7 The term "creditable acquisition" is defined in s 11-5 as follows:
11-5 What is a creditable acquisition?
You make a creditable acquisition if:
(a) you acquire anything solely or partly for a creditable purpose; and
(b) the supply of the thing to you is a taxable supply; and
(c) you provide, or are liable to provide, consideration for the supply; and
(d) you are registered, or required to be registered.
The term "creditable purpose" is in turn defined (to the extent presently relevant) in s 11-15 as follows:
11-15 Meaning of creditable purpose
(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.
8 The amount of goods and services tax ("GST") that must be paid on taxable supplies is given by ss 9-70 and 9-75. Section 9-70, and subs (1) of s 9-75, read as follows:
9-70 The amount of GST on taxable supplies
The amount of GST on a taxable supply is 10% of the value of the taxable supply.
9-75 The value of taxable supplies
(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.
9 The amount of input tax credit that is allowable in respect of a creditable acquisition is given by s 11-25 as follows:
11-25 How much are the input tax credits for creditable acquisitions?
The amount of the input tax credit for a creditable acquisition is an amount equal to the GST payable on the supply of the thing acquired. However, the amount of the input tax credit is reduced if the acquisition is only partly creditable.
10 The "net amount" is the amount that the entity in question must pay to the Commonwealth, or the Commonwealth must refund to the entity, each period: s 7-15. The way the "net amount" is calculated is the subject of s 17-5, as follows:
17-5 Net amounts
(1) The net amount for a tax period applying to you is worked out using the following formula:
GST ─ Input tax credits
where:
GST is the sum of all of the GST for which you are liable on the taxable supplies that are attributable to the tax period.
input tax credits is the sum of all of the input tax credits to which you are entitled for the creditable acquisitions and creditable importations that are attributable to the tax period.
(2) However, the net amount for the tax period may be increased or decreased if you have any adjustments for the tax period.
11 From the foregoing brief survey, it will be seen that liability to pay GST, and entitlements to input tax credits, arise under s 7-1 of the GST Act. The amount of GST is 10% of the value of the taxable supply (s 9-70), and the value of the taxable supply is ten-elevenths of the GST-inclusive consideration for the supply (s 9-75). The effect of these provisions is that the amount of GST is one-eleventh of the consideration actually received in respect of the supply. The amount of the input tax credit in respect of an acquisition is an amount equal to the GST payable on the supply by the supplier. At least in the normal course, that amount is one-eleventh of the consideration actually paid in respect of the acquisition. The sum of all the GST payable by an entity in a tax period, less the sum of all the input tax credits to which the entity is entitled in that period, is the entity's "net amount" for the period: s 17-5. Put another way, the difference between one-eleventh of the consideration received in respect of all taxable supplies in the period and one-eleventh of the consideration paid in respect of all creditable acquisitions in the period is the entity's "net amount" for the period.
12 Particularly as the Commissioner's case was developed in this proceeding, it is a central assumption of the system established by the GST Act that an entity's net amount is calculated by reference to its taxable supplies and to its creditable acquisitions. Supplies which are "GST-free" are not part of the calculation. Acquisitions which are not creditable - ie those in respect of which the supplier was not liable to pay GST - are not part of the calculation. As to the latter, there is no a priori reason to assume that all or even (necessarily) most of the acquisitions of a GST-registered trading enterprise will be creditable ones. A dealer in goods predominantly acquired from suppliers who do not themselves pay GST (such as, possibly, second-hand book stores) may have very few creditable acquisitions in a particular tax period. In such a case, the "net amount" for the entity would be close to its GST for the period. Correspondingly, there may be entities most of whose supplies are GST-free (such as, possibly, a company substantially involved in the export trade). In such a case, the entity's input tax credits may be much greater than its GST, and its "net amount" may be negative to a significant degree.
13 Against this broad appreciation of the general concepts employed by the GST Act, it is now necessary to consider the provisions of Div 126 which are of direct relevance in the present case. By s 126-25, Subdiv 9-C of Pt 2-2, which includes ss 9-70 and 9-75, does not apply to a "gambling supply". That term is defined in s 126-35 as follows:
(1) A gambling supply is a taxable supply involving:
(a) the supply of a ticket (however described) in a lottery, raffle or similar undertaking; or
(b) the acceptance of a bet (however described) relating to the outcome of a gambling event.
In the same section, a "gambling event" is defined as follows:
(2) A gambling event is:
(a) the conducting of a lottery or raffle, or similar undertaking; or
(b) a race, game, or sporting event, or any other event, for which there is an outcome.
Thus GST remains payable on gambling supplies because they are taxable supplies and the operation of s 7-1 is not excluded by Div 126. Also, by s 7-15, the "net amount" is still the amount which the entity must pay to the Commonwealth, or the Commonwealth must refund to the entity, each tax period. However, the provisions fixing the amount of GST at 10% of the value of the taxable supply, and those defining the latter concept, are inapplicable to a gambling supply. Thus the starting point for the calculation of the entity's "net amount" under s 17-5 would, but for the provisions of Div 126 itself, be missing in the case of gambling supplies.
14 The function of Div 126 is to provide an alternative way of working out the net amount where gambling supplies are concerned. Section 126-1, which is an "explanatory section" introducing the Division, puts the matter as follows:
Gambling is dealt with under the GST by using a global accounting system that provides for an alternative way of working out your net amounts by incorporating your net profits from taxable supplies involving gambling.
The division uses a special concept of "net amount", which has effect in place of the provisions of s 17-5. This is done by s 126-5, which provides as follows:
126-5 Global accounting system for gambling supplies
(1) If you are liable for the GST on a gambling supply, your net amount for the tax period to which the GST on the supply is attributable is as follows:
Global GST amount + Other GST - Input tax credits
where:
global GST amount is your global GST amount for the tax period.
input tax credits is the sum of all of the input tax credits to which you are entitled on the creditable acquisitions and creditable importations that are attributable to the tax period.
….
other GST is the sum of all of the GST for which you are liable on the taxable supplies that are attributable to the tax period, other than gambling supplies.
(2) However, the net amount for the tax period may be increased or decreased if you have any adjustments for the tax period.
(3) This section has effect despite section 17-5 (which is about net amounts).
15 Two things may be noted about s 126-5. First, it applies to an entity in a tax period if liability for GST on any gambling supply arose in that period. That is to say, once an entity makes a single gambling supply in a period, its "net amount" must be calculated under Div 126. Secondly, the calculation set out in subs (1) covers all bases, as it were. The second and third components of the "net amount" referred to in that calculation relate to GST on taxable supplies other than gambling supplies ("other GST") and to input tax credits except where the thing supplied was a gambling supply ("input tax credits") respectively. Thus, for example, if a casino served a meal to one of its customers, the GST attracted by the consideration for the meal would be within its "other GST" for the purposes of s 126-5; and if it paid a contract caterer to prepare and serve that meal, the GST component of that payment would be within its "input tax credits" for the purposes of the section. These aspects of Div 126 are uncontroversial, and have nothing to do with the present case.
16 The case is concerned, rather, with so much of the entity's "net amount" as is constituted by its "global GST amount" in the calculation required by s 126-5. At the times which are presently relevant, that term was defined in s 126-10 as follows:
126-10 Global GST amounts
(1) Your global GST amount for a tax period is as follows:
where:
total amounts wagered is the sum of the consideration for all of your gambling supplies that are attributable to that tax period.
total monetary prizes is the sum of:
(a) the monetary prizes you are liable to pay, during the tax period, on the outcome of gambling events (whether or not any of those gambling events, or the gambling supplies to which the monetary prizes relate, take place during the tax period); and
(b) any amounts of money you are liable to pay, during the tax period, under agreements between you and recipients of your gambling supplies, to repay to them a proportion of their losses relating to those supplies (whether or not the supplies take place during the tax period).
(2) However, your global GST amount is zero for any tax period in which total monetary prizes exceeds total amounts wagered.
(3) In working out the total monetary prizes for a tax period, disregard any monetary prizes you are liable to pay, during the tax period, that relate to supplies that are GST-free under Subdivision 38-H.
(4) Your global GST amount for a tax period may be affected by sections 126-15 and 126-20.
In what follows in these reasons, I shall refer to "total amount wagered" rather than to the, presumably mistaken, plural version of the same phrase given in the definition. I would also add, for the sake of accuracy only, that in 2006 the reference to Subdiv 38-H in s 126-10(3) was altered to s 38-270 (the only provision in Subdiv 38-H), but nothing turns on this.
17 It will be seen that the calculation of the "global GST amount" under s 126-10(1) requires the identification of two components, namely, "total amount wagered" and "total monetary prizes". Calculation of the former requires the summation of the consideration for all of the entity's "gambling supplies" that are attributable to the period in question. Calculation of the latter requires (under para (a) of the definition) the summation of the monetary prizes that the entity is liable to pay, during the tax period, on the outcome of gambling events. One eleventh of the difference between the two is the entity's "global GST amount", which is then carried into the calculation of its "net amount" under s 126-5. At least at the superficial level, this has the appearance of mimicking the way in which an entity's net amount is calculated under the general provisions of the GST Act, using an artifice in which monetary prizes are treated as a kind of analogue for the consideration which an entity pays for creditable acquisitions.
18 The controversy in the present case relates to that analogy, the legitimacy of which was at the centre of the submissions made on behalf of the Commissioner. There is no issue as to the concept of "total amount wagered". It calls in the consideration for all of the gambling supplies made by the entity that are attributable to the period in question. However, in terms at least, the definition of "total monetary prizes" in s 126-10(1) calls in (under para (a)) all of the monetary prizes which the entity is liable to pay in the tax period. In a case in which some of the entity's gambling supplies were GST-free - such as when a lottery ticket was supplied to a non-resident of Australia, and he or she made or had no effective use or enjoyment of the ticket in Australia - a literal reading of this definition would produce the result that the entity would effectively be allowed an input tax credit in relation to a prize paid to a gambler upon whose wager no GST was paid. According to the Commissioner, such a result could not have been intended by the legislature.
19 When the applicants originally submitted their business activity statements and calculated their net amounts, they took a view about the meaning of s 126-10 which differed from that which they now take. Their original view was, they say, based upon a publication of the Commissioner in which the following advice was provided:
Gambling sales you make to gamblers who are outside Australia are GST-free exports. This means that you do not include the wagers you receive from gamblers outside Australia when you work out the GST on your margin. Any monetary prizes you pay to these recipients are also excluded from the calculation.
That is to say, what the applicants did was to exclude from the calculation of "total monetary prizes" prizes which were paid to non-residents the consideration for whose wagers had not been counted in the calculation of "total amount wagered". The applicants now say that they were mistaken to have so proceeded, and that the Commissioner's advice did not correctly reflect the terms of the definition of "total monetary prizes". The Commissioner's position is that which found expression in his publication, namely, that "total monetary prizes" extends only to prizes paid on wagers which were gambling supplies as defined (and therefore taxable supplies as defined).
20 Any consideration of the problem of construction which the definition of "total monetary prizes" presents must commence with the words of the definition itself. At least as regards so much of that definition as precedes the parenthesis, these words support the position taken by the applicants: in terms, the definition is not limited to prizes paid out to customers whose wagers were gambling supplies as defined. Further, an internal grammatical construction of s 126-10(1) provides at least some support for that position: the legislature obviously had gambling supplies in the forefront of its mind, and limited the definition of "total amount wagered" by reference to that concept, but did not so limit the definition of "total monetary prizes". This has the appearance of a distinction consciously made.
21 Yet the Commissioner's position is not without textual support in the terms of s 126-10(1) either. The parenthetical passage in para (a) of the definition of "total monetary prizes" seems clearly to be based on an assumption that such prizes will "relate" to gambling supplies. It was submitted on behalf of the applicants that this passage was concerned with timing only. That is undoubtedly so, but the assumption is evident nonetheless. The applicants' position also involves a certain want of congruity as between paras (a) and (b) of the definition: whereas the prizes paid to gamblers whose wagers were not gambling supplies would be included in the definition under para (a), refunds of losses under special agreements involving such gamblers would not be so included under para (b). In the general scheme of Div 126, there is no obvious, or even implicit, explanation for such an apparent anomaly.
22 There is, therefore, a certain want of internal discipline in the terminology actually used by the draftsman in the definition of "total monetary prizes". In the absence of some other meaning clearly being implied by that terminology, however, I would have to hold that the applicants' preferred construction is the one most naturally conveyed by the words which are central to the present controversy: "the monetary prizes you are liable to pay … on the outcome of gambling events …."
23 The Commissioner also relied on the use of the definite article as the first word in para (a) of the definition of "total monetary prizes" in s 126-10(1). He submitted:
Total monetary prizes brings to account, quite particularly, the monetary prizes, as distinct from any monetary prizes, all monetary prizes or, merely, monetary prizes. Use of the definite article denotes the monetary prizes in question. It refers to something definite, already known and defined. Once one understands that the prize in question is the outcome of the wager and not the outcome of the gambling event in respect of which the wager is made, then the definite article identifies, and limits, the monetary prizes to be brought to account to those payable only in respect of the wagers which have been brought to account by the previously defined integer in the calculation, total amounts wagered.
I am not attracted to this submission. The monetary prizes that are limited by the definite article are those which meet the description "you are liable to pay, during the tax period, on the outcome of gambling events [etc]". As a matter of text, there is no warrant for relating the definite article to the context of the other term defined in the subsection. Had the legislature intended that there should be such a relation, it might well, and would presumably, have used the same language as it did in subs (3). It is to that subsection that I next turn.
24 Support for the applicants' construction of the definition of "total monetary prizes" is to be found in the terms of subs (3) of s 126-10, as it existed in October 2005 (and as it was enacted). Here there was a specific exclusion from the scope of "total monetary prizes" of prizes which related to supplies that were GST-free, but only under Subdiv 38-H, which dealt with the subject of "raffles and bingo conducted by charitable institutions etc". In a submission which was, in my view, of some force, the applicants argued that subs (3) demonstrated that the legislature must have intended that, save in the case of prizes of the kind for which the subsection made specific provision, the definition of "total monetary prizes" should be read literally, that is, by not excluding prizes that related to supplies that were GST-free.
25 Counsel for the Commissioner countered that argument by referring to the legislative history surrounding the introduction of cl 126-10(3) into the Bill which became the GST Act. It was introduced by amendment in the Senate on 24 June 1999, together with the introduction of cl 38-270 in a new Subdiv 38-H. The clause read as follows:
A supply is GST-free if:
(a) the supplier is a charitable institution, a trustee of a charitable fund or a gift-deductible entity; and
(b) the supply is:
(i) a supply of a ticket in a raffle; or
(ii) an acceptance of a person's participation in a game of bingo; or
(iii) a gambling supply of a kind specified in the regulations; and
(c) the supply does not contravene a Sate law or a Territory law.
The Supplementary Explanatory Memorandum dealt with the subject in these terms:
1.36 Charitable institutions, trustees of charitable funds and gift-deductible entities may run certain gambling events, such as raffles and bingo, in order to raise funds. Currently under the GST Bill, such events are treated the same as gambling generally and are subject to GST under Division 126. However, raffles and bingo conducted by charitable institutions, trustees of charitable funds and gift-deductible entities are not subject to State taxes on gambling.
1.37 Request 31 inserts new subdivision 38-FA to provide that supplies of raffles and bingo by charitable institutions, trustees of charitable funds or gift-deductible entities are GST-free. However, similar events, such as lotteries, which are subject to State taxes on gambling, are not covered by new subdivision 38-FA and are not GST-free.
It was pointed out on behalf of the Commissioner that subcl (3) was explicable wholly by reference to the realisation, during the passage of the Bill, that charitable raffles and the like had not been subject to State taxes, and it was only the need to leave them no worse off under the new GST system that occupied the legislature's mind in relevant respects.
26 In my view, while the timing of, and the extrinsic material accompanying, the introduction of subcl (3) into cl 126-10 explains the legislature's reason for so proceeding, it provides no explanation of why, if the definition of "total monetary prizes" in subcl (1) already excluded prizes that related to supplies that were GST-free (ie to non-gambling supplies), it was considered necessary to enact subcl (3) in addition to the new cl 38-270. Indeed, taking a conventional objective approach to the problem, I consider that the introduction of subcl (3) into cl 126-10 was consistent only with a legislative intention that prizes which related to supplies that were not gambling supplies were not to be excluded from total monetary prizes as defined. Had the legislative intention been otherwise, the enactment of cl 38-270, by making the supplies in question GST-free, would have been sufficient to exclude those supplies from the concept of "taxable supplies" and thus the corresponding prizes from the definition of "total monetary prizes".
27 The Commissioner next submitted that this is a case in which a purely textual approach to construction is unsatisfactory, and that there are clear indications in the object and purpose of s 126-10, and in the Explanatory Memorandum which accompanied its enactment in 1999, which point to the conclusion that the legislature intended that the definition of "total monetary prizes" should be confined to such prizes as were paid out to persons whose wagers had been by way of gambling supplies. In this context the applicants accepted that Div 126 represented the legislature's attempt to collect something corresponding to conventional GST in the rather unusual, and problematic, circumstances of entities which conducted gambling businesses, lotteries, and the like.
28 The Commissioner's starting point was, therefore, an identification of the GST regime established generally by the GST Act, and an understanding of its features. Those features have been referred to in the cases. The Commissioner relied principally upon the exposition provided by Hill J (with the assent of Stone and Allsop JJ) in HP Mercantile Pty Ltd v Commissioner of Taxation (2005) 143 FCR 553, 564-565 [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.
In the same case, his Honour also said (143 FCR at 553 [13]):
The genus 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.
29 The Commissioner also reminded me that GST has been described as "a practical business tax", that is to say, "one that is designed, where practicable, to quarantine business from the ultimate burden of the tax": Saga Holidays Ltd v Commissioner of Taxation (2006) 156 FCR 256, 264 [29]-[30]. That being the case, in the interpretation of the GST Act, one should -
… adopt a purposive approach to the interpretation of the GST Act, rejecting strict grammatical analyses in favour of a consideration not only of the syntax but also of "the policy and the surrounding legislative context" of the relevant provision ….
(Saga Holidays 156 FCR at 264 [29]). This approach to construction, while pressed on me particularly by the Commissioner, was not resisted by the applicants, and it is manifestly one that should be adopted, at least as a matter of general principle.
30 According to the Commissioner, the importance of these understandings of the general purpose and objects of the GST Act to a construction of s 126-10 is that they show (and here I quote from the Commissioner's written outline), that "the role of input tax credits is confined to ensuring that suppliers do not bear GST embedded in the price of their acquisitions, thus ensuring that the GST is borne by the ultimate consumer". The Commissioner's outline proceeded as follows:
Accordingly, whilst it is true that a supplier who makes a large proportion of GST-free supplies may only ever receive GST refunds … that is because the nature of a GST-free supply is that no GST is to be borne by the ultimate consumer. Where a supplier makes GST-free supplies, the supplier needs input tax credits for GST embedded in its own acquisitions to achieve that objective. Whilst the Act collects the tax from the supplier, the tax is concerned only with bringing to account the value of taxable supplies.
31 In the Commissioner's case, it is significant that an acquisition is a creditable acquisition only if the corresponding supply is a taxable supply. If so, the consideration paid by the acquirer will include GST. The practical effect of the input tax credit which then arises under s 7-1(2) will be to strip the GST component out of the consideration which the entity pays for the acquisition. The other side of the same coin is that, where the corresponding supply is not a taxable one, the acquisition will not be a creditable one, and no entitlement to an input tax credit will arise. That is to say, where there is no GST embedded in the consideration paid for the acquisition, there is nothing to strip out and nothing is stripped out.
32 The applicants argued that many businesses which make supplies which are predominantly GST-free - because, for instance, they are made to non-residents - will still derive credits on their acquisitions, and may end up receiving a GST refund every period. But this is no answer to the Commissioner's point. Such businesses derive credits only where GST is embedded in the consideration they pay for their acquisitions. It is that circumstance, rather than an excess of input tax credits over the GST collected in a period, which gives force to the Commissioner's reliance on the general scheme of the GST Act.
33 From these general propositions, the Commissioner moved into the gambling context. It was submitted on his behalf:
32. It is true, as the applicants point out … that Division 126 makes special provision for gambling operators whose acquisitions would not, in many cases, be taken into account under the basic rules. Recreational gamblers do not make taxable supplies because they are not registered or required to be registered for GST purposes (s 9-5, taxable supply).
33. Supplies to those recreational gamblers who are resident in Australia would be taxable under the basic rules (in the absence of Division 126). Permitting an effective credit for the prizes paid in respect of their wagers provides a correct reflection of the economic value (value added) by gambling activity connected with Australia.
34. It does not follow that monetary prizes paid in connection with GST-free supplies to non-resident gamblers are also to be brought to account. As already pointed out, it is obvious from the definition of taxable supply that the GST is intended to be a tax which reflects the value of relevant economic activity only to the extent that it is connected with Australia. Bringing these latter monetary prizes to account does not reflect the value added by gambling supplies connected with Australia.
35. The supply by the non-resident gambler is not a supply connected with Australia (s 9-5, taxable supply and s 9-25(5), supplies connected with Australia). Accordingly, to permit an effective credit for monetary prizes paid to non-resident gamblers would amount to giving a supplier who makes GST-free supplies an input tax credit for an acquisition which does not include GST in the price i.e. the supply to the acquirer is, itself, free of GST.
34 These submissions are problematic in a number of respects. First, the statement that "recreational gamblers do not make taxable supplies because they are not registered or required to be registered for GST purposes" carries the silent assumption that persons who gamble for business, and who are registered for GST, do make taxable supplies on those occasions when they win - the consideration for the supplies being their monetary prizes. This proposition was not the subject of any detailed analysis in the Commissioner's submissions, either written or oral, and I would consider it doubtful at best. In one aspect of submissions made on his behalf, the Commissioner suggested that a gambling entity might, by the payment of a prize or winnings, be treated as accepting the surrender of the gambler's right to receive that very payment (see s 11-10(2)(e) of the GST Act). So to approach the matter, in my view, scarcely treats the GST as a "practical business tax", as the Commissioner elsewhere submitted. What happens when a gambling business pays out on an event in relation to which it accepted a wager is the discharge of the business's obligations arising under the contract in question by performance. It involves, in my view, no acquisition of anything by the business. Indeed, it is the circumstance that a prize paid to a gambler is so different from conventional consideration for a service or thing acquired by the relevant gambling business that makes me reluctant to accept the Commissioner's submission that the legislature self-evidently intended that what should be subtracted as "total monetary prizes" under s 126-10 was confined to prizes paid in relation to gambling supplies. Gambling, and the rewards which accrue to those who win, are genuinely sui generis, and the legislature treated them as such.
35 I note that the view which I have just expressed is consistent with the opinion of the Advocate General in HJ Glawe Spiel- und Unterhaltungsgeräte Aufstellungsgesellschaft mbH & Co KG v Finanzamt Hamburg-Barmbek-Uhlenhorst [1995] 1 CMLR 70, 76-77, to which I was referred by the applicants. The question in that case was whether the total of the moneys inserted into a gaming machine by a customer was "the consideration which has been or is to be obtained by the supplier from the purchaser" for the purposes of Art 11A(1)(a) of the Sixth VAT Directive 77/388 of the European Community. In proposing an affirmative answer to that question, the European Commission submitted that value added tax on the winnings paid out to the various customers could be deducted under Art 17(2) as "value added tax due or paid in respect of goods or services supplied or to be supplied to him by another taxable person". The Advocate General did not agree with that submission, saying:
… Article 17(2) is clearly inapplicable on its wording since, as the Commission concedes, the sums paid out to winning players do not constitute the consideration for "goods or services supplied or to be supplied to [the operator] by another taxable person" for the purposes of that provision.
36 Secondly, the statement that "supplies to those residential gamblers who are resident in Australia would be taxable under the basic rules" may be accepted. So to propose is to recognise that the sale of a lottery ticket, for example, is the supply of something for consideration in the conventional way. But the conformity of supplies to recreational gamblers with the general scheme of the GST Act says nothing about the much more contentious proposition with which the Commissioner's para 32 is concerned, namely, that there is a supply by such a gambler when he or she wins a prize.
37 Thirdly, in these passages from his written submissions, the Commissioner introduces the notion that the relevant "economic activity" must be "connected with Australia" for it to be within the general scheme of the GST Act. Broadly, that is uncontroversial. Indeed, the sale of a ticket to an overseas-based gambler by a gambling business carried on in Australia would be a supply connected with Australia within the meaning of s 9-25(5) of the GST Act. As such, the supply would be a "taxable supply" under s 9-5 were it not for the specific exclusion of the supply by reason of it being "GST-free". It is this latter characteristic of such a supply, rather than a want of connection with Australia, that has given rise to the problem in the present case. In this respect, the final sentence of para 34 of the Commissioner's submissions is based upon a distinction which is, in my view, a false one. However the problem is looked at, monetary prizes paid to non-resident gamblers arise from supplies which are connected with Australia.
38 Fourthly, in para 35, the Commissioner returns to the context in which being paid a prize is treated as the equivalent of the gambler receiving consideration for a supply made (eg to one of the applicants) by him or her. If that were an appropriate frame of reference, I accept that such a supply may not be "connected with Australia" for the purposes of the GST Act. However, for reasons already stated, I do not accept that, when a gambler receives his or her winnings, those winnings are to be treated as consideration for a supply made by him or her to the entity by which they are paid.
39 Fifthly, in these submissions the Commissioner also invokes the notion, which he derives (for example) from the final sentence in the second passage from HP Mercantile set out at para 28 above, that the GST is a tax upon the value added by a particular supplier. So much may be accepted. But the submissions move into more difficult territory, in my view, when they attempt to apply that notion to the circumstances of gambling, particularly where a prize is treated as consideration for something which the gambling business has acquired. Although the sale of each ticket in a lottery (for example) may be seen as an individual transaction which, but for Div 126, might be subject to GST in the conventional way, I do not accept that the calculation of the value added by the entity conducting the lottery may be reduced below the level at which all ticket sales, and all prizes, are taken into account. In a single lottery (or other contest or game of chance) there is a single outcome which all gamblers have a chance of winning. The viability of the lottery as a business undertaking assumes the participation of those gamblers. The value which is added by the sale of all of the relevant tickets must, if we are to proceed by way of the analogies which, on the Commissioner's case, are implicit in Div 126, take account of the prize which must be paid to whomever it is paid. Any other approach would be quite unrealistic.
40 The next element of the Commissioner's case was that a construction of the expression "total monetary prizes" which promotes the purpose or object underlying Div 126 should be preferred to one which does not. It is uncontroversial that I should take that approach: Acts Interpretation Act 1901 (Cth), s 15AA. Here the Commissioner relies on s 126-1. That is an "explanatory section", as to which s 182-10(2) provides as follows:
(2) Explanatory sections form part of this Act, but they are not operative provisions. In interpreting an operative provision, an explanatory section may only be considered:
(a) in determining the purpose or object underlying the provision; or
(b) to confirm that the provision's meaning is the ordinary meaning conveyed by its text, taking into account its context in this Act and the purpose or object underlying the provision; or
(c) in determining the provision's meaning if the provision is ambiguous or obscure; or
(d) in determining the provision's meaning if the ordinary meaning conveyed by its text, taking into account its context in this Act and the purpose or object underlying the provision, leads to a result that is manifestly absurd or is unreasonable.
Thus s 126-1 may only be considered in the interpretation of s 126-10 for one of the purposes listed in s 182-10(2), in which respect the Commissioner relied particularly on paras (a), (c) and (d). But the subsection does not mandate a particular result. It does not require, for example, that the meaning of an ambiguous provision must be that conveyed by the relevant explanatory section. In this sense, s 126-1 may be used as an aid to construction in the ways indicated in s 182-10(2), but not to the exclusion of other legitimately available aids.
41 Section 126-1 refers to "net profits from taxable supplies involving gambling". The term "net profits" is not defined in the GST Act, and I would consider that the subtraction required by the calculation in s 126-10(1) would yield what might more appropriately be described as gross margin rather than net profits. Making allowance for that distinction, however, the essence of the Commissioner's point is that, whether it be net profits or gross margin, the concept refers to a gain made in relation to taxable supplies. If the applicants' preferred construction is to be accepted, the outgoings from all supplies involving gambling would be deducted from only those receipts which related to taxable supplies. According to the Commissioner, such a construction would not tend to achieve the purpose conveyed by s 126-1.
42 I do not, however, regard it as self-evident that what s 126-1 describes as "net profits from taxable supplies involving gambling" is the figure which would result from subtracting monetary prizes paid to gamblers whose wagers were gambling supplies from the total consideration paid by those gamblers for those supplies. For the net amount to be calculated by reference to such an idea would, in my view, be incongruous with the perception of the GST as a practical business tax. Take a very simple example of a lottery in which 100,000 tickets were sold at $10 each, yielding a "total amount wagered" of $1m. Assume that 95,000 tickets were sold by way of gambling supplies as defined, and 5,000 tickets were sold by way of GST-free supplies. Assume also that there was one prize only, of $800,000. On the Commissioner's case, if that prize were won by the holder of a ticket which had been sold by way of a GST-free supply, the amount indicated by the calculation in parenthesis in s 126-10 would be $950,000. In my view, it would be quite artificial to regard this sum as the entity's "net profits from taxable supplies involving gambling". The necessity to pay the prize was an expense necessarily incurred by the business which conducted the lottery in relation to every ticket which was sold. The fact that the prize had to be paid to someone could not be ignored in any calculation of "net profits", even to the extent that they were "from" gambling supplies. Thus I am not disposed to view s 126-1 as disclosing an object or purpose, in relation to s 126-10, which is any more favourable to the Commissioner's preferred construction than it is to the applicants'.
43 The Commissioner also relied on s 15AB of the Acts Interpretation Act, subs (1) of which provides as follows:
Subject to subsection (3), in the interpretation of a provision of an Act, if any material not forming part of the Act is capable of assisting in the ascertainment of the meaning of the provision, consideration may be given to that material:
(a) to confirm that the meaning of the provision is the ordinary meaning conveyed by the text of the provision taking into account its context in the Act and the purpose or object underlying the Act; or
(b) to determine the meaning of the provision when:
(i) the provision is ambiguous or obscure; or
(ii) the ordinary meaning conveyed by the text of the provision taking into account its context in the Act and the purpose or object underlying the Act leads to a result that is manifestly absurd or is unreasonable.
In the present case, the "material not forming part of the Act" to which the Commissioner pointed was the Explanatory Memorandum for the Bill which became the GST Act. It described the problem of exacting GST in the context of gambling in the following terms:
GST applies to gambling conducted by registered or required to be registered entities. This includes gambling in casinos, gaming machines in clubs and hotels, lotteries, raffles, betting on racing and other events …. However, determining individual bets or ticket sales (wagers) and prizes and then applying GST and input tax credits would be difficult. For example, a casino operator would have to apply GST on every spin of the roulette wheel for every player for every square on the table.
44 The solution to this difficulty which the legislature adopted in 1999 was explained in the Explanatory Memorandum as follows:
… the GST on gambling is applied to the margin of the person providing the gambling opportunity (for example, the casino operator). Applying the margin to gambling activities achieves the same result as applying GST to individual wagers and allowing input tax credits in relation to prizes paid out.
Under the heading "Amount of GST" the memorandum continued as follows:
GST on gambling is 1/11 of the GST inclusive margin. The GST inclusive margin is the total wagers less the total amount paid or payable in money (including casino chips) as prizes. This is your global gambling GST amount. Division 126. Effectively this adds all the wagers together and all of the prizes together and applies GST to the difference between these totals. Section 126-10
And, under the heading "Input Tax Credits", the following appeared:
Gambling operators are entitled to input tax credits on things that they acquire to make gambling supplies. Gambling operators are not entitled to input tax credits in respect of prizes payable in money. Such prizes are included in the calculation of the margin.
If you acquire a gambling supply you are not entitled to an input tax credit on it. This is because GST on the supply to you was charged on the margin of the supply. Input tax credits are not available for acquisitions where the GST on the supply was charged on the margin. Section 126-30
45 It must be said that these extracts from the Explanatory Memorandum provide by no means unqualified support for the Commissioner's argument. The concluding sentence in the first extract, the whole of the second extract and the third sentence in the third extract support the construction for which the applicants contend. More importantly, in my view, they demonstrate that the legislature most likely did not have in mind at all the dimension of s 126-10(1) that has presently become controversial. I infer from the extracts that no attention was actually, as distinct from constructively, given to the question whether all prizes, or only prizes paid in respect of gambling supplies, were to be included in "total monetary prizes".
46 Returning to s 15AB(1) of the Acts Interpretation Act, I commence by reiterating the view expressed earlier that the ordinary meaning of the definition of "total monetary prizes" - ie the "ordinary meaning conveyed by the text" - is that for which the applicants contend. I do not regard the Explanatory Memorandum as confirming that meaning, but it is as consistent with that meaning as it is with any other. Neither do I regard the provision in question as "ambiguous or obscure", and I do not believe that the Commissioner seriously contended that it was. The thrust of the submission made on his behalf was that the ordinary meaning conveyed by the text of the definition, taking into account its context in the GST Act and the purpose or object underlying that Act, led to a result that was manifestly absurd or unreasonable.
47 There are, in my view, two difficulties which this submission encounters. The first is that the prize paid to a successful gambler is not akin to the consideration paid to someone from whom something is acquired in the paradigmatic instance of a business which acquires things, adds value to them, and supplies the result to a customer, on which the assumptions underlying the GST Act are based. For the very reason that gambling transactions, at least in the context of prizes paid out, are sui generis, it is not open to a court to conclude that the words chosen by the legislature produce a result which is absurd or unreasonable. If it be the case that the legislature regarded the "net profits" derived by a business from gambling supplies as defined as the figure which remained after the prizes which were in fact paid to all gamblers had been accounted for, there is, as explained above, a fairly obvious sense in which such a perception should be viewed as a reasonable one.
48 The second difficulty arises from the words of s 15AB itself. The task of the court under that provision is not simply to consider whether the ordinary meaning of a provision would lead to a result that was manifestly absurd or was unreasonable. The task is to use (in this case) the Explanatory Memorandum to determine the actual meaning of the provision where the ordinary meaning would lead to such a result. That is to say, notwithstanding a conclusion that the ordinary meaning of the provision would lead to a result that was manifestly absurd or was unreasonable, the question remains: what is the meaning of the provision? If the Explanatory Memorandum can be of assistance in answering that question, it may be used for that purpose. In the present case, for reasons which I have attempted to explain earlier, the Explanatory Memorandum does not provide an unequivocal insight into legislative intent. If the definition of "total monetary prizes" does not mean what it says, what it does mean is not clearly revealed by the Explanatory Memorandum.
49 This is not, in my view, a case in which a court can look at a provision of an Act of Parliament and be confident not only that the words of the provision could not have been what the legislature intended but also that the meaning actually intended was an obviously alternative, identifiable, one. At most, it might be a case in which the statutory draftsman had not thought through the implications of the words which he or she employed. It is quite possible that he or she did not have in the forefront of his or her mind the arithmetical outcome ordained by those words in situations in which successful gamblers were based overseas. It would not be the first time that some practical, possibly only occasional, impact of new legislation of broad application had escaped the conscious anticipation of the draftsman. However these things may be, they provide no warrant for the court, either under s 15AB or generally, not only to hold that the legislature probably did not mean what it said, but also to supply what it considers would most probably have been the draftsman's chosen wording, had the matter been given the attention which it required. I accept the submission of the applicants that I should follow the advice of Lords Simonds and Reid in IRC v Wolfson [1949] 1 All ER 865, 868 and 870:
It is not the function of a court of law to give to words a strained and unnatural meaning because only thus will a taxing section apply to a transaction which, had the legislature thought of it, would have been covered by appropriate words.
50 The applicants also relied upon an amendment to subs (3) of s 126-10 of the GST Act made by the Tax Laws Amendment (2009 GST Administration Measures) Act 2010 (Cth). By that amendment, the words "under s 38-270" were omitted from the subsection, so that the subsection then concluded with the words "GST-free". According to the applicants, this amendment would not have been necessary if the construction of para (a) of the definition of "total monetary prizes" for which the Commissioner contended was always that intended by the legislature. They pointed to the general principle of construction that, occasionally, a later amendment may be so obviously relevant to the meaning which was conveyed by the provision in question in its unamended form as to be capable of throwing light upon legislative intention at the earlier time: Grain Elevators Board (Vic) v Shire of Dunmunkle (1946) 73 CLR 70, 85-86; Commissioner of Taxation v Energy Resources of Australia Ltd (2003) 135 FCR 346, 353; Hooker v Gilling (2007) 48 MVR 136, 143.
51 The Commissioner described the applicants' identification of the purpose of the 2010 amendment as "speculation". It was submitted on his behalf that Parliament's "actual intention" in 2010 was that disclosed in the relevant passage in the Explanatory Memorandum to the Tax Laws Amendment (2009 GST Administration Measures) Bill 2009. However, the passages upon which the Commissioner relied are very high-level, and do not deal specifically with the problematic constructional questions which arose under the legislation as it previously existed. He relies upon a statement in the memorandum that the purpose of the Bill was "to clarify how the gambling operator's margin is calculated where the supplies made by the operator are GST-free"; and a further statement that "the amendments do not alter the nexus required between supplies and the liability to pay prize money under current law". A much better indication, in my view, of the legislature's perception of the evil which they were addressing in the 2009 Bill, and thus of the problematic construction carried by the pre-existing legislation, is to be found in the following passage of the Explanatory Memorandum.
Wagers by entities outside Australia are GST-free by virtue of item 2 or 3 of subsection 38-190(1) of the GST Act. Hence, they are not taxable supplies. Since the total amount wagered includes only gambling supplies, which are taxable supplies, the total amount wagered will exclude bets made by entities outside Australia. However, on a literal interpretation, total monetary prizes include prize money liable to be paid out on all bets, including bets by entities outside Australia. Total monetary prizes include any amount of money the gambling operator is liable to pay out on the outcome of gambling events and these amounts are not restricted to gambling supplies. This would mean the gambling operator's margin does not reflect the value added over time for consumption in Australia.
It is in this passage that the Explanatory Memorandum came squarely to grips with the problem that gave rise to the amendment. Quite clearly, the passage speaks loudly of the good sense involved in the approach of the common law as encapsulated in Dunmunkle and the other cases to which I was referred by the applicants.
52 For the foregoing reasons, I take the view that this is not a case in which the court would be justified in departing from the ordinary meaning conveyed by the text of the definition of "total monetary prizes" in s 126-10 of the GST Act. That meaning corresponds with the position taken by the applicants.
53 Against the prospect that I might decide the constructional point under s 126-10 in the way that I have, the Commissioner argued that, because of s 105-65 of the GST Act (and corresponding provisions which were applicable at earlier times), he was in any event under no obligation to make refunds to the applicants of the net amounts which they had overpaid. In this respect, the parties made no distinction between s 105-65 itself and the earlier provisions to which I have just parenthetically referred, in which circumstances it will be sufficient to address the point by reference to the former.
54 Section 105-65 of the GST Act provided as follows:
(1) The Commissioner need not give you a refund or an amount to which this section applies, or apply (under Division 3 or 3A of Part IIB) an amount to which this section applies if:
(a) you overpaid the amount, or the amount was not refunded to you, because a supply was treated as a taxable supply, or an arrangement was treated as giving rise to a taxable supply, to any extent; and
(b) the supply is not a taxable supply, or the arrangement does not give rise to a taxable supply, to that extent (for example, because it is GST-free); and
(c) one of the following applies:
(i) the Commissioner is not satisfied that you have reimbursed a corresponding amount to the recipient of the supply or (in the case of an arrangement treated as giving rise to a taxable supply) to an entity treated as the recipient;
(ii) the recipient of the supply, or (in the case of an arrangement treated as giving rise to a taxable supply) the entity treated as the recipient, is registered or required to be registered.
(2) This section applies to the following amounts:
(a) in the case of a supply:
(i) so much of any net amount or amount of GST as you have overpaid (as mentioned in paragraph (1)(a)); or
(ii) so much of any net amount that is payable to you under section 35-5 of the GST Act as the Commissioner has not refunded to you (as mentioned in paragraph (1)(a)), either by paying it to you or by applying it under Division 3 of Part IIB of this Act;
(b) in the case of an arrangement:
(i) so much of any net amount or amount of GST to which subparagraph (a)(i) would apply if the arrangement were a supply; or
(ii) so much of any net amount to which subparagraph (a)(ii) would apply if the arrangement were a supply.
It appears to be common ground that, if s 105-65(1) is otherwise applicable in the circumstances, it should be held that there was no reimbursement of the kind referred to in subpara (i) of para (c) of the subsection.
55 Before reaching para (c), however, the Commissioner's submission encounters significant difficulties under para (a) (the requirements of which are, of course, cumulative with those set out in paras (b) and (c)). Despite the persistent endeavours of counsel for the Commissioner, I confess to a complete inability to appreciate how it might be said, on the assumed facts of the present case, that the overpayments made by the applicants arose because supplies were treated as taxable supplies, or arrangements were treated as giving rise to taxable supplies, to any extent. On the view which I have taken of s 126-10, the overpayments were made because the applicants took the view that it was only prizes paid to gamblers whose wagers had been by way of gambling supplies that were to be subtracted as "total monetary prizes" in the formula set out in s 126-10(1). It is common ground that those supplies were not taxable ones, and it is not suggested that the applicants ever treated them as taxable. In my view, therefore, s 105-65(1)(a) is quite irrelevant to the circumstances of the present case.
56 Counsel for the Commissioner sought to extract themselves from the reality of what s 105-65(1)(a) actually says by relying upon the concluding words of the paragraph - "to any extent". They submitted:
Insert 'T' Notes 02
[I]n our submission, one has to be careful about the reading, giving this section too literal a reading, because at the end of the day it is concerned with simply an overpayment, an overpayment follows because of the way the Act operates from the treating of a supply in a particular way and the words are only designed to do that. And one sees that it is really only concerned with overpayments and not this very close analysis of the words because of the words, "to any extent". And your Honour in our submission, it's appropriate to read it that way and give full meaning to the words "to any extent" because of the evident - because otherwise the evident purpose of the section which is apparent from the condition (c) would not be met.
I would, with respect, make the following observations about this submission. First, the reading of s 105-65(1)(a) which I prefer is not "too literal a reading" - it is the only reading which the words of the paragraph sensibly convey. Secondly, the subsection is not "concerned simply with an overpayment", but with an overpayment of a particular kind, made in the circumstances referred to. Thirdly, the words "to any extent" at the end of the paragraph, and the corresponding words "to that extent" in para (b), address the situation in which a particular supply might have been treated as a taxable one to some extent only. It is not concerned to expand beyond its sensible meaning the wording of the main operative part of the paragraph. And fourthly, the "evident purpose of the section", in my view, is to deal with the situation in which the recipient of a particular supply has been charged an amount from which one eleventh was included in the calculation of the supplying entity's "net amount", but has not been reimbursed a corresponding sum in anticipation of a refund being received from the Commissioner. That purpose, and the circumstances which are before the court in the present case, pass each other like ships in the night. From the outset, the applicants treated supplies made to overseas-based gamblers as GST-free. There was, therefore, never a notional eleventh part embedded in the consideration paid by those gamblers for those supplies; and there was, therefore, no situation with which the evident purpose of para (c) of the subsection was concerned.
57 In the circumstances, the Commissioner's reliance upon s 105-65 of the GST Act, and corresponding earlier provisions, must be rejected.
58 For the above reasons, the decisions under appeal, and the corresponding assessments, will be set aside, and orders will be made to entitle the applicants to the refunds which they seek.
I certify that the preceding fifty-eight (58) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jessup.