In tax circles at least, there has been some interest in the recently handed down decision of the Full Federal Court in ATS Pacific (ATS Pacific Pty Ltd v Commissioner of Taxation  FCAFC 33).
There is an inherent competition between Parliament’s intention to tax and a person’s intention to avoid taxation. Of course in the majority of cases taxation is a straightforward affair; but in a revenue statute Parliament’s dilemma is to use a finite amount of words to cover an infinite variety of circumstances. In the GST context, the base of taxation is the concept of a ‘supply’. Thus a supply of a good would ordinarily attract GST, as will the supply of a service, as will the supply of intangible or real property. Yet equity and policy demand that revenue statutes create concessions and, in this respect, the GST is no exception. The more known GST exceptions include food, healthcare and education. Lesser known GST exceptions include the supply of things for consumption outside Australia (in s 38-190 of the A New Tax System (Goods and Services Tax) Act (GST Act)).
One area that has caused some difficulty has been inbound tourism from overseas. If a non-resident took a flight to Australia, then while in Australian they hit up a hotel or a pub, they would have to pay GST on the accommodation or food that is supplied to him or her. So much is uncontroversial.
Is it possible then, for the non-resident tourist to buy an all-inclusive holiday package while they are overseas and avoid having to pay GST by redeeming the pre-paid purchases (perhaps by way of a voucher) at the same hotel or pub once they are in Australia?
This was (almost) the business model ran by ATS Pacific. ATS was in the business of selling Australian holiday packages that was eventually consumed by non-resident tourists. Now, had ATS directly sold a holiday package to the non-resident tourist, then ATS would have been liable to charge GST on the holiday components of the package. Parliament foresaw this loophole and provided under s 38-190(2) that a supply of a thing to a non-resident would not be GST-free if it is the supply of a right or option to acquire something the supply of which would not be GST-free. In other words, if ATS sold the non-resident tourist vouchers to acquire a good or service that would not be GST-free in Australia, then that voucher itself would not be GST-free.
So what was ATS’ business model?
Cleverly, ATS did not supply anything to the non-resident tourist.
ATS purported to sell ‘arranging services’ to non-resident travel agents which avoided them selling rights to acquire something that would not be GST-free. In short, ATS sold arranging services to non-resident travel agents, who then on sold the holiday package to the non-resident tourists.
In more detail, a non-resident tourist would say to the non-resident travel agent ‘I would like to go to Sydney’. The non-resident travel agent would then say to ATS ‘I would like to buy a holiday package for my client to go to Sydney’.
ATS would then contact the Hilton and say, I would like to book accommodation for three days and three nights, redeemable by either myself or another person.
ATS would then contact Hertz rental cars and say, I would like to rent a car for three days and three nights, redeemable by either myself or another person.
ATS would then contact Tetsuyas and say, I would like to book an evening for two guests for the degustation menu, redeemable either by myself or another person.
ATS then gives the non-resident travel agent an email saying that everything is ready for the tourist. With this email was a code (something like JK93FF67).
Then when the non-resident tourist comes to Australia he or she would say to the Hilton concierge “JK93FF67” with a wink and a nod. Voila, the non-resident tourist would be given a ‘complimentary’ room for three days and three nights. The same would happen at Hertz and Tetsuyas.
How did this business model apparently avoid GST?
It was because when ATS made a booking with the Hilton, the Hilton, correctly so, charged ATS GST on the supply of the room. Similarly Hertz charged GST on the supply of the cars. However, because ATS acquired the products in the course of its business, it was entitled to GST input credits and so a refund on its GST (because GST is supposed to be a tax on consumption to be borne by the end user). In essence, ATS’ acquisition of the hotel accommodation, transport, and any other goods or service would be GST-free.
In the ordinary case, was ATS to sell the holiday package to the tourist directly, as identified above, ATS would have had to charge GST on its supply and so the ATO would eventually collect that 10 per cent GST on the initial supply by the Hilton or Hertz rental cars.
Instead however, ATS didn’t actually supply anything to the non-resident tourist did it?
All ATS supplied was a facility for the non-resident travel agent to make arrangements for a non-resident tourist to receive complimentary hotel rooms and car rentals upon his or her arrival to Australia. ATS contended that all it supplied was a single GST-free supply of booking or arranging services. This was, allegedly, made GST free by s 38-190(1) item 2 which provided that ‘a supply that is made to a non-resident who is not in Australia when the thing supplied is done’ is GST free. So the supply of ‘booking services’ was indeed made to the non-resident travel agent while the non-resident travel agent was not in Australia.
Of course ATS turned a profit from this – I use the word complimentary in jest. ATS would pay the Hilton and Hertz, say, $10,000. ATS would charge the non-resident travel agent $10,400, and the non-resident travel agent would charge the non-resident tourist $10,800; all in all a $200 saving because $1,000 GST would have been payable otherwise.
The ATO was understandably upset. The case therefore revolved around a simple question; what was the supply and how do we identify it?
The case on appeal
If nothing was indeed supplied to the end consumer, then the GST payable would ‘drop out’ and never be collected. The primary judge tacked this problem by implying a contractual term (using the jurisprudence in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266) that ATS supplied the non-resident travel agent with a contractual right or promise that the Australian providers (the Hilton and Hertz) would provide the products to the non-resident tourist.
This being the case, the primary judge held at  that it amounted to ‘a supply under an agreement with a non-resident [the travel agent] in circumstances where the supply is provided, or the agreement requires it be provided to another entity [the tourist] in Australia’ and so was not GST-free under s 38-190(3).
The first question is the characterisation of the supply.
Edmonds J wrote the leading judgment, with whom Pagone J concurred and Davies J agreed. In his Honour’s judgment, his Honour eschewed strictly legal analysis of the rights supplied by whom and to whom. His Honour said at :
I do not think it is desirable, in the interests of certainty of application of a revenue statute, for the characterisation of a supply made by performance of an executory contract, to depend upon whether or not a term can be implied into the contract, unless it is absolutely essential to give business efficacy to the contract. In this day and age, revenue statutes are inherently complex, and the GST Act is certainly no exception. The concept of a “supply”, as defined in s 9-10 of the GST Act, is fundamental to the operation of that Act and has greatly contributed to that uncertainty… Resort to jurisprudence in contract law to imply a term into a contract does not contribute to an aspirational hope, let alone a confident expectation, of certainty of application going forward.
At , Edmonds J continued:
In determining the character of a supply – what was really supplied? – pursuant to performance of an executory contract, a court is not to be “handcuffed” by the terms embodied in the four corners of the contract, the more so if those terms and conditions do not represent all the terms and conditions of the contract; or where the contract is but one link in a chain of contracts, the performance of each being related to, if not dependent on, performance of the immediately preceding contract; or where, by reference to the factual matrix of the entirety of the arrangements, the commercial or practical reality points to the conferral or provision of a supply which goes beyond the conclusion that might otherwise be drawn from a confined analysis of the terms and conditions of one contract in that chain.
If the reader can follow the pro-numerals, at  Edmonds J explains:
Undoubtedly, where the supply is made pursuant to the performance of a stand-alone executory contract between B and C which is totally unrelated to any other contract either B or C has entered into, an analysis of the terms and conditions of that contract will shed considerable light on the character of the supply made between B and C. Where, however, the supply is made pursuant to the performance of an executory contract between B and C which is related to a contract between A and B; to a contract between C and D; and to the consumption by D of what A provided B, it could not, at least in my view, be seriously denied that in determining the character of the supply from B to C one could not have regard to matters standing outside the contract between B and C, in particular, to the terms of the contract between A and B, between C and D and to the consumption by D of the contractual promise from A to B in determining the characterisation of the supply from B to C.
In other words, if ATS enters into a contract with a non-resident travel agent with the intention of benefiting the non-resident tourist, that benefit to the non-resident tourist is relevant to characterising the supply by ATS.
Edmonds J concluded on the characterisation issue:
[I]t was open to [the primary judge] to find that the supply made by ATS to the [non-resident travel agents] was to be properly characterised as a promise by ATS that ATS would ensure that when the [non-resident tourists] came to Australia they would be provided with the Products the [non-resident tourists] had paid for, and that there was no error on the part of [the primary judge] in so finding.
The second question was whether any of the GST exceptions in s 38-190(1) applied to the case at hand.
It was almost incontrovertible that the accommodation supplied was not GST-free because of a blanket rule that the exceptions in s 38-190(1) do not apply to supplies of real property; so much followed from the decision in Saga Holidays Ltd v Commissioner of Taxation (2006) 156 FCR 256.
Insofar as the goods and services component is concerned, Edmonds J found that s 38-190(2) applied and at  reasoned:
[It] is whether ATS’ supply to the NR Travel Agents characterised as the supply of a promise that it (ATS) would ensure that the Australian Providers would provide the goods and services components of the Products to the NR Tourists when they came to Australia, carries with it a right to acquire those goods or services. In my opinion, having regard to the characterisation of the supply made by ATS to the NR Travel Agents and the articulation of the promise constituting that supply, it did carry a right to acquire those goods or services, albeit a right exercisable by or for the benefit of the NR Tourists. It follows, in my view, that insofar as the non-accommodation components are concerned, the exclusion in s 38-190(2) is triggered with respect to ATS’ supply of the promise, as articulated by the primary judge, to the NR Travel Agents, and such supplies are not GST-free.
The consequence was that none of the supplies made by ATS to the non-resident travel agents were GST free.
Further, while the primary judge found that the margin charged by ATS (in our example above, being $400) was GST-free, because it was, in her Honour’s opinion, consideration received for a booking or arranging service, the Full Federal Court disagreed. In short, because ATS chose to structure their business as the provision of a comprehensive package, they were liable to pay GST even on their margin. The margin could not be dissected and removed from the acquisition of the hotel room, car, or meal by ATS for the non-resident tourist.
ATS Pacific is a good case because it illustrates the creative energies exhibited by taxpayers and their advisors in attempts to minimise tax liabilities.
It is important in the revenue context of course because it eschews a strictly legalistic approach to the supply and acquisition of rights in the GST context. Rightly so I think, if the GST is to be a fair tax and serve its policy purpose of taxing consumption in Australia.
Schedule: s 38-190 of the GST Act
Supplies of things, other than goods or real property, for consumption outside Australia
(1) The third column of this table sets out supplies that are GST-free (except to the extent that they are supplies of goods or *real property):
Supplies of things, other than goods or real property, for consumption outside Australia
These supplies are GST-free (except to the extent that they are supplies of goods or *real property)…
Supply connected with property outside Australia
a supply that is directly connected with goods or real property situated outside Australia.
Supply to *non-resident outside Australia
a supply that is made to a *non-resident who is not in Australia when the thing supplied is done, and:
(a) the supply is neither a supply of work physically performed on goods situated in Australia when the work is done nor a supply directly connected with *real property situated in Australia; or
(b) the *non-resident acquires the thing in *carrying on the non-resident’s *enterprise, but is not *registered or *required to be registered.
Supplies used or enjoyed outside Australia
(a) that is made to a *recipient who is not in Australia when the thing supplied is done; and
(b) the effective use or enjoyment of which takes place outside Australia;
other than a supply of work physically performed on goods situated in Australia when the thing supplied is done, or a supply directly connected with *real property situated in Australia.
a supply that is made in relation to rights if:
(a) the rights are for use outside Australia; or
(b) the supply is to an entity that is not an *Australian resident and is outside Australia when the thing supplied is done.
Export of services used to repair etc. imported goods
a supply that is constituted by the repair, renovation, modification or treatment of goods from outside Australia whose destination is outside Australia.
(2) However, a supply covered by any of items 1 to 5 in the table in subsection (1) is not GST-free if it is the supply of a right or option to acquire something the supply of which would be *connected with Australia and would not be *GST-free.
(2A) A supply covered by any of items 2 to 4 in the table in subsection (1) is not *GST-free if the acquisition of the supply relates (whether directly or indirectly, or wholly or partly) to the making of a supply of *real property situated in Australia that would be, wholly or partly, *input taxed under Subdivision 40-B or 40-C.
Note: Subdivision 40-B deals with the supply of premises (including a berth at a marina) by way of lease, hire or licence. Subdivision 40-C deals with the sale of residential premises and the supply of residential premises by way of long term lease.
(3) Without limiting subsection (2) or (2A), a supply covered by item 2 in that table is not GST-free if:
(a) it is a supply under an agreement entered into, whether directly or indirectly, with a *non-resident; and
(b) the supply is provided, or the agreement requires it to be provided, to another entity in Australia.