Consideration
19 Rio Tinto accepts that the provision of the accommodation is an input taxed supply and accepts that there is a connection between the acquisitions in question and the provision of that accommodation. However, it contends that the connection was not a relevant connection for the purpose of s 11-15. It was submitted for Rio Tinto that for s 11-15(2)(a) to apply, the making of an input taxed supply, not the making of a taxable supply, must be the "moving cause" or "purpose" of the acquisition. It was submitted the acquisitions in question did not relevantly "relate to" the making of supplies that would be input taxed because the "moving cause" in, or "purpose" of, supplying residential accommodation was the carrying on of Hamersley's "enterprise" of mining and selling iron ore (ie the making of taxable supplies), not the leasing of accommodation as an end activity in itself (ie making input taxed supplies). It was submitted that the evidence established that Hamersley only provides accommodation to maintain a workforce for its operations and that the accommodation would not have been provided but for the fact that it is essential in its business. In the circumstances, the argument went, s 11-15(2)(a) did not apply because the supply of residential premises was not the end commercial objective of the acquisitions but "merely an intermediate step" and "a necessary input" in the carrying on of Hamersley's "enterprise" of mining and selling iron ore.
20 The reasoning in the New Zealand case of Commissioner of Inland Revenue v BNZ Investment Advisory Services Ltd (1994) 16 NZTC 11,111 ("BNZ Investments") was said to be instructive. The taxpayer, in that case, was in the business of offering investment advice to its customers for which it received modest fees. If the customer acted on that advice or made investments though the taxpayer, the taxpayer received a fee or commission from the financial institution with which the investment was made. The taxpayer incurred overhead costs and claimed the equivalent of an input tax credit for the GST on the goods and services acquired. They were claimed on the basis that the "principle purpose" of acquiring the goods and services was to make the taxable supply of providing investment advice, as opposed to the exempt supply of selling financial investments for fees and commissions. The Court held that the "principle purpose" of the taxpayer in acquiring those goods and services was not for the single goal of offering investment advice to members of the public but to derive income from the GST exempt services (equivalent to "input taxed supplies" under the GST Act). Doogue J reasoned at [24]-[25]:
The taxpayer had no interest in acquiring goods and services unless it was going to derive income capable of meeting the costs of such goods and services. The giving of investment advice was merely a means to that end and not the end. The taxpayer achieved negligible direct income from that service … there was no suggestion whatever for the tax payer, however, that it was carrying on business for some purpose other than the achieving of a profit through the earning of income. It was not suggested, for example, that it was simply there to provide services for customers of the BNZ group and was enabled to be run at a loss for that purpose. If that had been the case, the position might have been different. The position might also have been different if the taxpayer's objectives in achieving income were by way of charging realistic fees for the advice given rather than by relying upon the investment income achieved by it.
21 In New Zealand, whether the goods and services acquired attracted GST in respect of which "input tax" could be claimed (equivalent to input tax credits under the GST Act) depended on whether they were acquired for the "the principle purpose" of making services that were taxable supplies or exempt supplies. Rio Tinto accepted that the statutory test in New Zealand is expressed in different language but submitted that the scheme under the GST Act is not relevantly different in that the criterion embodied in the words "relates to" in s 11-15(2)(a) is the identification of a purpose of making a supply which would be input taxed, as distinct from a purpose of making taxable supplies. Rio Tinto argued that this construction of s 11-15 is supported textually, and by the scheme and policy of the legislation. It was argued that as, in this case, the provision of housing was merely a means to Hamersley carrying on its business, there was not a sufficient and material connection between the acquisitions in question and the making of input tax supplies for the purposes of s 11-15(2)(a). I am unable to agree.
22 Section 11-15 was considered in HP Mercantile, where Hill J (with whom Stone and Allsop JJ agreed) observed as follows at [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.
In Axa Asia Pacific v Commissioner of Taxation (2008) 173 FCR 500 ("Axa Asia Pacific"), Lindgren J at [124] similarly stated that "creditable purpose" is defined in s 11-15 by way of a positive test (s 11-15(1)) and a negative test or blocking provision (s 11-15(2)(a)), with both tests being a matter of objective fact.
23 Unlike the New Zealand legislation considered in BNZ Investments, s 11-15 does not use the language of, or require, or even direct, an inquiry into purpose. Whilst the entitlement to an input tax credit depends on an entity having a "creditable purpose" in making the acquisition, "creditable purpose" is a statutory construct and has a specific statutory meaning. Section 11-15 cannot be construed in isolation from the context in which it appears or considered independently of the statutory scheme of which it forms part: K & S Lake City Freighters Pty Ltd v Gordon & Gotch (1985) 157 CLR 309 at 312. As the High Court said in Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355 at 381, the primary object of statutory construction is to construe the relevant provision so that it is consistent with the language and purpose of all the provisions of the statute.
24 Within the terms of s 11-15(1), a "creditable purpose" is attributed according to whether, and the extent to which, goods or services are acquired by an entity "in carrying on" its "enterprise": s 11-15(1). The word "in" simply means "in the course of" in the same way as that word has been construed in the context of s 8-1 of the Income Tax Assessment Act 1997 (Cth): s 9-5(b); Amalgamated Zinc (De Bavay's) Ltd v Federal Commissioner of Taxation (1935) 54 CLR 295; Commissioner of Taxation v Day (2008) 236 CLR 163; HP Mercantile at [13], [48]. Giving effect to the words of s 11-15(1), goods or services are acquired by an entity for a "creditable purpose" if the acquisition is connected with the activities that constitute the entity's "enterprise". As Hill J stated in HP Mercantile, the requirement for a "creditable purpose" is that the acquisition has been in whole or in part acquired in carrying on an enterprise. Whether an acquisition has such a connection will depend on the scope of the activities that constitute the entity's "enterprise", as that expression is defined in s 9-20. If the acquisitions relate to an enterprise carried on by the entity, the terms of s 11-15(1) are engaged. Section 11-15(2)(a) must be considered in context with s 11-15(1) and only falls to be considered if s 11-15(1) applies: that is, where an acquisition has the requisite connection with the entity's enterprise: cf Steele v Deputy Commissioner of Taxation (1999) 197 CLR 459 at [24]. If an acquisition does not fall within the terms of s 11-15(1), it is unnecessary to consider s 11-15(2)(a). Lindgren J in Axa Asia Pacific was correct to describe s 11-15(2)(a) as a "blocking" provision.
25 Textually, 11-15(2)(a) is concerned with a different inquiry to s 11-15(1). The language of s 11-15(2)(a) directs an inquiry into whether the acquisition has a nexus with input taxed supplies that an entity makes in carrying on its enterprise. The use of the words "however" and "to the extent that" as they relate to s 11-15(2)(a) indicate that something may be acquired in carrying on an enterprise (that is, satisfy s 11-15(1)) but nonetheless wholly or partly "relate" to making supplies that would be input taxed: Federal Commissioner of Taxation v American Express (2010) 187 FCR 398 at [104]-[105]. The legislative scheme of the GST Act contemplates that an entity may make taxable supplies, GST free supplies and input taxed supplies, all as part of the activities constituting an entity's "enterprise". An apportionment is required to the extent that an acquisition has a relevant relationship with both the making of taxable supplies and input taxed supplies, such as where there are undifferentiated general overhead outgoings: s 11-30; HP Mercantile at [37].
26 As the authorities make clear, the words "relates to" must be given a meaning that depends on the context in which they are used: J & G Knowles v Federal Commissioner of Taxation (2000) 96 FCR 402 at 408; HP Mercantile at [35]. The relationship must be one that is "sufficient" or "material" for s 11-15(2)(a) to apply, but the disentitling factor that disallows input tax credits which otherwise would be available is a relationship with the making of input taxed supplies (on which no GST is payable): HP Mercantile at [46]. The qualification that an entity does not have a creditable purpose "to the extent" that an acquisition meets the requirements of s 11-15(1) but also falls within the terms of s 11-15(2)(a) thus gives meaning and content to the required relationship between the acquisition and input taxed supplies for the purposes of s 11-15(2)(a). If an entity makes input taxed supplies, and makes acquisitions that relevantly relate to the making of those input taxed supplies, s 11-15(2)(a) operates to deny input tax credits on those acquisitions. It is the objective relationship between an acquisition and making supplies that would be input taxed with which s 11-15(2)(a) is concerned, not the moving cause or principal purpose behind the acquisition. The purpose for which an acquisition was made may in some cases bear upon whether the acquisition has a relevant relationship with the making of supplies that would be input taxed, but it is the existence of a connection or relationship between the acquisition and supplies that would be input taxed that is the statutory criterion directed by s 11-15(2)(a).
27 Rio Tinto's reliance on the legislative policy for the enactment of s 40-35 as set out in the Explanatory Memorandum to the A New Tax System (Goods and Services Tax) Bill 1998 (Cth) at para 5.164 does not aid its argument. The EM states that the purpose of s 40-35 is to put renters in the same position as owner/occupiers. Rio Tinto relied on that paragraph to argue that s 40-35 is only concerned with a supply to an ultimate consumer, not to an intermediate supply as a step in the making of another supply that is the objective of the "enterprise". There are difficulties in following how that proposition flows from the apparent legislative object of s 40-35 but, in any event with respect to the submission, it is uncontroversial that Hamersley makes input taxed supplies of residential accommodation within the meaning of s 40-35. The issue is whether a requisite relationship exists for the purposes of s 11-15 between the acquisitions the subject of the dispute and the making of those input taxed supplies. Whether a requisite relationship exists for the purposes of s 11-15 depends on the proper construction of that provision and for the reasons given, it is the existence of a connection or relationship between the acquisition and supplies that would be input taxed that is the statutory criterion directed by s 11-15(2)(a).
28 Rio Tinto also called in aid the legislative policy to which Hill J in HP Mercantile referred at [13] as follows:
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.
and at [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.
29 It was argued that the legislative policy would be defeated by the Commissioner's construction of s 11-15 by reason that Hamersley's business is to profit from the making of taxable and GST free supplies of iron ore, not the provision of accommodation. It was submitted that the Commissioner's construction means that Hamersley can only recoup the GST cost in the price of its taxable activities (thereby resulting in cascading of tax) or in the price of its exports (thereby resulting in GST being borne on exports). Thus, it was said, the Commissioner's construction would result in double taxation on taxable supplies and unrecoverable GST would be embedded in the GST free supplies because Hamersley's leasing activities operate at a loss. There are a number of responses to this submission.
30 First, the task of statutory construction does not seek to identify or assume the underlying policy of a provision and then to construe that policy. That is what Rio Tinto seeks to do here. As French CJ and Hayne J said in Certain Lloyd's Underwriters Subscribing to Contract No IH00AAQS v Cross (2012) 248 CLR 378 at [26]:
A … danger that must be avoided in identifying a statute's purpose is the making of some a priori assumption about its purpose. The purpose of the legislation must be derived from what the legislation says, and not from any assumption about the desired or desirable reach or operation of the relevant provisions.
As general statements of policy, the observations of Hill J in HP Mercantile set out in para 28 above can be accepted but those observations do not provide the answer to the proper construction of s 11-15.
31 Secondly, the fact that it may be necessary for Hamersley to subsidise the rent on the accommodation in order to attract and retain its workforce, with the consequence that the leasing activity is loss making, does not gainsay the application of s 11-15(2)(a). The words used by the legislature do not support the existence of a statutory rule embedded within s 11-15 that the recovery of input tax credits should only be blocked where the supplier is able to recover the cost of the GST on its inputs in the price charged for the input taxed supply. Further, there is nothing in the legislation (or the authorities) which suggests that if the supplier makes the commercial decision not to pass on the GST cost on inputs, it can avoid the effect of input taxation. The decision to provide a rental subsidy to employees was a commercial choice by Hamersley, which does not impinge on the proper construction of s 11-15.
32 Thirdly, it is the transaction that determines the GST outcome. In this case, Hamersley has chosen to lease accommodation to its workforce with the consequence that s 40-35 applies and the provision of accommodation is an input taxed supply. The policy to deny input tax credits where the acquisitions relate to the making of those supplies is readily explicable given that GST is not payable on an input taxed supply.
33 Section 11-15(2)(a) should be construed consistently with the scheme of the GST Act under which GST is not payable on input taxed supplies that an entity makes and correlatively there is no entitlement to input tax credits on acquisitions that relate to such input taxed supplies. The words "relates to" in s 11-15(2)(a) simply denote that there must be a relationship or connection between an acquisition and the making of input taxed supplies. What must be established to come within the section is a material or sufficient relationship but the existence of such a relationship is not made to depend on a "purpose" test. A finding that the provision of accommodation was an essential and necessary incident of Hamersley carrying on its mining operations would not mean that s 11-15(2)(a) was not engaged. It may be accepted that Hamersley's leasing activities are wholly incidental to its mining operations and merely a means to Hamersley carrying on its business but the relevant inquiry is whether the acquisitions in question were connected with the input taxed supplies that Hamersley makes as part of its activities. On the uncontroversial facts of this case, the acquisitions in question all have a direct and immediate connection with Hamersley's provision of the leased accommodation and that direct and immediate connection constitutes a sufficient and material relationship for the purposes of s 11-15(2)(a).