TT-Line Company Pty Ltd v Commissioner of Taxation

Federal Court of Australia|2009-06-18|Before: Mr J, Stone J

REASONS FOR JUDGMENT 1 This is an application under s 39B of the Judiciary Act 1903 (Cth). It raises a limited but difficult issue concerning the interpretation of s 9-15 of the GST Act, the full title of which is A New Tax System (Goods and Services Tax) Act 1999 (Cth). The matter is a test case and is receiving test-case funding. The applicant seeks declarations concerning its liability to pay goods and services tax in respect of transactions described below.

The facts 2 The facts relevant to the determination to be made are not in dispute and the following account is taken mainly from the agreed statement of facts filed by the parties on 23 April 2009. 3 The applicant company is incorporated under the Corporations (Tasmania) Act 1990 (Tas) and is wholly owned by the State of Tasmania. It operates a passenger, vehicle and freight ferry service between Tasmania and the Australian mainland trading under the name "Spirit of Tasmania". In September 1996 the Commonwealth Government established the Bass Strait Passenger Vehicle Equalisation Scheme (the Scheme) for the purpose of reducing "the cost of seagoing travel for eligible passenger vehicles". The Scheme is funded under the Appropriation Act (No 1) 2007-2008 (Cth). It is listed as an "Administered programme" of the Department of Transport and Regional Services in the Portfolio Budget Statements for 2007-2008. 4 The Scheme operates under a Ministerial Direction approved on 1 September 2002. The written directions given by the Minister state that it applies where a rebate has been granted to an eligible passenger "who is booked to travel on a Bass Strait passenger service or Bass Strait vehicle service"; clause 4.1. The rebate may be allowed by the Service Operator who may then claim reimbursement. Alternately an eligible passenger may claim reimbursement directly. In practice, and relevantly for the present case, the Scheme operates by the Commonwealth reimbursing the applicant. 5 On 17 April 2008 Mr J Egan of 9 Hampstead Drive, Hoppers Crossing, Victoria used the applicant's internet site, to book a return crossing of Bass Strait on the vessel named the Spirit of Tasmania. The booking was for two adults and included the transport of a Mitsubishi Magna motor vehicle. Departure was from Melbourne for Devonport on 6 May 2008, returning from Devonport to Melbourne on 17 May 2008. The total price of $574 included GST. The parties agree that Mr Egan was an "eligible passenger" and the applicant is a "Service Operator" as defined under the Scheme. 6 When making the booking Mr Egan confirmed that he had read and accepted the Fee Conditions and the Terms and Conditions of carriage by checking the relevant box on the internet booking form. These conditions made no mention of the Scheme however the standard car fares page of the site stated that the listed prices included the deduction of the Bass Strait Passenger Vehicle Equalisation Scheme rebate of $168 each way for a standard car. A reservation confirmation sent on completion of the booking confirmed the details of the reservation and the total price of $574 (including GST). The last three paragraphs of the agreed statement of facts are: A document entitled "Reservation Confirmation" generated by the Applicant for internal purposes and not provided to Mr Egan showed, amongst other things, the gross amount paid by Mr Egan of $574. The document also refers to the rebate of $336 payable under the Scheme. … On 27 May 2008, the Applicant submitted a claim for reimbursement in accordance with clause 9 of the Scheme for the period from 28 April 2008 to 25 May 2008. The total amount of the claim for that period was $1,958,729.00, which included $336.00 in respect of Mr Egan's transport. On 4 June 2008 the Applicant received the amount of $1,958,729.00 by bank deposit from Centrelink by way of reimbursement under the Scheme for the period from 28 April 2008 to 25 May 2008. This included $336.00 in respect of Mr Egan's transport.

The issues 7 There are two questions raised by the issues in this case. Ultimately the issue between the parties is whether the applicant must pay GST only in respect of the amount it actually receives from its customers or in respect of the sum of that amount and the amount of the rebate paid by the Commonwealth under the Scheme. This depends on whether the amount received by the applicant from the Commonwealth under the Scheme is consideration within the meaning of s 9-15 of the GST Act and, if it would otherwise be consideration, whether it falls within the exemption in s 9-15(3)(c). 8 If the payment made under the Scheme is not consideration the applicant's supply of services will not be a taxable supply within the meaning of the GST Act; s 9-5(a). Consequently the supply would not attract GST under s 9-40 of the GST Act. The parties seek to resolve these broader issues in the context of the specific service provided to Mr Egan described in [5] above. I will deal with the issues in the same order as they were dealt with at the trial, namely by addressing first the s 9-15(3)(c) question and then considering the question of consideration under s 9-15.

The first question - s 9-15(3)(c) exemption 9 The question raised by the declaration sought in paragraph 1(a) of the application can be expressed as follows: Is the payment made by the Commonwealth to the applicant by way of reimbursement under the Scheme "a payment made by a government related entity to another government related entity … specifically covered by an appropriation under an Australian law" within the meaning of s 9-15(3)(c) of the GST Act?

10 Section 9-15 provides a definition of "consideration" for the purposes of the GST Act. The definition is very wide and goes beyond the meaning of consideration at common law. Despite this, s 9-15(3) provides some exceptions including the following exception in subsection (3)(c): (3) However: … (c) a payment made by a government related entity to another government related entity is not the provision of consideration if the payment is specifically covered by an appropriation under an Australian law. [Emphasis added] 11 The applicant contends that the transaction entered into with Mr Egan falls within the exception in s 9-15(3)(c) and thus it is not liable to pay GST in respect of that transaction. The respondent contends that s 9-15(3)(c) is not satisfied as the relevant payment was not "specifically" covered by an appropriation under Australian law. 12 The Commissioner submits that s 9-15(3)(c) is to be interpreted consistently with ss 81 and 83 of the Commonwealth Constitution when it is being applied in the context of a payment by a Commonwealth entity to another government related entity. As this interpretation raises questions as to the interpretation of the Commonwealth Constitution the respondent issued notices under s 78B of the Judiciary Act 1903 (Cth). Neither the Commonwealth nor any of the States sought to intervene in this proceeding. Section 81 provides for "one Consolidated Revenue Fund" from which withdrawals may be made only under appropriation authorised by Parliament. While it is beyond doubt that s 9-15 should be interpreted consistently with the Constitution and in particular with ss 81 and 83, the point adds little to the analysis. 13 If the exception to the definition of consideration in s 9-15(c) is to apply, the first requirement is that the payment in issue must have been made by one "government related entity" to another government related entity. The term "government related entity" is defined in s 195-1 of the GST Act: government related entity is: (a) a government entity; or (b) an entity that would be a government entity but for subparagraph (e)(i) of the definition of government entity in the A New Tax System (Australian Business Number) Act 1999; or (c) a local governing body established by or under a State law or a Territory law. 14 The definition of "government entity" says that it has the meaning given by s 41 of the A New Tax System (Australian Business Number) Act 1999 (Cth). Section 41 defines a government entity as: (a) a Department of State of the Commonwealth; or … (e) an organisation that: (i) is not an entity; and (ii) is either established by the Commonwealth, a State or a Territory (whether under a law or not) to carry on an enterprise or established for a public purpose by an Australian law; and (iii) can be separately identified by reference to the nature of the activities carried on through the organisation or the location of the organisation; whether or not the organisation is part of a Department or branch described in paragraph (a), (b), (c) or (d) or of another organisation of the kind described in this paragraph. 15 There is no dispute that the applicant is a government related entity and so much can be seen from the above definitions. It was incorporated under the Corporations (Tasmania) Act 1990 (Tas) and is wholly owned by the State of Tasmania. It was set up by the State of Tasmania to manage and facilitate the operation of a shipping service to and from Tasmania. Similarly the Department of Transport and Regional Services is clearly a Department of State of the Commonwealth and therefore is also a government related entity. 16 It only remains to consider whether the payment of the rebate is "specifically covered by an appropriation under an Australian law". The parties accept that the Scheme is funded under the Appropriation Act (No 1) 2007-2008 (Cth) (Appropriation Act). The issue then is whether it is "specifically" covered by this appropriation. In addressing this aspect of question 1 it is necessary to determine which of the range of meanings attributed to the word "specifically" applies in this case. In making that determination the word, specifically, must be given some work to do. In other words, for a payment to be specifically covered by an appropriation something more is needed than would be the case for a payment merely to be covered by an appropriation. Considering the context of "specifically" in s 9-15(3)(c) and the need for it to add something to the meaning of the requirement of the subsection, I am of the opinion that it means "expressly" or "explicitly". The payment to the government related entity must be expressly or explicitly covered by the appropriation. 17 Schedule 1 of the Appropriation Act appropriates the sum of $846,521,000 to "Transport and Regional Services". The Schedule identifies two outcomes for the Department of Transport and Regional Services, Outcome 1 of which is "Fostering an efficient, sustainable, competitive, safe and secure transport system". In the Portfolio Budget Statements for 2007-08, the appropriation for transport and regional services in respect of Outcome 1 allocates funds between administered and departmental expenditures.The "Bass Strait Passenger Vehicle Equalisation Scheme" is listed among the administered programmes for Outcome 1 in the Portfolio Budget Statements for 2007-08. 18 The role of Portfolio Budget Statements in the context of parliamentary appropriations was explained by Gleeson CJ in Combet v The Commonwealth of Australia (2005) 224 CLR 494 at 525: The Appropriation Act, in s 4, refers to Portfolio Budget Statements. This is a defined term, meaning the Portfolio Budget Statements that were tabled in the Senate or the House of Representatives in relation to the Bill for the Appropriation Act… Those statements, prepared by Ministers for the budget estimates process, contained information on proposed agency activities in support of spending proposed by the Appropriation Bill. Such statements explain and seek to justify the appropriations proposed. They are scrutinised as part of the budget process. They reflect government policy as it affects budgetary planning. … In Sch1 to the Appropriation Act, for each agency of each portfolio there is a statement of an outcome, or a number of outcomes. Reference has already been made to the generality, and political content, of some of these objectives. Furthermore, in most cases, neither departmental outputs (goods and services provided) nor administered expenses could possibly be the sole sources of influence contributing to or bearing upon the stated outcome.

19 In Combet at 567, the majority (Gummow, Hayne, Callinan and Heydon JJ) discussed the practice of distinguishing in Portfolio Budget Statements between departmental and administered items. Their Honours commented that appropriation acts treated departmental and administered items differently and that funds for departmental items "need not be applied to activities in respect of a designated outcome" but may be expended only on "departmental expenditure". By implication they accepted that funds allocated to administered items must be applied to activities in respect of a designated outcome. 20 The Bills Digest for the Appropriation Act under consideration here also addressed the distinction between departmental and administered expenses: Departmental outputs are expenses that portfolio departments and agencies control. They are essentially the cost of running agencies, for example, salaries and other day-to-day operating expenses. The bulk of appropriations in the Bill are for departmental expenses. Administered expenses are those that agencies administer on the Government's behalf. While most administered expenses are funded through special appropriations, some are funded through the Bill. The "regional partnerships" program and the Bass Strait Passenger Vehicle Equalisation Scheme are examples of administered expenses funded through the Bill.

21 The applicant pointed to the above references to the Scheme in support of its contention that the Scheme is specifically covered by an appropriation under an Australian law. They call in aid the decision of the majority in Combet, where it was held that expenditure on a program of advertising instituted by the government to provide information about, and to promote its proposed "workplace relations reform package" was lawfully authorised under the Appropriation Act (No 1) 2005-2006 (Cth). 22 In my view the decision in Combet does not assist the applicant. That case was concerned with whether the particular expenditure was lawful. That is not an issue here. There has been no challenge to the legality of the expenditure under the Scheme; there is no question that the expenditure is covered by a valid appropriation. The references to the Scheme mentioned above are undoubtedly sufficient to establish that the expenditure under the Scheme is lawful. The issue is whether payments under the scheme are specifically covered. 23 While it may be that the Scheme is specifically covered by the Appropriation Act these references are not sufficient to establish that payments under the Scheme are specifically covered. Under the Scheme, payments may be made to any Service Operator which transports eligible passengers on the Bass Strait crossings or to the individual passengers. The Scheme operates generally, not specifically. It does not require that the recipient of the payments be a government related entity. I note, however, that the subsection, in referring to the payment that must be specifically covered, uses the definite article. It is the payment that is made to the government related entity that must be specifically covered. It is not sufficient for the payment to be consistent with a specified purpose. As the Commissioner submitted: There is nothing in the Scheme that limits the recipient of a payment of a "rebate" to TT-Line or any wider class of government related entities. As such, it allows for payment to the operator of a commercial shipping service carrying passengers or passenger vehicles between Tasmania and the mainland whether or not that "Service Operator" is a "government related entity". TT-Line falls within the Scheme not because it is a "government related entity" but because it operates a commercial shipping service.

24 Even accepted at its highest, the evidence adduced at the hearing did not establish that the applicant has a monopoly on the services covered by the Scheme although it clearly provides the vast majority of such services. There was some evidence of two other small operators. Even if the evidence had established that the applicant had a monopoly it would not have advanced the matter. It is clear from the words of subsection (c) that it is not sufficient for payment merely to be made by one government related entity to another. In order for such payment to be specifically covered by an appropriation it would, at the very least, be necessary for payments to be limited to government related entities. That fact that the Scheme allows for payment to a non-government related entity indicates that the appropriation is limited to a purpose not to a payee or class of payees. This is sufficient to dispose of the issue under s 9-15(3)(c) even if, as a matter of fact, no payments were made to non-government related entities.

The second question - "consideration" under s 9-15 25 The question raised by the declaration sought in paragraph 1(b) of the application can be expressed as follows: Is the payment made by the Commonwealth to the applicant in connection with the supply of transport services to a passenger by way of reimbursement under the Scheme "consideration" within the meaning of s 9-15(3)(c) of the GST Act? 26 It is implicit in the above analysis that, unless the exception in s 9-15(3)(c) applies, the payment made under the Scheme would fall within the statutory definition of consideration. The question should, however, be addressed directly. 27 As previously mentioned the concept of consideration in the GST Act is broader than under the common law of contract; Chief Commissioner of State Revenue (NSW) v Dick Smith Electronics Holdings Pty Ltd (2005) 221 CLR 496 at 518. The statutory definition extends to "any payment, or any act or forbearance" that is "in connection with a supply of anything" or "in response to or for the inducement of a supply of anything"; s 9-15(1). In particular s 9-15(2) provides that: It does not matter whether the payment, act or forbearance was voluntary, or whether it was by the recipient of the supply. 28 The supply in question is the supply by the applicant of travel services to the eligible passenger. The reimbursement of the deduction allowed to Mr Egan was a payment made under the Scheme the express purpose of which was to reduce the cost of such travel services. It was clearly a payment "in connection with" the supply of the travel services to Mr Egan and might also be described as having been made "in response to or for the inducement of" the supply of travel services to Mr Egan. That being so, the fact the consideration for the supply of services to Mr Egan flowed in part from the third party (the Commonwealth) and that Mr Egan was never under any obligation to pay the full (unrebated) amount is not to the point. Similarly, I do not think it is necessary to resort, as the Commissioner did in submissions, to the concept of a practical business relationship between the reimbursement paid to the applicant and the travel services supplied to Mr Egan, although I accept that there was such a relationship. It is sufficient to note that the circumstances of the payment made in the context of the Scheme fall squarely within the words of the Statute. 29 In written submissions the applicant relied on the decision of the European Court of Justice in Tolsma v Inspecteur der Omzetbelasting Leeuwarden [1994] BVC 117 as "instructive". The case involved a busker who played his barrel organ in public with the purpose of soliciting money from passers-by. The Court held that, as any payments made by the passers-by were voluntary, there was no consideration within the meaning of Article 2(1) of the Sixth Directive. The decision is clearly inapplicable in the light of the express statement in s 9-15(2); see [10] above. 30 The applicant also relied on the decision of the New Zealand Court of Appeal in Commissioner of Inland Revenue v New Zealand Refining Co Ltd (1997) 18 NZTC 13,187 in which the Court held that certain payments made by the Crown to the New Zealand Refining Co Ltd were not consideration for the supply of services by the taxpayer to its customers but were made to resolve a dispute between them. 31 The definition of consideration in the New Zealand GST Act (Goods and Services Tax Act 1985 (NZ)) was similar to the definition in s 9-15. It extended to payments, acts or forbearance "whether or not voluntary, in respect of, in response to, or for the inducement of, the supply of any goods and services". The payments in question were made after the NZ government moved from a protective policy pursuant to which it gave the taxpayer assurances as to the level of profits it would receive in a series of support letters and moved to a policy of deregulation. The government negotiated an end to the support letters and in return agreed to certain payments including $85 million over three years conditional on the refinery remaining operational on each annual payment date. The trial judge expressed his conclusions in the following passages which were quoted with approval by the Court of Appeal at 13,190: The payments made under clause 2.1 are in respect of the resolution of the disputes identified in the agreement. One of their associated purposes is to assist the refinery to continue its operations and avoid closure. In that sense the payments can also be said to be in respect of the continued operation of the refinery. That however does not of itself mean they are also in respect of the supply of services to customers. The payments are not for the individual services received by the oil companies, and bear no relationship to their extent, quality or even to their delivery in a form which would entitle NZRC to some form of emolument from its customers. In the sense that they are in part to assist the refinery's operations they form an unspecified contribution to its operating expenses, and are not part of the value of the supply of services to the oil companies. An injection of money into an existing business, whether to meet operational expenses, to repay debt, or to provide capital for expansion and in each case made for the purpose of maintaining financial viability is not in my view a payment in respect of the supply of the services which will ultimately result or flow from a continuation of the business operations. 32 In expressing their concurrence with the trial judge the Court of Appeal stated that although the payments were intended to keep the refinery open for three years, "they were not payments for any supply". The Court added, at 13,193: Nor were they payments for supply to a customer or customers since in theory they could be earned without any supply actually being made, however unlikely that might be in practice. In our view the payments related to the structure or framework within which supplies of services were expected to be made. They were to compensate NZRC for the removal of the protections given by the Support Letters and its exposure to the hot winds of competition. … The payments were received in the course of the taxable activity of NZRC but they were not in consideration for any supply made by it.

33 The aspect of the arrangement which led the Court of Appeal to hold that there was no supply is the basis for distinguishing that case from the present. Here there is a definite supply to the eligible passenger (Mr Egan). The applicant's right to reimbursement of the rebate allowed to Mr Egan was contingent upon the supply of travel services to him. If the applicant had failed to provide those services then pursuant to clause 13.2 of the Scheme, the reimbursement would have to be repaid. Two further decisions of the European Court of Justice to which the applicant referred can be similarly distinguished. They are Mohr v Finanzamt Bad Segeberg [1996] BVC 293 and Landboden-Agrardienste GmbH & Co KG v Finanzamt Calau [1998] BVC 70. Both these cases concerned responses to government incentives in relation to agricultural production which were held not to constitute the provision of a supply.

The objects of the GST Act 34 The final argument put by the applicant is that the interpretation favoured by the Commissioner is inconsistent with the fundamental principles of the GST Act in that it would result in the applicant bearing the burden of the GST without any means to pass that burden on to the recipient of the supply, in this case Mr Egan. The respondent submitted that to overcome this difficulty the applicant could simply charge GST on the full price of the fare including any rebate. The Commissioner also contends that its construction promotes the objects of the GST Act. In particular the Commissioner points to paragraph 17 of the Intergovernmental Agreement on the Reform of Commonwealth-State Financial Relations which provides that: The Parties intend that the Commonwealth, States, Territories and local government and their statutory corporations and authorities will operate as if they were subject to the GST legislation. They will be entitled to register, will pay GST or make voluntary or notional payments where necessary and will be entitled to claim input tax credits in the same way as non-Government organisations. All such payments will be included in GST revenue.

35 I am rather more attracted to the Commissioner's analysis than to the applicant's. It is supported by comments made in the Explanatory Memorandum to the Bill that introduced the exception in s 9-15(3)(c). In any event, the ordinary and natural meaning of the words of s 9-15(3)(c) are sufficiently clear as to make it unnecessary to pursue this issue further. 36 It follows from the above that, as the exception in 9-15(3)(c) does not apply here, the applicant made a taxable supply to Mr Egan and is therefore liable to GST on the amount paid to it under the Scheme. For these reasons the application must be dismissed. As this is a test case and is receiving test case funding there will be no order as to costs. I certify that the preceding thirty-six (36) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Stone.

Associate: Dated: 18 June 2009 Counsel for the Applicant: D Russell QC with BL Jones

Solicitor for the Applicant: KPMG Tax Lawyers Pty Ltd

Counsel for the Respondent: Dr MA Perry QC with MJ O'Meara

(NZ) Judiciary Act 1903(Cth)

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