie the feasibility study, centred upon a ruling issued by the Commissioner, being GSTR 2002/2 which contained a discussion of the occasions when an acquisition might relate to making a financial supply and gave an example involving a company, Belvedere Ltd which sought advice from another company, Eagle Corp as to how it might expand its operations into mineral exploration. The advice ultimately given was that Belvedere Ltd should take over another company Rochester Enterprises, an activity which would involve Belvedere Ltd making a financial supply. The ruling made the following comment: "The services rendered prior to Belvedere Ltd forming an intention to acquire the shares of Rochester Enterprises (at the Board meeting) are for a creditable purpose while services after that date are not for a creditable purpose as they relate to making supplies that would be input taxed." 27 It was no part of the Trustee's case that it had relied upon the ruling in circumstances which would result in the Commissioner being required to assess its case in accordance with the ruling. Rather, the Trustee argued that the Tribunal should take account of the ruling and the example given as part of its role in administrative review (cf Ryan v Federal Commissioner of Taxation 2004 ATC 2181 at [38]) and decide in accordance with the ruling and thus, it was said, favourable to it, unless otherwise of the view that the ruling was wrong. 28 The Tribunal then proceeded to consider whether the ruling was wrong and thus, to examine the reasoning in the ruling. It concluded that the ruling was referring to a case where the advice given did not relate to making a supply as such, but to deliberations which may have led to a decision not to make the relevant supply. So read, the ruling was not, in the view of the Tribunal, wrong. Accordingly, the Tribunal adopted the reasoning in it. In consequence, the Tribunal found that the Trust had acquired the feasibility services for a creditable purpose and was thus entitled to full input tax credits.

The submissions 29 For the Trustee on the appeal, it was argued as it had been in the Tribunal, that an input tax credit was allowable to it, having passed the positive limb of s 11-15(1) because the negative limb of s 11-15(2)(a), which operated to disallow input tax credits, applied only to the case where the acquisition related to a future supply which was input taxed. Since the input taxed supply in this case (the acquisition of the debts) occurred prior to the debt collection fees being paid or invoiced (see the attribution rules to be found in Division 29 of the GST Act) and there was no subsequent input taxed supply made, the provisions of s 11-15(2)(a) of the GST Act had no application. 30 The interpretation contended for was said to follow as a matter of language, and regard was had also to other provisions of the GST Act, which supplied, so it was said, the context in which s 11-15(2)(a) was to be read. 31 For the Commissioner, it was argued that the legislative policy was that input tax credits not be given to entities whose enterprises only consisted of making input taxed supplies and it mattered not whether the supplies were made before the acquisitions for which credit was claimed, or after. This was said to be clear from the EM. Further, it was submitted, there was nothing in the context of the GST Act which supported the interpretation contended for by the Trustee. The words "that would be input taxed" when read in their context, referred not to conditional futurity, as submitted, but as the Tribunal had said, were used in the conditional sense. So read, an input tax credit was not available, both where the acquisition in question related to an input taxed supply not yet made, as well as to an input taxed supply that had already been made. It was inconceivable that the obtaining of input taxed credits would be based upon the sequence in which inputs and outputs occurred. 32 As to the matter the subject of the cross-appeal, it will have been noted that the acquisitions which gave rise to the claim for input tax credits in respect of GST payable on the supplies made by Stratford in the feasibility study preceded the making of the input taxed supply, being the acquisition of the debts. Hence, the previous argument had no application. However, it was submitted for the Trustee that the reasoning which led to the ruling which discussed the Belvedere case required the conclusion in the present case that input taxed credits should be allowed in the case of the feasibility study. For the Commissioner, it was submitted that the Tribunal fell into error in that the ruling was distinguishable. It dealt with a case where advice was given in respect of a series of possible courses of action which could be taken, not where the only question which was the subject of the feasibility study here was whether the Trustee should proceed to acquire the debts, that is to say, to make the relevant financial supplies that were input taxed. 33 It is convenient to discuss the question the subject of the appeal first.

"[R]elates to making supplies that would be input taxed" 34 There is nothing in the language used which requires the words "relates to making supplies that would be input taxed" to be read as referring only to the making of supplies which, if made at all, would be made at some future time, that time being after the acquisitions which are claimed to give rise to input tax credits. 35 First, it is clear that s 11-15(2)(a) requires there to be a relationship between the acquisition and the making of the supplies - whether those supplies are only to be in the future, if at all, or may be past or future supplies. There seemed to be no real disagreement between the parties as to the nature of the relationship required. Both parties appeared to accept that the relationship was one which had to be a "real" and substantial relationship - not one that was trivial. There was some discussion on the question whether the relationship could be indirect or had to be direct, although it did not seem that anything turned upon that in the submissions of the Trustee. 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: Tooheys Ltd v Commissioner of Stamp Duties (NSW) (1960) 105 CLR 602 at 620 per TaylorJ; Joye v Beach Petroleum NL (1996) 67 FCR 275 at 285 per Beaumont and Lehane JJ; and Australian Competition and Consumer Commission v Maritime Union of Australia (2001) 114 FCR 472 at 487 per Hill J. It appears also in more recent High Court authority such as North Sydney Council v Ligon 302 Pty Ltd (1996) 185 CLR 470; Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355 at 387 and O'Grady v Northern Queensland Co Ltd (1990) 169 CLR 356 at 374 per Toohey and Gaudron JJ. 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 falls 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 sub-sections 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. 39 Whatever may be the case where a relationship is indirect, that is not the case here. Once it is accepted that what is required is a real or substantial relationship, it becomes then a question of fact whether such a relationship exists in a particular case. The Tribunal, as sole arbiter of fact, found, without difficulty, that there was a real relationship that existed between, on the one hand, the acquisition of the debt collection supplies and on the other, the acquisition of the debts. As the Commissioner's written submissions say, the activities of the Trust in acquiring the debts and then collecting them were closely connected as one continuous course of conduct. Necessarily, for the Trustee to be entitled to a refund of input tax credits the Trust had to be carrying on an enterprise - relevantly here, activities in the form of a business: (cf s 9-20(1)(a)). That business began with the feasibility study and proceeded through the acquisition of the debts (the financial supply) and the collection of those debts. To say that fees paid for assistance to collect the debts had no real relationship with the acquisition of the debts would, in this context, be remarkable. 40 The next matter to be noted is that the relationship must be one that relates to "making" supplies that are input taxed, not one that relates to the supplies themselves. It is difficult to see that anything turns upon that in the present case. 41 It may be hoped that concentration upon linguistic analysis by engaging in a syntactical enquiry into the meaning of the word "would" when used in conjunction with "making" would not be the correct approach to the present issue of interpretation. Nor is it particularly helpful to engage in a discussion as to whether the word "making" is a present participle or a gerundive. It is true that the word "would" could suggest futurity just as the word might suggest conditionality. Indeed, it could suggest both. But to say that is not to solve the construction issue, merely to suggest that more than one alternative is open. It suffices to say that one meaning of the word "would" is conditionality. While the 42nd meaning in the Oxford English Dictionary quoted by the Tribunal refers to conditionality, the Macquarie Dictionary, (3d ed), gives as its first meaning "1. (used to form conditional)". 42 As reference to policy would indicate, there was a need in framing a provision disentitling a taxpayer to input tax credits to use a word suggesting conditionality, to ensure that a credit would not be available if there would have been a relationship between the acquisition and a future supply, in the event that no future supply eventuated. A simple example would be the case of acquisitions relating to establishing a financial institution which collapsed before making any supply. Had a supply been in fact made by that financial institution, it may be assumed the supply would have been a financial supply. Such a case would necessarily be encompassed by the words: "the acquisition relates to making supplies that would be input taxed." 43 A more profitable approach to the question of construction is to consider both the policy which is enshrined in Division 11 and the legislative context, so far as that casts light upon the proper interpretation of s 11-15(2)(a).

The legislative policy 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 Limited (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. 47 It is submitted for the Trustee that the legislative policy is to ensure, in the case of an entity making input taxed supplies, that the output tax borne by the entity in making acquisitions is embedded in the consideration received for the input tax supplies it makes. The written submission of the Trustee puts the policy in the following way: "The underlying policy is that denying an input tax credit on 'inputs' will still lead to the 'outputs' resulting from those 'inputs' being priced to reflect the GST paid on the 'inputs'. Particularly as applied to 'financial supplies', this overcomes difficult problems of valuing the supply for the purpose of imposing GST, that is of determining the 'added value' involved in the ultimate output for the purpose of imposing the value added tax." 48 As a general statement of the policy behind input taxation, this may be accepted, albeit that it is incomplete because it omits altogether the case where, for whatever reason, the taxpayer in fact makes no supplies at all. Since a person will be taken to be carrying on an enterprise if the taxpayer does anything in the course of the commencement of an enterprise, there will always be the possibility that the enterprise might fail before there has been any supply made. It is difficult to see why the legislative policy would be to give a taxpayer a full input tax credit in such a case, while not giving it a credit if the enterprise in fact did not fail but thereafter operated to make a supply. Hence, the policy stated above must be adjusted so that, at the least, it provides that the denial of credits would lead to any outputs, if in fact made, reflecting in a commercial sense, the GST paid on the inputs. It may also be noted here that a taxpayer will carry on an enterprise in the defined sense where the taxpayer is acting in terminating a business (see definition of "carrying on" in s 195-1 of the GST Act). Thus it might be expected that acquisitions would likely be made in the termination stage of an enterprise which related to supplies made earlier than the acquisitions. If these supplies were financial supplies as defined, it would be expected that the taxpayer would not qualify for full input tax credits in such a case. 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. 52 There is no reason in principle or policy why the grant of input tax credits should depend upon the sequence in which acquisition and supply occur. In the real world, while often, perhaps normally, acquisitions will precede supplies to which they are related, this is not inevitably the case. Let it be assumed that a bank proposes to make a loan to its client secured by mortgage. It may obtain advice on the form of the security before making the loan or it may obtain advice on some aspect of the security after making the loan. It can hardly be thought that the legislative policy would refuse the input tax credit where the loan followed the advice, but allow it where the advice followed the loan. Just as in the income tax context, a loss or outgoing may have been incurred in gaining or producing assessable income of a previous taxation year (cf Placer Pacific Management Pty Ltd v Federal Commissioner of Taxation (1995) 95 ATC 4459), so too, an acquisition may have been made in relation to the making of input taxed supplies in a past GST period, just as it may be made in relation to the making of input taxed supplies in the current or future GST period. All that is required is a relationship between the acquisition and the making of supplies that, if any are made, would be input taxed. 53 There is nothing in the extrinsic materials which suggests otherwise. It is true that the EM addresses the case where the conventional sequence of acquisition followed by supply applies. But there is nothing that can be drawn from this to support either view of the construction of s 11-15(2)(a).

The legislative context 54 Senior counsel for the Trustee relied upon a number of statutory provisions in the GST Act in support of his argument of futurity. These are respectively: s 40-1; the note to s 9-30(2); and the definition of "financial acquisitions threshold" in s 189-5. Reference should also be made to the provisions of Divisions 129 and 132 dealing with adjustments. It is necessary to consider these provisions and whether they lead to the conclusion submitted for by the Trustee. 55 Section 40-1 is the explanatory section to Division 40, dealing with input taxed supplies. Under the heading "What this Division is about" appears the following: "This Division provides for the supplies that are input taxed. If a supply is input taxed, then: i. no GST is payable on the supply; ii. there is no entitlement to an input tax credit for anything acquired or imported to make the supply (see sections 11-15 and 15-10)…" 56 With respect to the submission, it is hard to see that s 40-1 compels a conclusion that s 11-15(2)(a) speaks only in the future. It is true that it notes that there is to be no entitlement to an input tax credit for anything acquired "to make the supply" - which is obviously correct. However, it hardly appears to be intended to set out, in summary form, what s 11-15 means. It cross-references that subsection so that the reader may read and interpret it. It must also be noted that the section is not an operative provision and has only the limited effect given to it in s 4-5 of the GST Act. It may only be considered for the limited purposes set out in s 182-10, which includes the determination of the purpose or object underlying the relevant provision. In my view, the explanation is expressed at such a level of generality that it would be unsafe to rely upon it for the purpose suggested by the Trustee. 57 The second matter relied upon is the note in s 9-30(2). The subsection itself is concerned with defining when a supply is input taxed. The note to it reads: "If a supply is input taxed, there is no entitlement to an input tax credit for the things that are acquired or imported to make the supply (see sections 11-15 and 15-10)." 58 Again, the note can only be used for the limited purpose of helping to identify, accurately and quickly, the provisions that are relevant and to help an understanding of them: s 4-1. Be that as it may, the note is not really of much assistance. It could hardly affect the proper interpretation of s 11-15(2)(a) or operate to rewrite it in the way the Trustee contends for. At best, it is an inexact summary of what s 11-15 provides. 59 The third matter relied upon is the definition of "financial acquisition" in s 189-15. The expression is defined to mean an acquisition: "…that relates to the making of a financial supply (other than a financial supply consisting of a borrowing." 60 The definition is for the purpose of enabling calculation of the financial acquisitions threshold. It is said that the focus is upon the making of a financial supply and on acquisitions that are inputs into the making of such a financial supply. So it is said that where the acquisition is not an input into the making of the financial supply because the financial supply, if made at all, precedes the acquisition, the policy of not allowing an input tax credit is not applicable. The submission is set out at [47]. 61 With respect, the way the submission is put gives far too much work to do for the definition in s 189. In particular, as the submissions of the Commissioner pointed out, nothing in s 189-15 supports the submission that the focus of paragraph (a) in s 11-15(2) is on "acquisitions that are inputs into the making of such a financial supply." 62 There are other provisions which may be more helpful. Division 129 of the GST Act is concerned with the making of adjustments when there has been a change in creditable purpose by reason of the occurrence of later events. Because it operates to create adjustments where there has been a change in creditable purpose by a use of the thing acquired in a different way to the intended use, it inevitably must be concerned with the situation where the acquisition precedes the supply. To that extent, it can give no assistance either way in the construction of s 11-15. 63 More significant, however, is Division 132. That Division is concerned with adjustments to be made where there has been an acquisition which was not fully creditable and subsequently, the taxpayer has made a taxable supply of the thing acquired. An obvious example would be the acquisition of, say, a computer by a financial institution where the computer is later sold in a supply that would, of its nature, be a taxable supply. The purpose of the Division is to give the taxpayer, in effect, a credit to the extent permitted by the Division to offset the output tax payable on the taxable supply. One would expect that the adjustment would be available, both in the case where the acquisition occurred before the making of a financial supply, as well as where the acquisition occurred after the making of a financial supply to which it was related. The language suggests this to be the case, or at least, does not differentiate between the two situations as would be expected if the Trustee's submission were correct. Thus, sub-s (4) operates to provide that, in working out the adjusted input tax credit which the Division grants, the acquisition is to be treated as having been for a creditable purpose: "except to the extent that the acquisition … (a) relates to the making of financial supplies". 64 The sub-section does, it seems to me, support the construction urged by the Commissioner, in that it uses language which does not differentiate, as otherwise would be necessary, between acquisitions which predate the making of supplies to which they relate, where the Division would apply and acquisitions which postdate the making of a related supply, where on the construction advanced by the Trustee, the taxpayer would have been entitled to a full input tax credit and thus there would be no work for Division 132. 65 Finally, it is significant as the Tribunal pointed out that reg 70-5.02 (Item 17) identifies debt recovery among other debt collection services and litigation as being activities which attracts a reduced input tax credit. In other words, the Regulations proceed upon the basis that various acquisitions made after an acquisition of debts (being a financial supply), while not attracting a full input tax credit, will qualify as being entitled to a reduced credit. In other words, whether a taxpayer acquires a debt (a financial supply) and then acquires debt collection services or whether the taxpayer makes a loan (a financial supply) and then acquires debt collection services, the Regulations contemplate that the taxpayer will not obtain a full input tax credit for the acquisitions of the debt collection services but will in both cases receive a partial credit. On the Trustee's argument, a full credit would be available in each case and the provisions of Item 17 would have no operation in either case.

Summary in respect of the appeal 66 It follows, in my view, that the interpretation suggested by the Commissioner is supported by the syntax, the policy and the surrounding legislative context, to the extent that each of these, at the least, does not require the construction advanced by the Trustee and at best, supports the construction advanced by the Commissioner. I would dismiss the appeal.

The cross-appeal - the feasibility study 67 The cross-appeal is concerned with the more conventional time sequence, that is to say the sequence where the acquisition precedes the making of the financial supply, in the present case, the debt acquisitions. 68 The reasons of the Tribunal concentrated, perhaps to a rather greater degree than was desirable, upon the ruling of the Commissioner: GSTR 2002/2. This no doubt reflects the argument advanced before it. 69 Before considering the issue, it is desirable to say something about a comment made by the Tribunal. At [41], the Tribunal points out that the ruling is expressed to be a public binding ruling and comments that the effect of ss 63 and 37 of the Taxation Administration Act 1953 (Cth) ("the Administration Act") is that the Commissioner does not have the power to issue public binding rulings in relation to an indirect tax, such as GST. Unless read carefully, this comment may be misleading, at least if it suggests that the Commissioner has no power to issue rulings at all relating to the GST. 70 Part IVAAA of the Administration Act provides for a system of public rulings and part IVAA a system of private rulings. The system of binding public rulings, dealt with in Part IVAAA, applies, in effect, only to rulings upon the application of an income tax law or a fringe benefit tax law. Likewise, Part IVAA is so limited. Neither apply to the GST. Section 37 of the Administration Act, in effect, operates to protect a taxpayer who has relied upon a ruling in relation to the operation of the GST legislation, and thus underpaid his or her GST liability. 71 There can be no suggestion that the Commissioner has no power to issue a ruling, whether public or private. So much is assumed by s 37, which is concerned, not with the power to issue a ruling, but with the consequence of a taxpayer relying upon a ruling that has been issued, but turns out to be wrong. To the extent that s 37 does not operate by implication to empower the Commissioner to give rulings, the giving of a ruling would be within the powers of the Commissioner under s 63 of the Administration Act which charges him with the general administration of the GST and other indirect tax laws, as defined. 72 In the present case, the Court is not concerned with the question of power to issue rulings, or indeed, with the correctness as such of GSTR 2002/2. It is concerned only with whether the Trustee representing the Trust, as an entity, was entitled to input tax credits for the feasibility study supplied by Stratford. 73 That question must be answered by reference to s 11-15(2)(a) and whether there is a sufficient relationship between the acquisition on the one hand and the making of the financial supply, which consisted of the acquisition of the debts on the other. As the Tribunal said at [37], the relationship between the advice to acquire the debts and the acquisition of the debts is as close, if not closer, than the relationship between the acquisition of the debts and the collection services with which the appeal was concerned. Once it is accepted that the relationship must be one that is not insubstantial, it is hard to see how there can be any answer to the cross-appeal, other than that no input tax credit was allowable to the Trustee for the GST payable on the supply to it of the services, being the feasibility study. The existence of the relationship is a question of fact for the Tribunal. This being said, it is difficult to see why the Tribunal found otherwise. 74 The Tribunal did so, as noted earlier, because it was of the view that the reasoning behind GSTR 2002/2 was correct and led to its conclusion. There is no suggestion that this does not involve a question of law upon which this Court, on the appeal, should rule. 75 It is obvious when one reads the ruling that the ruling was seeking to draw a distinction between the case where the advice sought by the taxpayer, a mining company, related to its expanding its mining activities and where the advice sought related to its acquiring shares, an input taxed supply to it. It was for that reason that the ruling suggested that the services rendered to Belvedere Ltd prior to its forming an intention to acquire the shares were for a creditable purpose (that is to say, they related to the mining activities and not to the share acquisition), but that the services rendered thereafter, when the intention was formed to proceed with a take-over, related to the making of an input taxed supply and were not for a creditable purpose. 76 No doubt, where a taxpayer seeks advice concerning activities, some of which are the making of taxable supplies and some the making of input taxed supplies, the acquisition will not relate, at least wholly, to the future activities of making input taxed supplies if engaged upon. Depending upon the facts, the whole amount of the acquisition may relate to the making of taxable supplies, or, there may be a need to make an apportionment, taking into account the extent to which the advice (the acquisition) related to the making of supplies that would be input taxed. That is not, however, the present case. The advice sought related to whether the Trustee should proceed with the making of a financial supply (that is to say, the acquisition of the debts). There is no question here of the advice relating to mixed activities. It related solely to the making of input taxed supplies (the debt acquisition) which if proceeded with would be input taxed. With respect to the Tribunal, I am of the view that it erred in law in holding that the provision of s 15-11(2)(a) did not, in the facts of the present case, operate to disallow to the Trustee an input tax credit for the GST payable by it on the acquisition of the feasibility study advice. 77 It follows that the cross-appeal should be allowed. 78 Since writing this judgment I have had the advantage of reading the reasons in draft of Stone J and would add that I agree with the comments made by her Honour.

Orders 79 I would, accordingly, allow the cross-appeal and dismiss the appeal. I would set aside the orders of the Tribunal and in lieu thereof, I would affirm the objection decisions of the Commissioner in respect of each of the GST periods which were the subject of the assessment. I would further order the Trustee to pay the costs of the Commissioner, both of the appeal and of the cross-appeal. I certify that the preceding seventy-nine (79) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Hill.

BETWEEN: HP MERCANTILE PTY LIMITED (ACN: 097 362 877)

AND: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

REASONS FOR JUDGMENT STONE J: 80 I have had the advantage of reading in draft form the reasons of Hill J. I agree with the orders proposed by his Honour and with his Honour's reasons for those orders. I would, however, like to make some addition comments in relation to the issue of whether the relationship referred to in s 11-15 of the GST Act (adopting the abbreviation used by Hill J) is an issue of fact. This issue arises because of the limited jurisdiction granted to this Court under s 44(1) of the Administrative Appeals Tribunal Act 1975 (Cth) ('the AAT Act'). Section 44(1) provides: '(1) A party to a proceeding before the Tribunal may appeal to the Federal Court of Australia, on a question of law, from any decision of the Tribunal in that proceeding.' [Emphasis added] 81 In TNT Skypak International (Aust) Pty Ltd v Federal Commissioner of Taxation (1988) 82 ALR 175 at 178 Gummow J observed: 'Section 44 of the AAT Act is expressed in narrower terms than the old s 196 of the Tax Act. This provided for appeals from the Board of Review which "involved" a question of law. The result was that if some question of law was involved, the whole of the decision of the Board was open to review, not merely the question of law … This no longer will be the case with appeals brought to this court under s 44 of the AAT Act. The existence of a question of law is now not merely a qualifying condition to ground the appeal, but also the subject matter of the appeal itself…' [Citations omitted] 82 In respect of the cross-appeal, the Trustee did not raise this issue of jurisdiction and there was no suggestion that the cross-appeal was incompetent. One can only assume that the Trustee had formed the opinion that this Court had jurisdiction to determine the issue in the cross-appeal. Nevertheless, it seems to me that even in the absence of a challenge by either party, where the jurisdiction of the Court to determine an issue is conditional on that issue being a question of law, the Court needs to be satisfied on that point. 83 It appears to be accepted that, in general, the ordinary meaning of a word is a question of fact; Collector of Customs v Pozzolanic Enterprises Pty Ltd (1993) 43 FCR 280 at 287, accepted on this point at least by the High Court in Collector of Customs v Agfa-Gevaert Limited (1996) 186 CLR 389 ('Agfa-Gevaert') at 395-7. In Life Insurance Co of Australia Limited v Phillips (1925) 36 CLR 60 at 78, Isaacs J distinguished between 'meaning' (a question of fact) and 'construction' (a question of law). Quoting Lindley LJ in Chatenay v The Brazilian Submarine Telegraph Company Limited [1891] 1 QB 79 at 85, his Honour explained, '[Lindley LJ] says: "The expression 'construction' as applied to a document, at all events as used by English lawyers, includes two things: first, the meaning of the words; and, secondly, their legal effect, or the effect which is to be given to them. The meaning of the words I take to be a question of fact in all cases whether we are dealing with a poem or a legal document. The effect of the words is a question of law." ' 84 In Agfa-Gevaert the High Court viewed this distinction with some scepticism, commenting at 396-7, 'With respect this distinction seems artificial, if not illusory. The meaning attributed to individual words in a phrase ultimately dictates the effect or construction that one gives to the phrase when taken as a whole and the approach that one adopts in determining the meaning of the individual words of that phrase is bound up in the syntactical construction of the phrase in question. … If the notions of meaning and construction are interdependent, as we think they are, then it is difficult to see how meaning is a question of fact while construction is a question of law without insisting on some qualification concerning construction that is currently absent from the law.' 85 More recent guidance can be found in Vetter v Lake Macquarie City Council (2001) 202 CLR 439 at 450 where Gleeson CJ, Gummow and Callinan JJ commented: 'Whether facts as found answer a statutory description or satisfy statutory criteria will very frequently be exclusively a question of law. To put the matter another way … whether the facts as found by the trial court can support the legal description given to them by the trial court is a question of law.'

See also, Hope v Bathurst City Council (1980) 144 CLR 1 at 7-9 per Mason J, with whom Gibbs, Stephen, Murphy and Aickin JJ agreed, and Hayes v Federal Commissioner of Taxation (1956) 96 CLR 47 at 51 per Fullagar J.

86 In this case the facts as accepted by the Tribunal include that the Trustee "incurred expense for due diligence advice from S as to whether it should acquire the debts". The Tribunal stated the issue in respect of the expenses incurred for the due diligence advice as being, "whether the procuring of advice whether to make supply by acquiring debts is related to the acquiring of the debts when the advice is accepted and implemented." Implicit in those statements is a finding of fact as to the reason the advice was sought. This involves an acceptance of the fact of a relationship between the advice and the acquisition. In my view, the subsequent question whether 'the acquisition relates to making supplies that would be input taxed' is a question of law which properly invokes the jurisdiction of this Court under s 44(1) of the AAT Act. I certify that the preceding seven (7) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Stone.

NEW SOUTH WALES DISTRICT REGISTRY NSD 1681 of 2004

BETWEEN: HP MERCANTILE PTY LIMITED (ACN: 097 362 877)

AND: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

ALLSOP J 87 I have had the considerable advantage of reading the reasons in draft of Hill J in this appeal, with which, subject to what follows, I agree. I also agree with the orders proposed by his Honour. 88 Were it not for the matters with which his Honour deals concerning the statutory scheme and the purpose and context of the legislation, I would be inclined to the view that the acquisition of legal and management services in collecting the debts did not relate to making the relevant supply, being the acquisition of the book of debts. As a matter of textual meaning, it can be said that the acquisitions relate to the debts but not to the acquiring of the debts. 89 Set against that textual point of view are the considerations to which Hill J refers concerning s 11-15(5). One then needs to appreciate the matters dealt with (if I may be permitted to say) so clearly by Hill J dealing with the statutory scheme and the legislative context and purpose. Taking all these matters into account, I would conclude that the Tribunal was correct in viewing the acquisitions of the legal and managerial services as related to making supplies that would be input taxed. 90 The above comments are not directed to what were referred to in argument as either the futurity argument (based on the word "would") or the timing or sequence argument. Plainly, in my view, an acquisition can relate to the making of a supply earlier occurring. Examples were given in argument. They readily spring to mind in any commercial context. For instance, legal or merchant banking advice in respect of a borrowing to replace temporary funding for the acquisition of the book of debts (the deemed supply) in particular if such refinancing was contemplated before the acquisition (deemed supply). 91 I have also had the advantage of reading the reasons in draft of Stone J with which I also agree. I certify that the preceding five (5) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Allsop.

Associate: Dated: 8 July 2005 Counsel for the appellants: S J Gageler SC, I S Young and B Young

Counsel for the Respondent: R Cordara QC and M Richmond

Solicitor for the Respondent: Australian Government Solicitor