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[2006] FCAFC 191
Federal Court of Australia (Full Court)
2006-12-20
Stone J, Gyles J, Young JJ
Original judgment source is linked above.
REASONS FOR JUDGMENT GYLES J 1 I agree with the orders proposed by Stone J and with her Honour's reasons for those orders. I certify that the preceding one (1) numbered paragraph is a true copy of the Reasons for Judgment herein of the Honourable Justice Gyles.
ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA
AND: THE COMMISSIONER OF TAXATION FOR THE COMMONWEALTH OF AUSTRALIA
COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
Stone J 2 The appellant, Saga, is a company incorporated in the United Kingdom. It sells holiday package tours of Australia, mostly to UK residents. It does not sell tours to Australian residents and has neither premises nor employees in Australia. Saga is, however, registered for the purposes of the A New Tax System (Goods and Services Tax) Act 1999 (Cth). The question in this appeal is whether a packaged holiday tour of Australia, sold by Saga to non-Australian residents is, within the meaning of s 9-5 of the GST Act, to any extent, a taxable supply. Saga submits that there is no such taxable supply. In the alternative, and only if its primary submission is not accepted, Saga submits that only the right to occupy a hotel room falls within the section, not any of the other aspects of the tour and not any of the other facilities supplied by a hotel. 3 The packaged holiday tour in question was called "A Taste of Australia". These tours were conducted during 2004. The tour package was paid for in the UK and, at least from the tourist's perspective, was an 'all inclusive' tour. The set price included travel insurance, return economy flights to Australia, transportation within the UK and Australia, a tour guide within Australia, various excursions to be conducted in Australia and, relevantly, accommodation at specified hotels in Australia.
The relevant contractual relationships 4 Delivery of the packaged holiday tour involved at least three bilateral contractual relationships. The first, which is central to the determination of this appeal, was between Saga and the prospective tourist in the UK. In return for payment of the set price Saga agreed to provide the tourist with a package holiday, including the components listed above. The terms and conditions of this contract can be found, inter alia, in a document entitled 'Overseas Booking Conditions And Helpful Information 2004/2005'. These conditions provided that the contract was governed by English law and that the purchase price was payable 56 days prior to departure. Saga reserved the right to cancel the tour or alter the tour itinerary (including accommodation) however pursuant tothe "Saga Holiday Promise", Saga agreed to give tourists a discount if certain significant changes were made to the holiday package, including if accommodation was altered to the tourist's detriment. 5 A second contract, the 'Longhaul Agent Agreement',was made between Saga and AOT Group Pty Ltd, an Australian company, for the provision of tour services to the tourists. That is, with a few exceptions not presently relevant, the elements of the Saga tour were provided or arranged by AOT which agreed to provide 'the Services which Saga may require and which are notified to and agreed with [AOT] in advance'. In practice, the arrangement between Saga and AOT was that, before the commencement of each tour, Saga would inform AOT as to the number of persons taking the tour and their details. AOT would use this information to confirm arrangements with the Australian service providers (see below). AOT charged Saga for the cost of tours commencedin the given month, plus a margin. AOT provided a tour manager to conduct the tours in Australia. Although the contract employed the language of agency, in Saga's submission, AOT's authority was limited; it was not able to commit Saga to contractual obligations, but rather did what was necessary in Australia to implement the 'A Taste of Australia' tour, promised by Saga to the tourist. 6 Thirdly, AOT entered into contracts with Australian service providers, including hoteliers, for the provision of services to the tourists. Apart from arrangements for certain domestic flights that are not presently relevant, Saga did not enter into any contracts with Australian service providers. Once Saga informed AOT of the number of tourists and their details, AOT would confirm the bookings made with the Australian service providers. The Australian service providers issued invoices to AOT, which were paid by AOT and which were kept confidential from Saga.
The statutory scheme 7 These proceedings concern the GST Act as it was prior to the amendments made by the Tax Laws Amendment (2005 Measures No 1) Act 2005, which commenced on 29 June 2005. The amendments made in 2005 would resolve for the future the main issues raised in this appeal, and indeed Saga sought to rely on these amendments in support of its construction of the GST Act, notwithstanding that these amendments were made after the period relevant to this appeal. 8 Pursuant to s 7-1 of the GST Act, 'GST is payable on * taxable supplies and * taxable importations.' Section 9-40 provides that an entity must pay the GST payable on any taxable supply it makes.
9 "Supply" is defined broadly in the Act as 'any form of supply whatsoever'; s 9-10(1). Section 9-10(2) provides that this includes: '(a) a supply of goods; (b) a supply of services; (c) a provision of advice or information; (d) a grant, assignment or surrender of * real property; (e) a creation, grant, transfer, assignment or surrender of any right; (f) a * financial supply; (g) an entry into, or release from, an obligation: (i) to do anything; or (ii) to refrain from an act; or (iii) to tolerate an act or situation; (h) any combination of any 2 or more of the matters referred to in paragraphs (a) to (g).'
10 Section 195-1 defines 'real property' as including: '(a) any interest in or right over land; or (b) a personal right to call for or be granted any interest in or right over land; or (c) a licence to occupy land or any other contractual right exercisable over or in relation to land.' 11 A "taxable supply" is defined in s 9-5 as follows: 'You make a taxable supplyif:
(a) you make the supply for * consideration; and (b) the supply is made in the course or furtherance of an * enterprise that you * carry on; and (c) the supply is * connected with Australia; and (d) you are * registered, or * required to be registered. However, the supply is not a * taxable supply to the extent that it is * GST‑free or * input taxed.' 12 It was accepted between the parties that Saga's supply to the tourist of the accommodation component of the holiday satisfied all of the above save for the connection with Australia required in s 9-5(c).
13 The criteria for determining whether a supply is 'connected with Australia' vary depending on whether or not that which is supplied is characterised as real property, as defined above. The relevant criteria are set out in s 9-25(4) and (5): 'Supplies of real property (4) A supply of * real property is connected with Australia if the real property, or the land to which the real property relates, is in Australia Supplies of anything else (5) A supply of anything other than goods or * real property is connected with Australia if either: (a) the thing is done in Australia; or (b) the supplier makes the supply through an * enterprise that the supplier * carries on in Australia.' 14 The Commissioner's position is that the requisite connection between the Saga tour and Australia is met because the tour involves (at least in part) a supply of real property in Australia. 15 Division 96 of the Act deals with supplies that are only partly connected with Australia. At the relevant time s 96-5 provided: '(1) If, because a supply (the actual supply) is a supply of more than one of these kinds: (a) a supply of goods; (b) a supply of * real property; (c) a * telecommunication supply; (d) a supply of anything, other than goods or real property, that is not a telecommunication supply; only part of the actual supply is * connected with Australia, then the actual supply is to be treated as if it were separate supplies in the following way. (2) The part of the actual supply that is * connected with Australia is to be treated as if it were a separate supply that is connected with Australia. (3) The part of the actual supply that is not * connected with Australia is to be treated as if it were a separate supply that is not connected with Australia. (4) However, if one of the kinds of supply that forms part of the actual supply may reasonably be regarded as incidental to: (a) the other kind of supply that forms part of the actual supply; or (b) one (but not both) of the other kinds of supply that form part of the actual supply; and its value (if it were a separate * taxable supply) would not exceed $50,000, it is treated as part of that other kind of supply. (5) This section has effect despite section 9-25…' 16 Another element of a 'taxable supply', is that the supply be made for consideration; ss 9-5(a).
The primary judge's decision 17 The primary judge noted that the 'principal issue arising for determination, as broadly framed by SAGA, is whether the supply by SAGA to the overseas tourists to Australia of the hotel accommodation component of SAGA's 'A Taste of Australia' tour package is subject to GST in SAGA's hands'. 18 It was common ground before his Honour that Saga's tour package satisfied all of the requirements of a 'taxable supply' set out in s 9-5, save for s 9-5(c). It was accepted between the parties that, as the Act was drafted at the relevant time, the only possible supply that could be connected with Australia as required by s 9-5(c) would be a supply of real property or perhaps real property and incidental goods. In the circumstances, the Commissioner assertedthat the accommodation component of the tour involved a grant of real property and that, for this component, the requisite connection existed. 19 His Honour made the 'preliminary observation' that the meaning of supply in s 9-10 included the creation of a right, a grant of real property and any combination of the factors listed in s 9-10. In his Honour's opinion it was therefore unnecessary for him to decide whether Saga's supply was of a contractual right in relation to land or a licence to occupy the land. 20 Further, his Honour noted that the notion of supply in the GST Act is not limited to simultaneous or immediate actual supply. His Honour construed the relevant supply in the following way: at the time of purchasing the package tour, the tourist acquires 'an inchoate right' to be accommodated at the hotel designated in the itinerary. This right crystallises when the tourist arrives at the hotel and is given a room. His Honour concluded that a hotel room is characterised in law as a form of real property, (presumably as that term is defined in the Act) and accordingly, that tourists staying in a particular hotel were contractual licensees of the property. 21 His Honour dismissed Saga's construction of the transaction, which was that upon payment the tourist received no more than a bundle of contractual rights, one of which was the right to be provided with accommodation, as 'artificially confined or restricted in scope of operation'. Further,his Honour rejected Saga's submission that, because the only right Saga conceded it created under the contract was not capable of specific performance and merely sounded in damages,there was no right 'exercisable over or in relation to land' . His Honour found that the definition of real property in s 195-1 was deliberately broad in its scope and intended to 'expand the limits of proprietary interests in realty' and that Saga's construction ran counter to the principles of statutory construction of the analogous VAT legislation, which reject the artificial dissection of transactions in favour of a 'broad and comprehensive approach'. 22 His Honour also rejected Saga's submission that the tour package, looked at as a whole, was a supply of services in which the provision of accommodation was not so dominant that it ought to determine the appropriate characterisation of the supply. His Honour found this submission inconsistent with the 'broad sweep' of s 9-10 and, in addition, held that the provision of accommodation (that is, the right to occupy the room) was also a fundamental aspect of the Saga tour. His Honour found that a right to accommodation (being the right to occupy the hotel room) was 'the principal focus of an accommodation hotel's business purposes and operations, and of an overseas traveller's patronage'. 23 In conclusion, his Honour held that the interpretation of the GST Act requires: 'a reasonably broad and comprehensive perspective to be taken, being a perspective which is also ambulatory in nature, having regard to the parameters of a supplier's business activities and the transactions in issue.' 24 His Honour's approach was clearly informed by his view that the: 'GST is traditionally a tax on 'businessmen', to be assessed and paid by businessmen, and to be administered and interpreted in accordance with the understanding of businessmen… Moreover… the GST Act contemplates that GST will be payable on the wide variety of business transactions which constitute a taxable supply (s 9-5) and as a necessary consequence, the legislation is expressed in general terms to facilitate its application to that wide variety of transactions.'
25 His Honour expressed the view that the 'most significant shortcoming in SAGA's submissions'was an 'unwarranted and artificial focus' upon the point in time when the overseas traveller commits to participate in 'A Taste of Australia' tour. The correct approach, in his Honour's view, 'should involve the determination of what SAGA undertakes to provide (and thus to supply for the purposes of the GST Act) as relevant components of that pending tour, in so far as the same would be connected with Australia for the purposes of and within s 9-5(c) of the GST Act, and thus at the time of supply.' In particular, his Honour found that the determination of what constitutes a supply may require 'a temporal survey of future as well as past and present activities' undertaken by either the taxpayer or by third parties in order to effect the supply. His Honour found that the statutory notion of supply encompassed: 'what takes place by way of an economic process in the nature of a supply which culminates in the consumer,… obtaining the good or service to be gained or enjoyed, pursuant to and in connection with the supplier's operations.' 26 His Honour held that, in assessing the nature of the supply and its connection to Australia in the context of an executory contract, the 'duration of the process or event which constitutes the taxing event or circumstance said to constitute the supply' ought not to be considered. Given the wide scope of the statutory notion of supply, his Honour rejected the submission that all that the tourist received from Saga was a chose in action. Rather, Saga supplied a holiday of which an essential part was the right to occupy hotel rooms allocated to the customers. Since the relevant hotels were situated in Australia, the connection to Australia for the purposes of s 9-5(c) of the Act was established. 27 In a separate judgment, handed down on 20 March 2006, his Honour dismissed the application and concluded that there should be no order as to costs, since the litigation raised important and difficult issues, especially in relation to the construction of the GST Act, which affected at least 100 foreign tour operators. In addition, his Honour agreed with Saga's submission that it was only shortly prior to the hearing that the Commissioner agreed that food and drinks, some 35% of the claimed tax payable, should not be considered to be subject to taxation.
THis appeal 28 In a notice of appeal filed on 31 March 2006, Saga relied on 14 grounds of appeal, which were listed as follows: 'Saga supplies rights or services, not real property
Interpretation of the GST Act 29 The Court has tended to 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; HP Mercantile Pty Ltd v Commissioner of Taxation (2005) 143 FCR 553 at [66]. Consideration of these aspects of the GST Act has lead to the tax being described as 'a practical business tax'; Sterling Guardian Pty Ltd v Commissioner of Taxation (2005) 220 ALR 550 at [39]. 30 The description is appropriate because it draws attention to two related aspects of the tax. The fact that liability to pay the tax is imposed at various stages of the supply chain means that it is a tax on business but, importantly, one that is designed, where practicable, to quarantine business from the ultimate burden of the tax. This and other aspects of the tax legitimately form part of the context in which the language of the Act is interpreted and explains, at least in part, why the description 'a practical business tax' seems to be appropriate. This does not mean, however, that there is some special canon of construction that should be applied when interpreting the GST Act. The purposive approach to interpretation, of its nature, takes account of the context of the Act and the phrase, 'a practical business tax' is a reference to that context, which as the Full Federal Court observed in Chaudhri v Commissioner of Taxation (2001) 109 FCR 416 at [6] : '… has the wide meaning which extends to the legislative history, the Parliamentary intention and the mischief to which a particular provision has been directed as well as the narrower meaning which would dictate reading the words to be construed by reference to the immediately surrounding or otherwise related provisions.'
The issues in this appeal 31 The primary ground of dispute in this appeal concerns the appropriate characterisation of the supply made by Saga to the tourists on entering into the 'A Taste of Australia' contract. As discussed above, the characterisation of this supply has a significant impact on the second major aspect of dispute, which is whether the supply was 'connected with Australia' in the sense referred to in s 9-5. The issues for determination were succinctly summarised in the respondent's written submissions: '(1) Whether the primary Judge was right to hold that the appellant's supply to its customers of the accommodation component of its "Taste of Australia" holidays was either: (a) a supply of a "contractual right exercisable … in relation to land"; or (b) a supply of "a licence to occupy land"; within para (c) of the definition of "real property" in section 195 of the Act. (2) Whether the primary Judge was right to hold that the supply of the accommodation component of the holidays was not incidental to the supply of the other components of the holiday for the purposes of section 96-5(4) of the Act. (3) Whether the primary Judge was right to hold that the services or facilities such as porterage and the use of pools or gymnasiums were part of the supply of the accommodation.'
32 Saga's preliminary submission was that it was inappropriate and 'entirely artificial' for his Honour to characterise the supply by reference to the individual components promised to the tourist. Rather, it submitted, Saga supplied a single right which was to the performance of the contract as a whole. This submission reflects Saga's underlying position that in an executory contract there are two supplies: the first of which occurs at the time of making the contract and the second at the time of performance. Saga supported this approach by reference to amendments to the Act made subsequent to the relevant events in this appeal and which are referred to above at [7]. Saga's submissions are examined in detail below in the context of the analysis of the Saga contract, however I should say, at the outset, that I attach no weight to the subsequent amendments to the Act. While there may be cases where subsequent amendments can be relied on to clarify the effect of the pre-amendment provisions, this is not such a case. As discussed below, the effect of the pre-amendment provisions here can be determined by entirely conventional analysis.
The accommodation component of Saga's supply 33 In challenging his Honour's finding that the Saga contract involved a supply of real property (within the extended definition in s 195-1), Saga submitted that his Honour placed too much emphasis on the view that the GST Act ought to be administered and interpreted in accordance with the understanding of businessmen, and therefore failed to apply the proper contractual analysis required by the GST Act. Such an analysis, it was submitted, should have been his Honour's starting point, and would have led him to the opposite conclusion. His Honour's conclusion, however, is entirely consistent with proper contractual analysis taking into account the statutory definitions contained in the GST Act. 34 The contract between Saga and a tourist was one whereby Saga promised to provide the tourist with certain accommodation. Had the tourist not been supplied with the promised accommodation Saga would have been in breach of this contract. This is true irrespective of the fact that Saga was not in a position to provide the accommodation itself and was relying on its arrangements with AOT to enable it to fulfil its contractual obligations to the tourist. It is also irrelevant to this analysis that the accommodation had not been appropriated to the contract (even by AOT) at the time the contract was made and that, had Saga breached the contract, specific performance would not have been an available remedy. The question remains, was there a supply of real property under the contract? 35 The concept of supply in the GST Act is very wide. Much has been made of the fact that, at the time it was entered into, the contract between Saga and the tourist was an executory contract. It was none the less binding although the time for performance, at least in relation to the accommodation component, had not yet arrived. There is nothing unusual about that. With some contracts creation and performance are more or less contemporaneous, for instance, the purchase of goods from a supermarket, but many are not. The most common form of contract for the sale of land, for instance, involves a promise to transfer title (or to put the purchaser in the position of becoming the registered proprietor) followed, generally many weeks later, by settlement at which time the promise is performed. The promise to transfer title to land does not create a proprietary interest at common law although it may do so in equity. It would not however, be correct to describe that equitable proprietary interest as real property, as that term is understood at common law. 36 The definition of 'real property' in the GST Act is, however, not confined to interests that would warrant that description under the general law. Indeed the definition goes well beyond even mere proprietary interests and encompasses interests that are purely contractual as well as personal interests which may or may not have arisen under contract; Sterling Guardian at [37]. For instance, s 195-1(c) includes as real property, 'a licence to occupy land' or 'any other contractual right exercisable over or in relation to land'. A licence to occupy land is not proprietary (Cowell v The Rosehill Racecourse Company Limited (1937) 56 CLR 605) although it may be coupled with the grant of a proprietary interest in land (Australian Softwood Forests Proprietary Limited v Attorney-General (NSW) (1981) 148 CLR 121. 37 Having considered this definition, his Honour, the primary judge, held that the contract between Saga and the tourist fell within s 195-1(c) and, as mentioned above at [19], that it was unnecessary for him to decide whether the supply by Saga was: 'of a contractual right in relation to land by way of a license [sic] to occupy land, or whether it is the supply of a license [sic] to occupy land, since both notions are here attracted.' 38 The distinction his Honour draws is not entirely clear however I am satisfied that, at the very least, the contract between Saga and the tourist can be accurately described as including "a contractual right exercisable … in relation to land" and therefore that it is not necessary to consider the question of a licence. The brochure for the "A Taste of Australia" tour highlights named hotels and motels in Sydney, Cairns, Alice Springs, Perth, Adelaide and Melbourne. The promise of accommodation in these hotels or others gives the tourist a right that is exercisable 'in relation to land'. So described, the contract does not have to provide a proprietary right, either at the time of its creation or at any later stage. Similarly, it is not necessary that Saga itself has rights in relation to the relevant land; the fact that it has given a contractually binding promise 'in relation to land' (that is the hotel accommodation) that is exercisable by the tourist is sufficient. 39 There is nothing in the description of the right as 'exercisable' in relation to land that requires it to be exercisable at the moment of creation of the contract. It would be an unwarranted implication to include such a time requirement thereby excluding executory contracts. Similarly, there is nothing in the notion of the right being 'exercisable' in relation to land that requires the tourist to have a specifically enforceable right over the land. To the contrary, the express inclusion of mere contractual rights in the statutory definition of real property indicates that specific enforcement as a remedy for breach is not contemplated even if the contract is breached or the licence revoked. It is only in special circumstances, for instance where a licence is coupled with an interest in land, that a promise to allow entry to land will be specifically enforceable; see [36] above. 40 While the definition of "real property" in s 195-1, and particularly in subsection (c), is very wide it is not entirely unconstrained. I have no difficulty with the notion of a right in relation to land including the right to occupy a hotel room although it would not, in my view, extend to a contract for the cleaning of the hotel room. Read in context, the definition shows an intention to extend the meaning of 'real property' beyond its meaning at common law. It does not, however, show an intention to divorce the term entirely from its ancestry. The link between 'real property' and a proprietary interest may have been dispensed with, however the context makes clear that for a right to qualify as 'real property' it is necessary that the relation to the land in question be real and substantial and not merely incidental; O'Grady v The Northern Queensland Company Limited (1990) 169 CLR 356 at 367 per Dawson J and 374 per Toohey and Gaudron JJ. 41 One aspect of Saga's submission that the contract between Saga and the tourist did not involve the supply of real property was that the accommodation component of the contract was comprised of a number of components in addition to the right to occupy a room. These other components included the use of furniture and facilities within each room, cleaning and linen service, access to common areas and facilities of the hotels such as pools and gymnasiums and various other hotel services such as porterage and concierge. It was conceded before the primary judge that meals and drinks were not part of the accommodation component and not part of the real property. In relation to the other services and facilities mentioned, some relate to the use of the room and others do not. It was submitted that "having regard to its essential character" the provision of a room was a subsidiary aspect of what should properly be described as "accommodation services" and not the provision of a contractual right exercisable in relation to land. Counsel for Saga referred the Court to Beynon and Partners v Commissioner of Customs and Excise [2005] 1 WLR 86 at 91, in support of the submission that where a supply is, from an economic point of view, a single service, it is inappropriate to consider individually the constituent elements of that service. 42 The Commissioner argued that the supply of the accommodation component of the tour was 'in substance and reality", a single supply that included all these components. The services and facilities are adjuncts to the right to use the room and, in general, they are not charged for separately. That being so the accommodation component is properly regarded as a single supply of real property. 43 I agree with his Honour, the primary judge, that Beynon, which was concerned with whether, for the purposes of the VAT, a doctor administering a drug to a patient supplied goods, namely drugs (which were zero rated for VAT) or a medical service (which would be input taxed), with the drugs incidental to the service, is of little assistance on this point. I am conscious of the High Court's comment in Avon Products Pty Limited v Commissioner of Taxation (2006) 227 ALR 398 at [28] about the considerable caution that must be exercised before relying on international authorities that deal with different statutory regimes. The warning is particular apt in the present circumstances since the details of the GST Act are significantly different from those of the equivalent legislation in the UK and other countries. In any event, I do not regard the facts of Beynon as analogous to the present circumstances. Nevertheless, in so far as Lord Hoffman focused on the 'social and economic reality' of the transaction I regard his approach as relevant. In my view the accommodation component is a single supply which is properly characterised as a supply of real property. 44 Counsel for Saga referred to the discussion about the GST Act's definition of 'real property' in the GST Act in Sterling Guardian v Commissioner of Taxation (2005)220 ALR 550 at [35] - [38]. In Saga's submission, this decision indicated that the focus of the term 'real property' in the Act was on the tangible asset itself, rather than the intangible interest or bundle of rights in the land. Hence, in paragraph (c) of the definition of real property, the 'land' in question needed to be tangible, identifiable land. This submission ignores the importance of statutory context. The discussion in Sterling Guardian makes clear that a reference to property (real or otherwise) may be a reference to the legal right or to the subject of the legal right. Which is the case depends on the context. The policy and context of the margin scheme set out in Division 75 of the Act is entirely different from that presently under consideration.
Taxable supply 45 Accepting as I do that the contract between Saga and the tourist involves a contractual right exercisable in relation to land and is therefore real property for the purposes of the GST Act, the connection to Australia required by the definition of 'taxable supply' in s 9-5 is satisfied if the land in question is in Australia; s 9-25(4). While the land in question is not at the time of contract allocated to the contract, it is clear that the obligation imposed on Saga requires that the land be 'in Australia'. That being so, for there to be a taxable supply made by Saga it is only necessary for there to be a 'supply' within the meaning of s 9-10. 46 The first point to make about s 9-10 is that the definition of supply in s 9-10(1) is just about as wide as possible ('any form of supply whatsoever') and that the examples given in s 9-10(2) are inclusive not exhaustive. Were it not for this there might arguably be a difficulty about whether the contract in question could be seen to be a 'grant, assignment or surrender'; s 9-10(2)(d). The difficulty with these terms is that, in the context of property law, they refer to a transfer of a proprietary interest, however the definition of 'real property' in the GST Act makes it clear that in this context they cannot bear their conventional meaning. In any event, the width of the primary definition makes it unnecessary to resolve this issue. I am therefore satisfied that the Saga contract involves a taxable supply of real property connected with Australia. 47 To the extent that the provision of the actual accommodation, for instance by the relevant hotel, was a supply by the hotel, I accept the submission made by Saga that it was not a taxable supply because it was made without consideration; see s 9-5(a).
Is the accommodation component incidental to other elements of the supply by Saga? 48 Saga's alternative submission, should the Court find against it on the issue of real property, was that if the accommodation component was a supply of real property, it was incidental to the actual supply of the tour. This raises the possible application of s 96-5 of the GST Act. The effect of s 96-5, which is set out at [15] above, is that the accommodation component of the Saga contract is to be treated as a separate supply connected with Australia unless (a) it can reasonably be regarded as "incidental" to the other components that are supplied under the contract; and (b) its value, treated as a separate taxable supply, would not exceed $50,000. If the proviso applies then the accommodation component is to be treated as part of the supply that is not connected with Australia. 49 There is no definition of "incidental" in the Act. Of the meanings given by the Shorter Oxford English Dictionary and the Macquarie Dictionary respectively, the following meanings are the most apposite to s 96-5: "occurring as something … of secondary importance" and "happening or likely to happen in fortuitous or subordinate conjunction with something else". 50 Counsel for Saga emphasised that the tour not the accommodation was the focus of Saga's tourist brochure; whilst accommodation was integral to the tour, it was subordinate to this focus, just as was the provision of food on the tour. In written submissions for Saga the point was made that, '… it is self-evident that the purpose of the A Taste of Australia tour is sightseeing, to experience Australian culture, food, etc, and to meet and engage with Australians, etc. … The "A Taste of Australia" tour package is not a luxury or destination travel, but touring. Accommodation is necessary to achieve this purpose, but may reasonably be regarded as incidental to the other aspects of the tour. Moreover, the terms of contract permit unilateral accommodation changes by Saga. Additionally, accommodation comprises only 23% to 34% (depending on the number of tourists) of the costs charged by AOT to Saga in respect of the Australian land content of the "A Taste of Australia" tour … and would be a much smaller percentage of the total tour costs (which include domestic and international air travel, travel costs to Heathrow and travel insurance.' 51 In support of its submission that the provision of accommodation was incidental to the main purpose of the contract, namely sightseeing, Saga referred to the comments of Dixon CJ in Burton v Honan (1952) 86 CLR 169 at 177 where his Honour was considering the scope of the incidental power in s 51(xxxix) of the Commonwealth Constitution. The Chief Justice said: "The view which I personally have expressed is that everything which is incidental to the main purpose of a power is contained within the power itself so that it extends to matters which are necessary for the reasonable fulfilment of the legislative power over the subject matter …" [emphasis added] 52 If I may say so, with respect, it is entirely appropriate to consider the purpose of a grant of power when determining the ambit of that power. That, however, is not the issue here and, in my view, Saga's submission is misconceived. Whilst the purpose of the tour may well be sightseeing, s 96-5 is not concerned with the purpose of the contract but with the 'supply' made under the contract. It is directed to an analysis of the supplies made, in circumstances where part of the "actual supply" is connected with Australia and part is not so connected. Saga, however, does not supply "sightseeing" except, arguably, in very limited situations. The tourist's purpose may be the reason for entering into the contract but it is not what is supplied under the contract. 53 Paragraph 5 of the statement of claim lists the elements of the supply that Saga agrees to provide to the tourist. Those elements are: (1) travel insurance and cancellation cover; (2) scheduled economy flights from Heathrow to Sydney and from Melbourne to Heathrow; (3) travel within the United Kingdom to Heathrow; (4) specified transportation within the Australia being: (a) scheduled economy flights: (i) from Sydney to Cairns …; (ii) from Cairns to Alice Springs …; and (iii) from Uluru to Perth …; (b) train travel on the Indian Pacific from Perth to Adelaide … ; (c) coach travel comprising: (i) transfers between accommodation and airports; (ii) tours in each of Sydney … Alice Springs … Adelaide… and Melbourne …; (iii) travel from Alice Springs to Uluru… (iv) travel from Adelaide to Melbourne via Mt Gambier…; (d) a harbour cruise in Sydney (day 4); and (e) a full day excursion by catamaran to Green Island including a cruise in a glass-bottomed boat (day 7); (5) all airport taxes, fees and charges; (6) the services of a representative to help check in at Heathrow; (7) accommodation specified as follows: … [the names of 9 hotels are listed here] (8) porterage of luggage at each accommodation; (9) meals specified to include 19 breakfasts, 4 lunches and 10 dinners; (10) obtaining a visa, if required; (11) the services of a tour guide in Australia. 54 The above list shows that, with the possible exception of items (4)(c)(ii), (d) and (e), the non-accommodation supply items provided under the Saga contract are mainly transport, meals and some personal assistance with luggage etc. There is no reason to characterise accommodation as subordinate or incidental to these items; both are important elements of the tour provided by Saga irrespective of the relative cost of these elements. The primary judge was correct to reject Saga's contention that s 96-5(4) applied. 55 As Saga pointed out, if the accommodation is not found to be incidental to the other elements of the package and the supply of "real property" is to be treated as if it were a separate supply that is connected with Australia, then the value of the supply of that real property must be calculated in accordance with s 96-10. In this regard Saga again raised the issue of whether only part of the accommodation component constituted 'real property' and that services and facilities relating to the cleaning of the room and the use of other parts of the hotel need to be distinguished for the purposes of this calculation. I have already expressed my view (see [41]-[42] above) that the accommodation component is a single supply of real property including all of these elements.
The cross appeal 56 The Commissioner cross-appealed from the decision of the primary judge relating to costs (Saga Holidays Limited v Commissioner of Taxation [2006] FCA 128). His Honour had accepted Saga's submissions that there ought to be no order as to costs, since the case was in the nature of a test case and the Commissioner had waited until immediately before the hearing to concede the correctness of a substantial part of Saga's claim. In particular his Honour stated: 'In my opinion the litigation raised important and difficult fiscal issues in particular on the construction of the legislation' and referred to at least 100 foreign tour operators affected by the outcome of the litigation. 57 The grounds of the Commissioner's cross appeal, listed in paragraphs 2-5 of the notice of cross-appeal, are: '2. His Honour erred in finding that the litigation was in the nature of a test case. 3. His Honour erred in finding that the nature of the litigation justified or supported the conclusion that a costs order ought not be made in favour of the Cross-appellant. 4. His Honour erred in finding that the Cross-appellant's concession in relation to meals justified or supported a departure from the general rule that costs should follow the event. 5. His Honour should have held that the Cross-appellant was entitled to his costs of the proceedings.' 58 Quoting from G E. Dal Pont, Law of Costs, LexisNexisButterworths 2003 at [9.26], the Commissioner submitted that the proceedings were not a test case in that this was not a case "where the parties seek primarily to settle a point of law, and where the impact of that rule on those parties is of secondary importance to the settlement of the rule itself". The Commissioner also submitted that the proceedings did not bear a public interest character nor was there evidence before his Honour to suggest that the applicant commenced the proceedings for reasons other than purely commercial reasons. The Commissioner submitted that the resolution of the issue in the proceedings had no ongoing significance (for the appellant or anyone else) because of the amendments to the GST Act referred to in [7] above. 59 The Commissioner submitted that even if the primary judge was correct that "the litigation raised important and difficult fiscal issues in particular on the construction of the legislation", this would not justify a departure from the ordinary rule that costs follow the event. Another issue raised by the Commissioner was the significance that had been attached to its late concession that 'meals and drinks' should not be considered to be part of the accommodation component of the contract made with the tourist, and therefore part of the real property supply. 60 The factors that the trial judge took into account in making his ruling on costs fell within the proper ambit of his discretion. During the principal hearing, it seems that the trial judge was informed that the proceedings were in the nature of a test case: at [3]. In the course of the hearing concerning costs, evidence was tendered that the Commissioner had given an undertaking to foreign tour operators who were clients of Deloitte Touche Tohmatsu that he would not issue a GST assessment against them without giving them ten days' notice of his intention to do so. The same undertaking had previously been given to Saga. The GST liability of at least 100 foreign tour operators depended on the outcome of the proceeding. Saga's individual commercial interest in the case did not prevent the proceedings having the character of a test case: Federal Commissioner of Taxation v B & G Plant Hire Pty Ltd (1994) 52 FCR 257 at 270; and Orellana-Fuentes v Standard Knitting Mills Pty Ltd (2003) 57 NSWLR 282 at [125]. It was also a not unreasonable view that the litigation raised important and difficult fiscal issues including potentially difficult points of construction of the GST Act: Save the Ridge Inc v Commonwealth [2006] FCAFC 51 at [12]. 61 There is no doubt that, more generally, the trial judge was entitled to take account of the Commissioner's late abandonment of a claim forming some 35% in value of what was originally contended by the Commissioner to be subject to taxation. 62 It is axiomatic that the court has a very wide discretion to award costs albeit that certain general principles may guide the exercise of that discretion. His Honour's decision as to costs was an exercise of that discretion and, even if this Court might have decided differently, there is no basis for interfering with that decision in the absence of a significant error being made in the exercise of his Honour's discretion. I am not satisfied that any such error occurred in this case. For that reason I would dismiss the cross-claim. The Commissioner, of course, having been successful in this appeal should have the costs of this appeal in the usual way. I certify that the preceding sixty-one (61) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Stone.
ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA
AND: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
Young J 63 I have had the benefit of reading a draft of the reasons for judgment prepared by Stone J. I agree with her Honour's reasons and the orders she proposes. 64 There are, however, some additional observations that I wish to make concerning the interaction of ss 9-10(2), 9-25 and 195-1 of the A New Tax System (Goods and Services Tax) Act 1999 (Cth). 65 In my opinion, the language of s 9-25(4), coupled with para (c) of the definition of 'real property' in s 195-1, presents insurmountable difficulties for Saga. Saga does not dispute that it made a contractual promise to its tour customers, for valuable consideration, that it would provide hotel accommodation in Australia as an integral part of the package tour. The contractual obligation that Saga thereby assumed, and the corresponding contractual right that it conferred on its customers, falls squarely within s 9-10(2)(d) and (g) as a 'supply' for the purposes of the GST Act. More importantly for present purposes, the customer's contractual right falls squarely within para (c) of the definition of 'real property' in s 195-1, i.e. it satisfies the description of a contractual right exercisable in relation to land in Australia. 66 The words 'in relation to' have a wide connotation: see O'Grady v The Northern Queensland Company Limited (1990) 169 CLR 356 at 364-365, 367, 374 and 376; PMT Partners Pty Limited (In Liquidation) v Australian National Parks and Wildlife Service (1995) 184 CLR 301 at 313 and 330; The State of Western Australia v Ward (2002) 213 CLR 1 at 246 [577]; and HP Mercantile Pty Ltd v Commissioner of Taxation (2005) 143 FCR 553 ('HP Mercantile') at 562-563 [35]. In isolation, the words are wide enough to cover any genuine connection, but the actual degree of nexus they require will vary with the statutory context. 67 Section 9-25 spells out the territorial connection that must exist before a supply attracts GST. It postulates several different tests to determine whether the supply is connected with Australia, depending on whether it was a supply of goods, a supply of real property or a supply of anything other than goods or real property. The language of s 9-25 casts a wide net. By means of the concept of 'supply' and the extended definition of 'real property', s 9-25(4) seeks to catch any supply of contractual rights where the exercise of those rights will have a real, rather than an exiguous, remote or insignificant, connection with land in Australia. The words of s 9-25(4) are broad enough to catch a contractual right to be provided with hotel accommodation in Australia, as that right has a real connection with land in Australia. Under s 96-5, the supply of that contractual right is to be treated as a separate supply, as it is an essential element of the package tour and not merely incidental to its other elements. 68 Saga argued that even if its contractual promise to provide hotel accommodation related to land in Australia (i.e. hotels), it did not confer any contractual right on customers that was exercisable in relation to land in Australia. It submitted that, as a matter of grammar, the word 'exercisable' would ordinarily be read as applying to the whole sequence of words which follow it. Consequently, it said that the relevant relationship is not between the contractual right and the land, but between the exercise of the contractual right and the land. In this case, Saga said that the contractual right it granted to its customers was not capable of being exercised in relation to the land, as it could only be vindicated by an action for damages rather than an action for specific performance. 69 There are two answers to Saga's argument. The first response is that it lacks substance. The customer's right is exercisable in relation to land: the performance that Saga must deliver is the provision of hotel accommodation in Australia; and from the customer's perspective, the contractual right is to be exercised by taking up the provision of hotel accommodation in Australia, without further consideration. It is not to the point that the customer's rights could only be enforced by an action for damages and not by specific performance; that is not the sense in which the word 'exercisable' is used in para (c) of the definition. It is also immaterial that Saga had a contractual right to substitute different hotels for those specified in the tour inventory and that the specific hotel rooms in Australia were not actually allocated to the customer until his or her arrival at the hotel. 70 The second answer to Saga's argument is that it depends on a very technical reading of s 195-1 that does not sit comfortably with the policy and purposes of the GST Act or the context in which s 195-1 must be applied: see HP Mercantile at 564 [40]-[43] per Hill J. GST has been described as a practical business tax: Sterling Guardian Pty Ltd v Commissioner of Taxation (2005) 220 ALR 550 at 562-563 [39]. It falls on a wide variety of transactions that constitute taxable supplies and it is self-assessing. For this reason, the legislation is expressed in broad and flexible language. These considerations, and the nature, policy and surrounding legislative context of the GST Act, indicate that the Court should construe the Act in a practical and common sense way and that, generally speaking, it should avoid interpretations which are unduly technical or overly meticulous and literal: see HP Mercantile at 564-566 [41]-[53] per Hill J; and DG Hill, Some thoughts on the principles applicable to the interpretation of the GST (2004) 6 Journal of Australian Taxation 1. This approach seems particularly apposite to the construction of s 9-25 and s 195-1. 71 I do not see any conflict between this approach to the interpretation of the GST Act and the proposition that the nature of the supply by Saga needs to be carefully characterised in order to determine whether it is connected with Australia within the meaning of s 9-25 and s 195-1. In this Court, there was no dispute that the supply by Saga must be characterised in order to determine whether it is connected with Australia within the meaning of s 9-25 and s 195-1, and that this necessitates a careful examination of the contract between Saga and its customers. Saga submitted that this examination should also extend to its contract with AOT Group Pty Ltd ('AOT'). It pointed out that in England it has been held that tripartite arrangements resulting from two or three separate but related bilateral contracts call for close analysis in order to determine their tax consequences under the value added tax legislation: see Customs and Excise Commissioners v Plantiflor Ltd [2002] 1 WLR 2287 at 2299 [49], [50] and at 2302 [67] per Lord Millett; and Customs and Excise Commissioners v Redrow Group plc [1999] 1 WLR 408 at 418-419 per Lord Millett. There are, however, some significant differences between those cases and the present case. 72 Saga's contract to provide hotel accommodation in Australia as an integral part of the tour did not restrict it to one particular means of providing that accommodation. It was open to Saga to provide the accommodation directly by making its own arrangements with hotels in Australia, or it could engage an independent contractor, such as AOT, to arrange the accommodation. The fact that it did the latter did not alter the character of its promise in any relevant respect. Whichever mode of performance Saga elected to pursue, what it promised was that it would provide hotel accommodation in Australia to its customers as part of the tour. 73 Saga also argued that the character of its supply, i.e. its contractual promise to provide the package tour, including the accommodation component, should be determined at the time that the customer committed to participate in the package tour and paid for it. It submitted that this analysis is not only conventional but in fact required by the terms of the GST Act. I do not disagree with this submission. In the ordinary case, the nature and character of a supply for consideration will be ascertained at the time it takes place. This approach conforms with the structure of the GST Act, and it is consistent with the way in which characterisation is undertaken in the context of sales tax and customs legislation: see Deputy Commissioner of Taxation v Stewart (1984) 154 CLR 385 at 401; Diethelm Manufacturing Pty Ltd v Commissioner of Taxation (1993) 44 FCR 450 at 461. Saga stressed the fact that, at the time at which the customer paid in full for the tour, Saga's contractual promises were executory, that is to say they were to be performed by Saga at a future date. That circumstance does not alter the fundamental character of Saga's contract as one that supplied the customer with a contractual right to be provided with hotel accommodation in Australia. 74 In summary, Saga's arguments in relation to the nature of its contract with each of its customers do not satisfactorily answer what I consider to be the decisive factor in this case. The supply arising from Saga's contractual obligation to provide hotel accommodation in Australia to its customer, and the customer's corresponding right to obtain hotel accommodation in Australia without providing further consideration, can properly be described as the supply of a contractual right exercisable in relation to land in Australia. 75 In my view, the appeal and the cross-appeal should be dismissed. I certify that the preceding thirteen (13) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Young.
Associate: Dated: 20 December 2006 Counsel for the S Gageler SC and M Leeming Appellant/Cross-Respondent:
Solicitor for the Heidtman & Co Appellant/Cross-Respondent:
Counsel for the GT Pagone QC and MA Wigney Respondent/Cross-Appellant:
Solicitor for the Australian Government Solicitor Respondent/Cross-Appellant:
Saga Holidays Limited
Commissioner of Taxation
(1981) 148 CLR 121
(1952) 86 CLR 169
(2001) 109 FCR 416
(1937) 56 CLR 605
(1984) 154 CLR 385
(1993) 44 FCR 450
(1994) 52 FCR 257
(2005) 143 FCR 553
(1990) 169 CLR 356
(2003) 57 NSWLR 282
(1995) 184 CLR 301
(2005) 220 ALR 550
(2002) 213 CLR 1
(2006) 227 ALR 398