Taxes and Duties - Miscellaneous taxes - Goods and Services Tax - Meaning of supply - Payment of judgment sum does not result in a supply being a release by the judgment creditor of the obligation to pay that judgment.

A New Tax System (Goods and Services Tax) Act 1999 (Cth), ss7-1, 9-5.

Interchase Corporation Limited v ACN 010 087 573 Pty Ltd & Ors [2000] QSC 13, referred to.

Judgment Number: [2001] TASSC 2

1 On 22 August 2000, I delivered reasons for judgment in Shaw v Director of Housing and State of Tasmania [2000] TASSC 115. I held that the plaintiff was entitled to recover damages from the defendants for negligent misstatement. At the conclusion of the trial, counsel agreed that in the event of me finding against the defendants on the issue of liability, I should not proceed to assess damages until I had given them a further opportunity to be heard. The hearing resumed on 17 November 2000. On that occasion, counsel said that agreement had been reached with respect to the following matters:

* the plaintiff's capital loss as at March 1993 was $102,545.52 (reasons for judgment, par55);

* interest on the capital loss until March 1993 at overdraft interest rates from time to time was $3,616.39 (reasons for judgment, par57);

* the total loss to March 1993 therefore was $106,161.91;

* interest, capitalised monthly, on the said sum of $106,161.91 to 17 November 2000, amounted to $165,017.29;

* in result, subject to what follows, the plaintiff is entitled to judgment against the defendants as at 17 November 2000, in the sum of $271,179.20.

2 Notwithstanding agreement with respect to all those matters, the parties were unable to agree whether or not the plaintiff will incur liability to pay tax as a result of payment of the judgment sum in accordance with the provisions of A New Tax System (Goods and Services Tax) Act 1999 (Cth) ("the Act"), and if he will be so liable, whether that liability is part of his loss and recoverable from the defendants.

3 For the plaintiff, Mr McElwaine submitted that his client might have to pay GST on receipt of the judgment sum. For the defendants, Mr Turner submitted that the plaintiff will not have to pay tax in consequence of payment of the judgment sum or, if he was wrong about that, the defendants were not liable to pay such tax as part of the damage caused by the tortious conduct. Mr McElwaine submitted that at the least, I should make a declaration that if the plaintiff is liable to pay tax in accordance with the provisions of the Act, the defendants shall indemnify him for such tax. Such a declaration was made in Provan v HCL Real Estate Limited and Ors (1992) 92 ATC 4644 with respect to the possible liability to pay capital gains tax. See also Duke Group Ltd (in liq) v Pilmer & Ors [2009] HCA 21; (1998) 72 ACSR 1.

4 Relevant to the issue of whether such a declaration should be made is the question whether a liability to pay tax (GST) by virtue of the provisions of the Act, forms part of the foreseeable loss caused by the defendants' tortious conduct. In Interchase Corporation Limited v ACN 010 087 573 Pty Ltd & Ors [2000] QSC 13, White J held that any liability to pay GST was not foreseeable at the time of the third defendant's breach of its duty of care. However, it seems to me that the first step is to construe the Act to determine whether, as between the parties to this litigation and upon the facts as found after trial, the plaintiff will be liable, or whether there is a real risk that the plaintiff will be liable to pay GST upon the defendants satisfying the judgment that will be entered against them. In Interchase White J did not decide this question but expressed doubt that payment of a judgment sum created a liability to pay GST. So far as I have been able to ascertain, and so far as counsel have been able to ascertain, this question has not previously been the subject of judicial determination.

5 The Act, s7-1(1) provides that:

6 The Act, s9-5 provides:

(b) the supply is made in the course or furtherance of an enterprise that you carry on; 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."

7 Liability to pay GST arises upon the making of a relevant supply. Mr McElwaine submitted that it was arguable that upon payment of the judgment sum, the plaintiff will release the defendants from their obligation to pay that sum and that such release will constitute a taxable supply within the meaning of the Act, s9-5. The critical paragraph is (a), but it is convenient to consider first whether pars(b) - (d) are satisfied upon the assumption that following the payment of the judgment sum the plaintiff will make a "supply for consideration".

8 The Act, s195 sets out a dictionary which (inter alia) defines an enterprise by a reference to s9-20. Relevantly, an enterprise is "an activity done in the form of a business". Section 195 defines business in the widest terms. The undisputed evidence at trial was that at all relevant times, including the time of trial, the plaintiff was a builder and developer. The finding was that in the course of carrying on that business the defendants were in breach of the duty of care they owed the plaintiff when they made certain representations and that the plaintiff thereby suffered losses which will be reflected in the judgment sum when it is finally calculated. If the payment of the judgment sum will result in the plaintiff making a taxable supply, it seems to me that such a supply would be one that "is made in the course or furtherance of an enterprise" that the plaintiff carries on within the meaning of the Act, s9-5(b). Obviously, the supply is connected with Australia as provided by s9-5(c), and it was an agreed fact that the plaintiff was registered within the meaning of par(d). I return to s9-5(a).

9 The Act, s9-15 defines "consideration". The definition includes "any payment" and subs(2A)(a) provides that it does not matter whether the payment is in compliance with an order of a court. Thus, payment of the judgment sum will constitute consideration within the meaning of the Act, but, as White J observed in Interchase at par54, payment of a judgment sum is not a supply. The "supply" must come from the plaintiff.

10 The Act, s9-10, defines a supply as follows:

(2) Without limiting subsection (1), supply includes any of these:

(d) a grant, assignment or surrender of real property;

(e) a creation, grant, transfer, assignment or surrender of any right;

(h) any combination of any 2 or more of the matters referred to in paragraphs (a) to (g).

(3) It does not matter whether it is lawful to do, to refrain from doing or to tolerate the act or situation constituting the supply.

(4) However, it does not include a supply of money unless the money is provided as consideration for a supply that is a supply of money."

11 Mr McElwaine submitted that when the Court finally assesses the damages and makes an order that judgment be entered for the plaintiff against the defendants for a specified sum of money, the defendants will be under an obligation to pay the money. Mr McElwaine then submitted that it was arguable that upon payment of that sum the plaintiff will make a supply within the meaning of the Act, s9-10(2)(g) in that he will thereupon release the defendant from an obligation to pay the money.

12 The provisions of the Act, s9-10(2) are not exhaustive. They are merely instances of the general proposition enacted by s9-10(1) which defines "supply" as "any form of supply whatsoever", but as the judgment sum will be damages for negligent misrepresentation, I am unable to conceive of any possible supply by the plaintiff upon receipt of the judgment sum other than the release of the obligation to pay that sum as referred to in s9-10(2)(g).

13 Both New Zealand and the United Kingdom have goods and services tax legislation. The Goods and Services Tax Act 1985 (NZ), s5(1) provides that the term "supply'' includes all forms of supply. The Value Added Tax Act 1994 (UK), s5(2)(a) defines "supply" as including "all forms of supply, but not anything done otherwise than for a consideration". In both the New Zealand and the United Kingdom legislation the definition section includes numerous subsections, none of which bear any resemblance to the Act, s9-10(2). However, as that subsection does not limit the generality of s9-10(1) it may be said that the primary definition of supply is the same in all three countries. Although the New Zealand Act, s8 and United Kingdom Act, s1 impose a tax upon the supply of goods and services, and the Act imposes a tax upon a "taxable supply", the definitions "goods" and "services" in the former two Acts are so broad that for the purposes of the argument under consideration, there is no material difference between the relevant sections in those Acts and the Act, 7-1.

14 In both countries it has been held that "supply" is a word of very wide import. See Case M108 (1990) 12 NZTC 284; Customs & Excise Commissioners v Oliver [1980] 1 All ER 355. However, counsel did not refer me to any case in New Zealand or the United Kingdom in which the argument raised by Mr McElwaine has been considered and my own researches have revealed none. It seems that at least in New Zealand, absent a connection with a taxable supply, a release of an obligation for consideration within the meaning of the Act, s9-10(2)(g) is not considered to be a supply. In Case S77 (1996) 17 NZTC 7483 a compromise of a cause of action was held not to be a supply. In that case farmers were burning off scrub on their farm when the fire got out of control and damaged some machinery belonging to contractors. The contractors commenced proceedings for damages but the action was settled out of court by the payment of a sum of money and the striking out of the proceedings by consent. Barber DJ held that the abandonment of their claim in return for payment of money did not involve a supply. He said, at 7487:

"All that has passed between the [farmers] and [the contractors] physically is the payment or handing over of a cheque. In the abstract, all that has passed between them is the surrendering by the [contractors] of their right to proceed with their claim against the [farmers]. That surrender is not a supply"

15 There is nothing in the report of that case to suggest that any consideration was given to the proposition that in the circumstances there had been a release within the meaning of the Act, s9-10(2)(g), nor that such circumstances could amount to a release within the meaning of s9-10(1).

16 The word "release" has ancient origins in the law. Its first principal use was in connection with the conveyance of real estate. A release was the conveyance of a larger estate or a remainder or a reversion to one in possession. The operative verb in the deed was "release". It operated to merge or pass certain interests in land to another. Such a release could operate in five different circumstances. See Blackstone Laws of England, Vol II, 324 et seq. A conveyance by release could not occur without voluntary action upon the releasor.

17 In recent times a release commonly means a discharge of a right of action, claim or demand made by one person upon another or others. A release is enforceable if it is given under seal or is supported by consideration. See, eg, McDermott v Black [1940] HCA 4; (1940) 63 CLR 161. It is the releasor's entry into the deed or agreement that extinguishes the claim or demand. See Bowes v Foster [1858] EngR 289; (1858) 2 H & N 779 at 782: [1858] EngR 289; 157 ER 322 at 323. Again, such a release could not be entered into without voluntary action upon the part of the releasor.

18 The obligation of the judgment debtor to pay the judgment sum is extinguished by the act of payment. The extinguishment or release does not depend upon any action on the part of the judgment creditor. As White J said in Interchase at par54:

"A taxable supply is made if the supply is made for consideration (s 9-5(a)). Consideration includes matters done pursuant to orders of a court (s 9-15(2A)(a)) but that does not of itself constitute a supply. The receipt of payment by a judgment creditor does not obviously involve the creation, grant, transfer, assignment or surrender of any right or the entry or release from an obligation (s 9-10(2)(e)(f)). When the judgment is satisfied the debt created by the judgment is thereby extinguished and does not depend on the surrender of any rights or the release of the judgment debtor"

19 It is true that in some circumstances, a release occurs by operation of law. For example, the discharge of a bankrupt operates as a release from all his debts subject to certain exceptions. However, the Act, s9-5 opens with the words, "You make a taxable supply if ..." The verb "make" indicates a legislative intention to impose the tax only on voluntary supplies, not upon those supplies that occur without an act of the releasor. The editors of GST in Practice - Transactions & Precedents at pars10-680 and 57-610, question whether a compulsory acquisition of land is a supply within the meaning of the Act, s9-10. Reference is made to Federal Commissioner of Taxation v St Hubert's Island Pty Ltd (in liq) (1978) 138 CLR 210 in which case it was held that a sale of land by the liquidator was a voluntary disposition and fell within the scope of the Income Tax Assessment Act 1936 (Cth), s36, notwithstanding an obligation imposed on the liquidator by the relevant Companies Act to make the sale. Accordingly, the editors question whether the same reasoning might be applied to compulsory acquisitions and the Act. It seems to me that different considerations arise when considering the meaning of "supply" in the Act. Notwithstanding the statutory compulsion, the liquidator's disposition in St Hubert's Island Pty Ltd (in liq) was something that was "made" by him and for that reason would be likely to be considered a supply within the meaning of the Act. This is quite a different situation from the matter at hand, for the release of the obligation to pay a judgment sum by the payment of that sum will occur regardless of whether the judgment creditor makes or does any act at all. It was held in Databank Systems Ltd v Commissioner of Inland Revenue (NZ) (1987) 9 NZTC 6213 that "supply" means "to furnish or provide". Application of that proposition to the word "supply" as enacted in the Act, s9-10 reinforces the concept that there is a legislative intention not to include in the word "supply" the release of an obligation that occurs independently of the act of the releasor.

20 For those reasons I am not persuaded that upon the defendants making payment of the judgment sum the plaintiff will make a supply within the meaning of the Act, s9-10 and consequently be liable to pay GST. Further, I am unpersuaded that there is a substantial risk that that will be the case. I will now hear counsel's submissions with respect to interest between 17 November last and today and then proceed to enter final judgment.