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Hill, Graham --- "Some Thoughts on the Principles Applicable to the Interpretation of the GST" [2003] JlATax 1; (2003) 6(1) Journal of Australian Taxation 1


SOME THOUGHTS ON THE PRINCIPLES APPLICABLE TO THE INTERPRETATION OF THE GST

By the Honourable Justice Graham HiII[*]

The GST legislation must be construed in accordance with the general rules applicable to the interpretation of taxation statutes. It will be given a purposive construction although there is some debate whether ambiguity would be resolved in favour of the taxpayer or the Commissioner. Case law of other jurisdictions may reveal the mischief which Parliament intended to overcome or even be a guide to interpretation unless the legislative context is different. Generally GST should be given a common sense construction and neither the legislation or the transaction under consideration should be subject to an overly technical analysis. However, it is unlikely that the European view that the Value Added Tax is a consumption tax and thus should be construed as only taxing cases where there is consumption will be adopted in Australia. It is too soon to conclude whether otherwise the Australian legislation will be construed having regard to generally accepted principles of value added taxation. The article considers some examples where these principles might or might not apply.

1. INTRODUCTION

The series of Acts which make up the Goods and Services Tax (“GST”) legislation are but Acts of the Australian Parliament and the general rules, perhaps guides is a better word, applicable to the interpretation of all Commonwealth statutes will apply to them, subject to the particular statutory rules in Ch 6 of the A New Tax System (Goods and Services Tax) Act 1999 (Cth) (“the GST Act”). On this basis this article need do no more than set out the general rules and make mention of the matters in Ch 6. However, there are, perhaps some modification to these guides which may apply to taxation statutes in particular. And as well there may be some specific guides which may be unique to the GST. The purpose of the present article is not to consider the general rules but to see whether there may be some rules, specific to the GST which may assist the interpretation of the legislation.

The European Union with its Value Added Tax (“VAT”) has an advantage which Australia does not have. That lies in the various Directives issued and particularly the Sixth Council Directive of 17 May 1977[1] which, while aimed at producing a harmonisation of legislation and its interpretation within member states, also produces a blue print to which reference may be had in interpreting the GST. So, the emphasis which the Sixth Directive places upon the significance of the input tax credit may assist a Court to conclude that a credit is available where, in the absence of the Directive it might be thought that the domestic legislation does not authorise it. Australian Courts, on the other hand, have to approach questions of interpretation of the GST legislation without the assistance of such a Directive. It may be that recourse will be had to European case law, affected as it is by the Directive, in ascertaining the policy behind the Australian legislation. Or it may not. That is one of the questions which will be explored later in the article.

2. GENERAL RULES FOR INTERPRETING REVENUE STATUTES

It can be said that there are two approaches evident in Australian case law to questions of construction of all statutes, including revenue statutes. The two approaches obviously overlap and such difference as there is between them will arise only at the margin.

All Acts of Parliament are expressed in what passes for the English language. Interpretation involves arriving at the meaning of the words which Parliament has used. The literal approach to interpretation, while said to be in search of the “intent of the Parliament”[2] requires that intent to be discerned from the language used in the statute as a whole.

The literal view, when it comes to the interpretation of taxation statutes, has as its philosophical premise the protection of the subject taxpayer from the revenue and perhaps also the need to impose discipline upon the Parliamentary draftsman in the drafting of taxation laws. Thus it is said that the interpretation of taxation laws is predicated upon the requirement that the intention of Parliament, whether that be the intention to impose a tax upon a person should be expressed in clear language. The consequence is said to be that taxation laws should therefore be construed strictly and the taxpayer be entitled to stand upon that strict or literal construction of the legislation. It may, although it does not necessarily follow from, such an approach to construction that any ambiguity in the legislation will be resolved in favour of the taxpayer.[3]

An alternative approach to the question of the interpretation of all laws, including taxation laws, is that they be given a purposive construction. The purposive construction view is given legislative force by the provisions of s 15AA of the Acts Interpretation Act 1901 (Cth), which requires Courts to give effect to the parliamentary intention as found in the legislation itself, or by reference to extrinsic materials. A general authoritative expression of the purposive method of construction of statutes, whether or not they be taxation statutes, is to be found in the joint judgment of Brennan CJ, Dawson, Toohey and Gummow JJ in CIC Insurance Ltd v Bankstown Football Club Ltd[4] where their Honours said:

the modem approach to statutory interpretation (a) insists that the context be considered in the first instance, nor merely at some later stage when ambiguity might be thought to arise and (b) uses “context” in its widest sense to include such things as the existing state of the law and the mischief which, by legitimate means such as those just mentioned, one may discern the statute was intended to remedy. Instances of general words in a statute being so constrained by their context are numerous. In particular ... if the apparently plain words of a provision are read in the light of the mischief which the statute was designed to overcome and of the objects of the legislation, they may wear a very different appearance. Further, inconvenience or improbability of result may assist the court in preferring to the literal meaning an alternative construction which, by the steps identified above, is reasonably open and more closely conforms to the legislative intent.

The purposive construction approach takes the philosophical stand that Parliament intends to express itself in such a way that will ensure that the policy underlying its legislation is clear at least from the overall context. Language can never be divorced from context which is why it will be important to consider context right at the outset rather than only when ambiguity is identified,[5] so that should there be some ambiguity in a particular provision the overall context will resolve that ambiguity. There should be no need to protect the taxpayer and the parliamentary draftsman is trusted to make the parliamentary purpose clear.

In fact the purposive approach, which clearly today has the upper hand, leaves much greater discretion to the judge than the literal approach, although you will not generally find that to be admitted. Often the legislative purpose or policy will be far from clear and in purporting to state or act upon that purpose or policy the judge may often be expressing implicitly, if not explicitly, the judge’s own philosophical position towards the subject matter of the legislation which for our purposes here is value added tax. You should not be surprised at this. Much has changed since the 1600s when Sir Francis Bacon wrote in his “Essays, Civil and Moral” in an essay entitled “Of Judicature”:

Judges ought to remember that their office is jus dicere, and not jus dare; to interpret law, and not to make law, or give law. Else will it be like the authority claimed by the Church of Rome ...

As a digression it might be added that not all has changed for the better. For as Bacon also wrote in the same essay:

Judges ought to be more learned than witty, more reverend that plausible, and more advised than confident.

It is not unusual, when reference is made to purposive construction in the context of taxation, for attention to be given to the decision of the High Court in Cooper Brookes (Wollongong) Pty Ltd v FC of T[6] and to select extracts from the various judgments in that case. However, two comments may be made. First, it is important to understand what that case was really about. Secondly, comments made by the Court in that case point in both directions so that selectivity may sometimes be misleading.

The case concerned the interpretation of a particular paragraph in legislation designed to prevent trafficking in loss companies. The legislation had been amended from time to time as loopholes in it were revealed and the particular paragraph to be construed was one such amendment. The construction sought to be put upon the paragraph by the taxpayer virtually meant that the amendment had missed its target. However, it is no doubt correct to say that the taxpayer relied upon the ordinary meaning of the words which Parliament had used. The construction sought to be put upon the paragraph by the Commissioner required adding in words, which were not there, but did then have the consequence that the paragraph overcame a particular tax avoidance practice which was argued to secure the allowance of losses in a particular circumstance.

Not surprisingly the Court declined to accept the literal interpretation of the paragraph, which led to absurdity and which was both capricious and irrational and instead adopted the interpretation which gave effect to the parliamentary intention.

By way of examples of quotations which point in both directions three can be cited. In the first, Mason and Wilson JJ, after refusing to confine the possibility of departure from the literal meaning to cases where there was absurdity or where the literal meaning produced a capricious or irrational result said:

But the propriety of departing from the literal interpretation is not confined to situations described by these labels. It extends to any situation in which for good reason the operation of the statute on a literal reading does not conform to the legislative intent as ascertained from the provisions of the statute, including the policy which may be discerned from those provisions.[7]

On the other hand one may take another passage from the same judgment:

Quite obviously questions of degree arise. If the choice is between two strongly competing interpretations, as we have said, the advantage may lie with that which produces the fairer and more convenient operation so long as it conforms to the legislative intention. If, however, one interpretation has a powerful advantage in ordinary meaning and grammatical sense, it will only be displaced if its operation is perceived to be unintended.[8]

The third extract is from the judgment of Gibbs CJ. His Honour, after accepting that where Parliament has made a mistake in the legislation the Court can take that into account in interpreting the legislation then continued:[9]

However, if the language of a statutory provision is clear and unambiguous, and is consistent and harmonious with the other provisions of the enactment, and can be intelligibly applied to the subject matter with which it deals, it must be given its ordinary and grammatical meaning, even if it leads to a result that may seem inconvenient or unjust. To say this is not to insist on too literal an interpretation, or to deny that the court should seek the real intention of the legislature. The danger that lies in departing from the ordinary meaning of unambiguous provisions is that “it may degrade into mere judicial criticism of the propriety of the acts of the Legislature... it may lead judges to put their own ideas of justice or social policy in place of the words of the statute”.

The particular difficulty that arises in taxation legislation more often, probably, than in the construction of other legislation, is to determine what the policy is which is discernible from the terms of the legislation. There may be cases where there are two interpretations open. Language, it must be said, is by nature ambiguous. Further there may be policy difficulties with each interpretation. The question which then arises is how the choice between the two interpretations is to be made. Ultimately that choice resolves itself into a decision which favours the one side or the other. It must be said, however, that “policy” ought not to be a synonym for ensuring that more tax is payable.[10]

Justice Kirby is perhaps the most strident advocate for the rejection of a rule which would resolve any ambiguity in a tax Act in favour of the taxpayer and thus acceptance of a rule which would, at least be implication, favour the revenue. His Honour’s most recent statement of position is to be found in his judgment in Austin v The Commonwealth[11] where, his Honour said:

In earlier times it used to be said that legislation imposing taxation was subject to a strict construction, in favour of the taxpayer. However, in more recent times, this Court has departed from the narrow and literal interpretation of words appearing in legislation, including that imposing taxation, in favour of an interpretation that seeks to achieve the apparent purposes or objects of the enactment as expressed in its terms.[12]

To be fair to his Honour it can be argued that the two rules, the one requiring strict construction and the other seeking to find the apparent purposes or object of an enactment are not necessarily in conflict. However, to the extent that his Honour rejects absolutely, a strict construction view, the references which his Honour gives for this are some extracts from Cooper Brooks and the decision of the Privy Council in Newton v FC of T.[13] But there are other and later citations which might be said to support the view which his Honour suggests has now been rejected.

For example, in FC of T v Hepples[14] Deane J, after confessing that the construction he preferred gave little scope for the application of the particular sections in question, said:

If that be so, it is the inevitable consequence of the fundamental principles applicable to the construction of taxation provisions at least in cases where no question of concealment of true substance under the artificialities of form is involved. In such cases, the relevant question is not how the particular provision can be construed in a way which will give best effect to some dimly-perceived legislative intent. It is whether the words which the legislature has used clearly impose the claimed tax. The importance of those principles is reinforced in present-day circumstances where the taxation system is based upon self assessment by taxpayers enforced by significant penalties for understatement.

In 1980, twenty-two years after Newton, to which Kirby J referred, Gibbs CJ referred to the rule which Kirby J saw as having now been departed from as being “the established rule”. His Honour said:

The established rule that no tax can be imposed on a subject by an Act of parliament without words which clearly show an intention to lay the burden upon him does not mean that the court will strive to find loopholes where none are apparent; the words of the Act must be given a fair and reasonable construction without leaning one way or the other. However, although, if the terms of the Act plainly impose the tax they should be given effect, equally if they do not reveal a clear intention to do so the liability should not be inferred from ambiguous words ...[15]

Having set out the competing views it suffices only to emphasise that it will be a rare case where the adoption of the one or the other view will operate to decide a concrete case. If one were cynical one might indeed conclude that it may well be the case that a Judge has reached a conclusion about a case before referring to whichever principle of construction the judge adopts and then only to add weight to the conclusion already reached. And in any event it is clear that s 15AA requires a purposive interpretation. The problem is only where the attempt to give a statute a purposive interpretation still leaves the possibility of two alternative constructions one which favours the revenue and the other which favours the taxpayer.

The Principle to be adopted can thus be stated as follows:

The Courts will construe the Australian legislation having regard to its context in the widest sense of that word with a view to adopting a construction which gives effect to the legislative policy to be found in the language which Parliament has used but having regard to relevant intrinsic materials. A construction will not be adopted which is absurd or irrational but even the literal meaning of the words used may be departed from if to do so is necessary to give effect to the purpose or objects of the legislation, but not merely because the interpretation to be adopted conforms to some personal theory of justice.

3. SPECIFIC STATUTORY RULES FOR THE INTERPRETATION OF THE GST ACT

Following the pattern set by the Income Tax Assessment Act 1997 (Cth) Ch 6 of the GST Act contains some special provisions concerning the interpretation of the GST Act. So s 182-10 sets out the role which explanatory sections (ie those which are headed “What this Division is about” plus some other specified sections) are to have. Although they are, (like, for example, certain types of heading,) treated as forming part of the Act, they do not have the same significance as operative provisions. There is no definition of what an operative provision is, but presumably these are all provisions other than explanatory sections and other than the material referred to in the second columns of the tables in Schs 1, 2 and 3. The explanatory sections are given virtually the same role as extrinsic material, that is, that resort may be had to them to determine the purpose or object of the provision or to determine the meaning of the operative provision if it is ambiguous or obscure.

4. EXTRINSIC MATERIAL

Whatever the position may have been at common law as to the use of extrinsic material (and at least Mason J was of the view that resort could be had to it to understand the mischief which Parliament intended to rectify)[16] it is now clear that resort may be had in the event of ambiguity to extrinsic materials in addition to doing so to determine the legislative purpose.[17]

There is quite detailed information to be found in the explanatory memoranda dealing with the initial bills and the amendments made to the bills which found their way into the GST Act and related legislation as well as in the explanatory memoranda to subsequent amending Acts. There are occasions where the explanatory material might be thought not to be quite consistent with the legislation. If that is really the case, then clearly the Courts will proceed to an interpretation of the legislation unassisted by the explanatory memoranda. An income tax example of this is to be found in Hepples to which reference has already been made where it was relatively clear that the explanatory memorandum was just wrong and could provide no guide at all to what were very difficult provisions in the then income tax law dealing with capital gains. A possible example in the GST context is the comments in the Explanatory Memorandum to the original bill concerning Div 105. The purpose of the Division is clear enough on its face. It is intended to ensure that where there is something like a mortgagee sale the question whether there will be a taxable supply will be determined by reference to whether the mortgagor is carrying on an enterprise and not by reference to the enterprise status of the mortgagee. The Explanatory Memorandum, however, provided as an example of the application of the Division the sale of goods repossessed under a hire purchase agreement. One would have thought there was some considerable doubt as to the application of the Division in that situation, if only because the hirer, when he or she sells, does not make a supply of some other person’s property, but rather of the hirer’s property. In other words there will be occasions when resort to the extrinsic materials may do more to confuse than to assist.

What is perhaps unique to the GST legislation is the number of general rulings and determinations which have been issued. These form, it might be said, almost a text-book like commentary to the legislation and more are yet to come. There is, perhaps, a question whether in resolving an issue of GST interpretation a Court can have regard to such rulings. The rulings, important though they may be in that they can practically be relied upon by taxpayers, are not binding upon Courts. Indeed in principle they represent no more than the official view of one of the parties to the litigation where it is precisely that official view which is the subject of the litigation. It is not impossible that a Court might read them to inform itself but for the reason already suggested they can be given no weight greater than the submissions of one of the parties to the litigation.

The principle to be adopted can be stated as follows:

The Courts may have regard to the extrinsic materials referred to in s 15AB of the Interpretation Act both to determine the mischief which Parliament intended to remedy and in the case of ambiguity to determine the legislative purpose and resolve the ambiguity (if possible). Extrinsic material does not include rulings which represent merely the view of one party to the dispute.

5. OVERSEAS AUTHORITIES IN THE INTERPRETATION OF GST

One question of some importance, which has been the subject of discussion among GST practitioners and is one the Courts will face when cases on GST really start coming before them in Australia, will be the significance of overseas case law in the interpretation of the Australian provision.

Obviously the common law of England was the received law of the Australian colonies and therefore in the 19th and the first half of the 20th centuries resort was uniformly had to English case law. The fact that English case law remained important for such a long time was partly the result of the retention of the Privy Council as the final court of appeal which was only abolished in the 1980s. It is not surprising, therefore, that when first State then Commonwealth income tax got underway resort was had to cases in England, notwithstanding the very different legislative scheme that was to be found in that country.

The first (non constitutional) income tax case decided by the High Court and reported in the Commonwealth Law Reports was Mooney v Commissioners of Taxation[18] where there were two issues. The first was whether profits arising from the sale of a mine were income and the second had to do with whether an appeal taken to the Court of Review relating to the assessment under a State income tax law was conclusive. A glance at the case will show the extent of English cases cited. On the first point the Court decided not to follow two Scottish cases which it distinguished as affording no assistance under the New South Wales legislation. As to the second the Court found that a Court of Review (a Tribunal) decision not to be final and binding and in so doing regarded an English decision to the contrary to be a decision on legislation so different that it could not assist in resolving the question.

The Commonwealth income tax law originating in 1922 and ultimately rewritten and consolidated in 1936 was not really based upon the English legislation, although clearly some parts of it bore a resemblance. However, routinely English cases were applied, particularly in the areas of what was income and what was capital. As Australian jurisprudence developed, of course, reliance on English decisions reduced substantially to the point that today English decisions are seldom cited and, when they are, are often not followed.

It is interesting to note that the first major income tax case reported in volume 1 of the Australian Tax Decisions was Federal Wharf Company Ltd v DFC of T[19] before Rich J where the issue was whether interest payable under the Harbors Act 1913 (SA) on compensation for land resumed was income. That case followed cases in the United Kingdom. Relatively recently the Full Federal Court had to consider whether pre-judgment interest on damages awarded was income.[20] In Riches v Westminster Bank Ltd[21] the House of Lords had held in England that it was. The House of Lords decision was not followed by the Full Court on the basis that while many of the principles applied in that country were given effect to in Australia, the general structure was so different that the United Kingdom cases should be treated with caution. It may not be easy, however, to discover the difference in the context of the legislation so far as it concerned pre-judgment interest and easier really to explain the differing result as essentially a difference in philosophy of the judges hearing the two cases.

Sales Tax, as many will know, was the work of experts brought to Australia from Canada and thus the legislation as originally enacted bore some resemblance to the sales tax legislation of Canada at the time. However the spate of early cases in the High Court, while they saw reliance by the Commissioner upon the decision of the Privy Council on appeal from Canada in Dominion Press Ltd v Minister of Customs and Excise[22] were decided without much reference to cases at all.[23]

Of course where the Australian legislation was closely modelled upon the English legislation, as was the case with stamp duty, considerable use was made of English authorities, until at least, the legislation of England and the Australian States diverged in the second half of the 20th century.

GST is different, in that those who drafted it paid particular attention to the New Zealand legislation, as well as to European and Canadian legislation and sought to produce a bill which attempted (subject to the political exigencies of no tax on food which emerged once the Bill burst into the political arena) to solve the problems which were seen to beset the overseas legislation. In many cases it will only be possible to understand the Australian legislation by reference to case law which pointed up problems in the legislation of New Zealand or elsewhere. It must follow that Courts will have regard to the overseas legislation as much to understand how the Australian legislation came to take the form it did as to reach a conclusion as to its meaning. It however does not follow that the results reached in the overseas cases will be the results which Courts will reach in Australia, if only because the legislature may deliberately have gone out of its way to legislate for a different result.

The first case which discussed GST in some detail was Shaw v Director of Housing and State of Tasmania (No 2).[24] That case considered cases both in the United Kingdom and New Zealand where it had been held that absent a connection with a taxable supply, a release of an obligation for consideration would not be a supply. The judgment proceeds on the assumption that for the purposes of the issue discussed there is no difference in the legislative context in those countries and Australia in reaching the conclusion that there was no substantial risk of GST being payable. Since the Commissioner of Taxation was not a party in the proceedings there was really no one to put a contrary view, even if the Commissioner were to take a contrary view which he does not.

There are scores of examples that can be given of circumstances where differences in the Australian legislative context may produce a different result. I will content myself with two.

It is obvious that the provisions of Subdiv 38J dealing with making supplies of a going concern GST free were modelled upon the New Zealand and had regard also to the Canadian legislation. In New Zealand at the time the draft was being prepared, although not now, it was possible for the sale of a going concern provisions to operate to be available without the necessity for the supplier and acquirer to agree in writing. This led, one might think, to litigation, particularly where the parties had different views on the question whether the going concern provisions applied. Those responsible for drafting the Australian provision obviously sought to obviate the problem by making it a prerequisite that both parties agree in writing. The problem can be illustrated by Allen Yacht Charters Limited v Commissioner of Inland Revenue.[25] In that case the purchaser of a yacht argued it had purchased a business as a going concern, the Tribunal found it had not and accordingly the purchaser was not entitled to claim a refund upon the purchase. The vendor had treated the transaction as GST free. The Commissioner then took the view that both vendor and purchaser should be treated in the same way and issued a GST assessment against the vendor. The matter ultimately went to the High Court. As it happens, that Court found there was no supply of a going concern with the consequence that the vendor was taxable. But a case might be envisaged where the purchaser has claimed an input credit and later litigation makes it clear that no GST was payable by the vendor such that the revenue may not be entitled to reopen the GST position of the purchaser, assuming there has been an assessment and the limitation period on reassessment has expired. As usually there will not be an assessment the revenue will generally be free to ensure that both vendor and purchaser are treated in the same way by adjusting the net GST payable by the purchaser in such a case.

However, it is also clear that the restrictions to be found in case law in New Zealand as to what constituted the supply of all the things necessary for the continued operation of an enterprise will be relevant to the Australian provisions. Should the situation arise in Australia that there was a sale of a motel upon ternis that it is vacant at completion and there was no motel business operating at the time of the supply, then clearly the decision of the High Court of New Zealand in Belton v Commissioner of Inland Revenue[26] will be treated with great respect and probably followed.

That is a simple example. A more interesting example is to be found in the area of preliminary expenditure of an enterprise. Those who drafted the Australian legislation were clearly aware of cases in the European Union such as Rompelman v Minister van Financien[27] and Intercommunale voor Zeewaterontzilting (Inzo) in Liquidation v Belgischer Staat.[28] These cases turned on the insistence in the 6th Directive that input credits be available to a taxpayer which carries on an economic activity. So in Rompelman the taxpayer was involved in acquiring title to units for use as showrooms intended for letting. The activity was a preparatory act but the taxpayer was held entitled to an input credit. The latter case was more difficult for it involved a taxpayer involved in a feasibility study of a project to turn sea water into fresh water which was ultimately abandoned. Nevertheless, Rompelman was followed and the taxpayer held entitled to the input tax credit.

These cases no doubt explain the expanded definition of “carrying on” an enterprise in s 195-1 which includes “doing anything in the course of the commencement” of the enterprise.

However, should facts similar to the Zeewaterontzilting case arise for decision in Australia, it would not follow that the decision in that case would require the same outcome, even if it helped to understand why the dictionary definition was expressed as it was. The issue for decision by a Court in Australia will be rather whether, the fact that the taxpayer never actually commenced business ie that its enterprise never began, had the necessary consequence that no input credits were available simply because what was done was not in the course of commencement of an enterprise but rather in the course of deciding whether to commence an enterprise. It may, perhaps, be possible to argue that the taxpayer in such a case is carrying on an activity that is in “the form of a business”, (whatever those words mean) albeit not actually a business and therefore an enterprise so that the taxpayer is entitled to an input tax credit. These issues never needed to be decided by the European Court of Justice because of the emphasis placed in Europe upon the importance that an output tax liability should unless there is real consumption, give rise to a corresponding input credit.

The principle to be adopted (and there are many other illustrations of it in what follows hereafter) can be stated as follows:

The Courts will always have regard to the case law of other jurisdictions in order to determine what the mischief was that the relevant Australian provision was intended to deal with but will not be bound by the outcome of the overseas cases to which it is referred where the legislation differs in its terms from that considered in those cases.

6. THE NEED FOR A PRACTICAL – BUSINESS INTERPRETATION

There is arguably room for a rule of construction in GST cases (but subject obviously to specific legislative provision) that requires GST legislation to be interpreted in a practical or business-oriented way and for that purpose requires transactions potentially subject to the GST to be analysed in a way that is not overly technical. Two considerations suggest such a rule of construction.

The first is that the legislation is self assessing. Entities which are liable to the tax are, by definition, carrying on an enterprise, that is to say usually, although not necessarily a business. Such entities are required in returns either monthly or quarterly to record the GST payable on their taxable supplies and account to the Commissioner for the net of the GST payable by them less any input tax credits and taking into account any increasing or decreasing adjustments. It is contemplated, also, that generally the entity making the supply would pass the tax on to the acquirer as part of the consideration payable on the transaction. It should therefore be inferred that the legislation is intended to be intelligible to all who are concerned with administering entities made liable to output tax or entitled to input tax credits.

The second is that the legislation contemplates that GST will be payable on the wide variety of business transactions which constitute taxable supplies. The consequence is that of necessity the legislation will be expressed, ordinarily at least, in the most general of terms so that it can apply to that wide variety of transactions. In this sense the legislation is not unlike s 51(1) of the Income Tax Assessment Act 1936 (Cth) or its later equivalent s 8-1 of the Income Tax Assessment Act 1997 (Cth) which grant a deduction for what may be called ordinary business expenses. That section is likewise expressed in general language precisely because it must be able to be applied to the more or less infinite variety of circumstances involving income earning or business expenditure. The fact that the legislation is necessarily required to extend to transactions which are so diverse means that it must be interpreted in a way which is likewise broad and practical and conversely suggests that it must not be interpreted narrowly or technically.

These two factors lead to the conclusion that the Courts should not give to the provisions of the GST Act an unnecessarily narrow or technical interpretation, but rather a broad non-technical interpretation. They probably lead also to the conclusion that when a particular transaction, the GST consequences of which falls to be considered, comes before the court the court should have regard to the substance of the transaction and the commercial reality of it[29] and not be constrained by matters of form.

A United Kingdom example illustrating the substance and reality approach taken at least by the Courts of that country is C & E Commissioners v Professional Footballers Association (Enterprises) Ltd.[30] That case concerned whether trophies presented to footballers at an award dinner for which members of the association purchased tickets should be treated for VAT purposes as a separate supply from the supply of the dinner to those who purchased tickets. It was held to conform with the substance and reality of the matter that one should look at the entire transaction as involving the one supply and not break it up into different supplies, the one the dinner and the other the presentation of the trophy when the consideration paid for the dinner covered the consideration for the provision of the trophy with the consequence that the output tax paid on the dinner tickets covered the provision of the trophies.

The problems which can arise where a transaction is exposed to a technical analysis can be seen in the arguments in Case L67.[31] That case concerned whether GST should be accounted for in New Zealand both at the time the deposit was paid as a supply of the equitable interest in the land for a consideration being the deposit and as at completion when there was a supply of the legal title to the land for a consideration equal to the difference between the deposit and the purchase price. The revenue were of the view that the whole GST should be accounted for at the time when the deposit was paid, being the time when the first part of the consideration was payable. The Tribunal there held that it was wrong to analyse the transaction as involving separate disposals of the legal and equitable interests in land. That would be an overly technical approach to the question. Fortunately the issue does not arise in Australia as a result of Div 99 which treats the deposit as a security deposit so that GST will only need to be attributed as at the time of settlement.[32]

There are many examples in Europe of Courts preferring a practical or commercial approach to the analysis of transactions rather than a narrow formal approach. It was said in British Airports Authority v Customs and Excise Commissioners[33] that in VAT cases there is a need to focus on the “substance and reality” of the circumstances surrounding the making of supplies. And in Customs and Excise Commissioners v Pippa-Dee Parties Ltd[34] it was said:

It is therefore clear that a technical analysis of one part of a transaction, or of one set of obligations within a contract, even though accurate in legal principle, which is capable of explaining the service supplied, or the consideration given in a restricted way, is not necessarily the right answer in law to the application of this statute ... [T]axable transactions should not be artificially dissected so as to demonstrate as being the service provided, or the consideration given, something other or less than that which appears to have been the service provided or consideration given upon an examination of the entire transaction. The meaning of “entire transaction” for this purpose must be objectively determined upon the facts of the transaction by reference to the terms agreed.

However, the principle of not adopting an overly complicated analysis of transactions can not be taken too far as the decision of the House of Lords in the well known case of Customs and Excise Commissioners v Redrow Group plc[35] illustrates. The case, it will be recalled involved the correctness of adopting a rights based analysis in tri-partite arrangements. To most of us, although not it seems the House of Lords, it was obvious that the estate agents selling domestic houses made supplies to the owners for whom they sold them. There is little room for argument that these owners consumed these supplies (the services of the agent selling their property) just as much as Redrow did and it is not difficult to understand why the Court of Appeal were persuaded that the services which the estate agents were supplying were the services ordinarily supplied by estate agents when selling houses for the owners of them. The supply to the owners was, of course, an exempt supply. But a more technical analysis of the transaction showed that the contract between Redrow and the agents gave Redrow a right to have the agents supply those services in consideration of the agreement by Redrow to pay the agents a fee and the grant of the right was itself a supply of services. It may be right to call this the primary supply if it is right that there was also a supply by the agent to those customers of Redrow who wished to sell their houses.

A good example of a common sense approach being taken to the construction of the VAT legislation in the United Kingdom is to be found in the cases dealing with mixed or composite supplies. The issue is one which inevitably will arise in legislation which distinguishes between taxable supplies and supplies which are GST free or input taxed. And it is an issue which inevitably will arise just because commercial transactions are seldom so simple that the proposition that the transaction is only capable of being analysed as involving a single supply is simply untrue. The fact that the proposition is untrue can be simply illustrated by an agreement for the sale of a car which comes with the manufacturer’s warranty. There will be at least three potential supplies in just that simple transaction, although fortunately only one amount of GST will be payable. There will be a supply because the transaction creates a right in the purchaser to have the car delivered; there will also be a supply because the transaction creates a right in the purchaser to performance under the warranty and there will be a supply when the car is actually transferred. If the warranty is called upon and there is work performed then there can be further supplies. The complications that can be created where warranties are given and actually called up in an international context can be seen in the New Zealand case of Suzuki New Zealand v Commissioner of Inland Revenue[36] where four different contractual arrangements were found being the warranty contract between the customer and Suzuki New Zealand, the warranty contract between Suzuki New Zealand and Suzuki Japan and service contracts between the repairer and the customer and between the repairer and Suzuki New Zealand and the one act of repair involved the performance of obligations under all of them.[37]

But to return to the mixed and composite supply question. Cases such as British Airways plc v Customs and Excise Commissioners[38] where the issue was whether there was one composite supply or a mixed supply when an air ticket was purchased and meals were to be served on the plane are capable of only one answer to any person who has ever eaten an airline meal. On the other hand it is easy to understand that a different analysis could be made for a train excursion fare which entitled the traveller to a gourmet meal with all the trimmings even if I have a difficulty too with the meals I have eaten on British Rail.[39]

The question culminated for the United Kingdom in the Card Protection Plan case in the European Court of Justice and subsequently once the question of principle was answered in the House of Lords.[40] Again a common sense result ensued. A customer buying the card protection plan service did get insurance cover as well as all sorts of other rights, such as registration of credit cards, notification loss service etc. The problem arose because insurance or arranging insurance is treated differently from providing the other services which membership brought with it. The European Court of Justice in its reasons decided that the question whether a transaction which comprised several elements was to be treated as a single supply or as two or more distinct supplies required all circumstances to be considered. However particularly it was necessary to take into account:

29 ... first, that it follows from article 2(1) of the Sixth Directive that every supply of a service must normally be regarded as distinct and independent and, secondly, that a supply which comprises a single service from an economic point of view should not be artificially split, so as not to distort the functioning of the VAT system, the essential features of the transaction must be ascertained in order to determine whether the taxable person is supplying the customer, being a typical customer, with several distinct principal services or with a single service.

30 ... There is a single supply in particular in cases where one or more elements are to be regarded as constituting the principal service, whist one or more elements are to be regarded by contrast, as ancillary services which share the tax treatment of the principal service. A service must be regarded as ancillary to a principal service if it does not constitute for customers an aim in itself, but a means of better enjoying the principal service supplied.[41]

The House of Lords had little difficulty in finding that the recording of details, luggage tags, getting replacement cards and the like, even the emergency cash advance, were all matters which were ancillary or incidental to the main objective of the scheme which was financial protection against loss ie insurance.

It is not difficult to be critical of the drafting of the Australian legislation, for example, in s 9-80 when it talks of “a supply” being “partly a taxable supply” and “partly a supply that is GST free or input taxed”. This does not fit neatly with the definition of “supply” which includes any combination of any two or more of the matters in paragraphs (a) to (g). The language of s 9-80 implies that what the House of Lords refers to as a distinction between “a single composite supply” and “two or more independent supplies” is not an analysis relevant to the Australian legislation which treats there as being one supply, albeit having more than one part. But differences of language of this kind, whether the language of s 9-80 or that in Ruling 2001/8 (a mixed supply having more than one part as against a composite supply) is not important so long as it is clear that the difference does not disclose an intention to produce a different result. This is, in my view, a case where it is clear that the legislation is to be interpreted in a common sense way so that the general scheme of the legislation is not to be distorted by producing a result that treats what can be said to be a merely incidental or ancillary supply as a separate supply but which does produce the result, where it matters, anyway, that where the one transaction comprises what can be said to be more than one supply, neither of which is ancillary to the other, the tax can be worked out as tax on more than one supply.

Accordingly there is, in my view, to be adopted in interpreting the GST a general principle which can be expressed as follows:

Unless the legislation otherwise requires, in interpreting the GST and characterising a transaction entered into for the purposes of the GST, that interpretation or that characterisation of the transaction will be adopted which produces a practical or common sense business result that accords with business reality and is not unduly technical.

Should the Australian legislation be interpreted subject to the guiding principle that the tax is a consumption tax to be born by the consumer? Should the underlying principles of a value added tax be resorted to in interpreting the Australian legislation?

There are numerous decisions in other jurisdictions where it has been said to be relevant to an outcome that value added taxes are consumption taxes intended to be passed on to an end consumer and that to be a value added tax there must be certain key characteristics.

Perhaps the most obvious example of the consumption tax approach will be found in cases such as Mohr v Finanzamt Bad Segeberg.[42] It will be recalled that the European Community, in an attempt to encourage milk producers to discontinue production paid them an amount to do so. The question was whether there was a taxable supply. The opinion of Advocate-General Jacobs which was adopted by the European Court of Justice, proceeded upon the basis that the scope of the tax was limited by its character as a tax on consumption. It is only when a trader supplies goods or services for consumption by identifiable customers that the tax, he said, would amount to a tax on consumption and that was absent in Mohr.

Although the Advocate General distinguished Apple and Pear Development Council v Customs and Excise Commissioners[43] as not a case involving the absence of consumption, the principle for which that case stands, namely that there was no direct relationship between the charge imposed upon producers and such benefits as may be said to have been received by individual producers by the Council fulfilling its charter of promoting apples and pears. Perhaps it is true that the absence of identifiable consumers was not relevant to Apple and Pear Development Council, but there is in any event an element of that in the case.

The requirement of consumption in the European Union really stems from Art 2 of the First Directive,[44] which says:

The principle of the common system of value added tax involves the application to goods and services of a general tax on consumption exactly proportional to the price of the goods and services ...

Associated with the application of a requirement to construe the European VAT legislation by reference to the underlying policy of a consumption tax in the European Union is also what may be said to be a possible rule that the VAT should be interpreted having regard to a general understanding of the aims and characteristics of a value added tax.

There is no comparable provision to the First Directive in Australia. However, there is no doubt that Parliament intended that the GST would operate as a tax on consumption because it said so in the initial Explanatory Memorandum.[45] However, we know that the Commissioner takes the view that Mohr and the later Landboden-Agardienste case would be decided differently in Australia, again because he has said so.[46]

There is also no doubt that the definition of supply is so wide in the Australian legislation that an entry into of an obligation to refrain from doing something would be a supply.[47] But it is also the case that the entry into an ordinary restrictive covenant will be a taxable supply in European VAT law where there is consideration. It may be possible to infer from the scheme of the Australian legislation that where there is a supplier there must always be an acquirer, although that is not self-evident. Perhaps the real problem in Mohr for Australia would really be if the legislation which authorised the payment to the farmer actually imposed itself the obligation upon the farmer to go out of business. Then there would be no real supply by the farmer at all. But if going out of business required an act of the farmer, as it did in Mohr (the execution of a covenant) it is difficult for me to see why that act, whether it was the entry into an agreement, or just a letter of acceptance to the relevant statutory authority would not constitute a supply by the farmer to the authority in question which, presumably could take action against the farmer if he sought to ignore the obligation. To some extent the decision in Mohr is a policy decision to ensure that the European Community compensation was not reduced in favour of a national government for what was a necessary economic restructure of the dairy industry[48] and there is an impression that European Courts may, anyway, be more inclined to policy driven conclusions, than Australian Courts. But, it is obvious that it will be unsafe to assume the same result will follow in Australia. And it will always be unsafe to assume the same result in Australia as is reached in overseas decisions where the legislation is different. Any attempt to interpret the Australian legislation by adopting a policy driven consumption tax analogy must yield to the terms of the legislation if contradictory to the approach. Conversely, however, if the relevant statutory provision in Australia is substantially similar to the overseas provision, overseas cases will clearly be treated with respect.

There is a possibility that a question of construction may be resolved by an Australian Court having regard to the underlying

theory of the GST. That underlying theory includes, as Rebecca Millar has pointed out, the following propositions:

i) Since the tax is one of general application, all supplies should be taxed unless the GST Act specifically provides that they are not to be taxed;

ii) GST should be charged at each step in the “production and distribution” chain;

iii) GST should be the appropriate proportion of the revenue earned at that step in the production chain and should not fall inappropriately on the wrong supplier. No supplier should remit more GST on a transaction than the appropriate percentage of the amount it receives for making a supply; nor should a supplier remit less GST than the appropriate percentage of the revenue it receives;

iv) To the extent that transactions are fully taxable, the GST remitted by each supplier should also be the appropriate proportion of the value added by the supplier, an effect that is generally received by crediting the tax paid on inputs against the tax due on outputs;

v) Since GST is a tax on private consumption in Australia, the full burden of the tax should fall on the end consumer at the intended rate.[49]

The paper demonstrates that Div 100 does not sit easily with these principles where there are voucher transactions involving more than two parties and discounts are involved. The author advocates amendment. I join in the call for amendment. The reason the general principles do not apply stems really from the specific terms of the Division. But it is perhaps worth considering a slightly modified example to those given in the paper to make another point.

Take the case of a Telco selling an ordinary phone voucher falling within Div 100 entitling the holder to calls worth $100 to a newsagent for ($80) where the newsagent then onsells it the consumer for $90, ie at a discount. Assuming each of the transactions which brings the phone card ultimately to the consumer is the supply of a voucher within Div 100, neither will involve a taxable supply. The question is what happens when the voucher is redeemed for phone calls. The act of redeeming the voucher will not be a supply because of s 100-10. There will be a supply of telephone calls by the Telco for consideration but what is that consideration which is “for” the supply, having regard to the extended meaning to be found in the legislation.

It will be likely that the Telco will have a published rate for phone useage, although it may have more than one such published rate. It is likely that the computer system of the Telco will debit the card with calls made in accordance with this published rate or rates. The Telco only ever receives direct monetary consideration of $80 and not from the customer but from the newsagent. But so long as one is looking at direct consideration that is really consideration for the voucher not the calls. Can the $80 be seen as consideration and the only consideration for the calls as well as for the supply of the voucher. If it can, then the GST payable for the calls would accord with the general principles set out above.

It can be said that the real or direct consideration for the calls is the customer redeeming the voucher, which at least prima facie is a non monetary consideration. The contrary view that the voucher expresses consideration as an amount of money and hence that amount is the consideration has some difficulty, notwithstanding that the voucher will refer to an entitled to a particular monetary value of calls. The phrase “expressed as an amount of money” would seem primarily, at least, to refer to agreements to pay a particular sum of money expressed to be the consideration” which is not the present case. If there is a consideration expressed as an amount of money, then the consideration for the phone calls is $100, being $20 more than the Telco ever receives and with the consequence that the real rate of GST will be 12½%. But if the relevant consideration is giving up the rights to which the customer is entitled under the voucher it may be said not to be expressed in money notwithstanding that there is a monetary value of calls stipulated. If the consideration is not consideration expressed as an amount of money then it is necessary to look at the market value of the consideration. The market value of the consideration is made by the legislation the touchstone for valuing the supply. It is not the other way around. The value of the consideration is not to be determined by valuing the supply.

The reference to market value of the consideration raises, as well, the question of what market one is talking about. Assuming that the consideration is the effectuating of the rights inherent in the card, or the satisfaction of those rights by performance by the Telco, the value, presumably is the same as the market value of the card. The relevant market may be the market in which the Telco sells the card, when it presumably is $80 or the market in which the consumer purchases the card, when it is presumably $90. It can be said that because the customer and the Telco are at arms length, the value of the consideration passing from the customer to the Telco (the rights which the customer has) should be equal to the value of the calls which the customer is to obtain. This, arguably, is the published call tariff assuming that there is only one rate for calls pursuant to which the Telco will debit the card, which can be assumed here to be $100.

The Commissioner is likely to prefer to assess GST on a consideration of $100 because that produces more GST. However, to do so will be palpably unfair to Telco which as has been noted is paying $10 GST and receiving $80 as consideration for the sale of the card. If it is possible to apply the VAT principles above, then the result should be $80 consideration equating with a GST of 10% of receipts. This result could be reached by noting that Telco is really selling its calls to phone card purchasers (the relevant market) for $80, even if those purchasers are buying the card and the resultant calls for $90. It will be interesting to see where the problem ultimately goes.

Is there a principle here? The jury is still out. But it may be difficult to convince a Court to decide a GST case by reference to overall general principles of VAT unless the language of the legislation reaches that result anyway. Only time will tell.


[*] Judge of the Federal Court of Australia. This article is based on a paper presented at the 15th Annual GST & Indirect Tax Weekend Workshop held by ATAX at Noosa, April 2003.

[1] 77/338/EEC.

[2] See Amalgamated Society of Engineers v Adelaide Steamship Co Ltd [1920] HCA 54; (1920) 28 CLR 129, 161-2 (per Higgins J) where the literal rule applicable to interpreting statutes generally is stated in its most absolute terms so that the literal meaning will prevail even where a result is inconvenient, or impolitic or improbable.

[3] A good statement of the literal rule is to be found in the judgment of Barton J in Heward v King [1905] HCA 48; (1905) 3 CLR 117, 127-8.

[4] (1997) 187 CLR 384, 408.

[5] The need to consider context at the outset is also emphasised by Lord Steyn in his paper “The Intractable Problem of the Interpretation of Legal Texts” (2003) 25 Sydney Law Review 4.

[6] [1981] HCA 26; (1980) 147 CLR 297.

[7] Ibid 321.

[8] Ibid.

[9] Ibid 305.

[10] Reference may be made to the article by M D’Ascenzo, “Along the Road to Damascus: A Framework for Interpreting the Tax Law” (2000) 16 Australian Tax Forum 384 where D’Ascenzo expounds the view that taxation law should be interpreted to take into account policy. The author does recognise the limits on the position he espouses but does not, with respect, recognise the difficulty which exists often in determining precisely what the policy is, other than the overall general policy of raising revenue.

[11] (2003) 195 ALR 321.

[12] Ibid para 251.

[13] [1958] UKPC 14; [1958] AC 450, 465-466.

[14] [1992] HCA 3; (1992) 173 CLR 492, 517.

[15] See Western Australian Trustee Executor and Agency Co Ltd v Commissioner of State Taxation (WA) 80 ATC 4565, 4571.

[16] See FC of T v Whitfords Beach Pty Ltd [1982] HCA 8; (1982) 150 CLR 355, 373. Those familiar with sales tax law might wonder whether Dixon CJ had resort to the parliamentary debates in preparing his seminal analysis of that legislative scheme in DFC of T v Ellis and Clark Ltd [1934] HCA 54; (1944) 52 CLR 85.

[17] Acts Interpretation Act 1901 (Cth), s 15AB. Interestingly the House of Lords has recently found that consideration can be given to traveaux preparatoires in the case of ambiguity: Pepper v Hart [1992] UKHL 3; [1993] AC 593, thus reversing the previous English law on that question.

[18] [1905] HCA 61; (1905) 3 CLR 221.

[19] [1930] HCA 30; (1930) 1 ATD 70.

[20] Whitaker v FC of T [1998] FCA 262; (1998) 153 ALR 334.

[21] [1947] AC 390.

[22] [1928] AC 340.

[23] See, for example, Adams v Rau [1931] HCA 43; (1931) 46 CLR 572; FC of T v Riley [1935] HCA 47; (1935) 53 CLR 69: and FC of T v Rochester [1934] HCA 17; (1934) 50 CLR 225. However, there is reference to the Dominion Press case in the judgment of Starke J in Riley, 80.

[24] [2001] TASSC 2; (2001) 10 Tas R 1.

[25] (1994) 16 NZTC 11270.

[26] (1997) 18 NZTC 13403.

[27] [1985] 1 ECJR 655.

[28] [1996] 1 ECJR 857.

[29] Cf C-38/93 HJ Glawe Speil-und Unterhaltungsgerate Aufstellungsgesellsdraft mbtt & Co KG v Finanzamt Hamburg-Barmbeck-Uhlenhhorst [1994] STC 543; and Trustees of the Nell Gwynn House Maintenance Fund v Commissioners of Customs and Excise [1998] UKHL 50; [1999] 1 All ER 385 (per Lord Slynn).

[30] [1993] 1 WLR 153.

[31] (1989) 11 NZTC 1391.

[32] See GSTR 2000/28 which gives the Commissioner’s view on the question of accounting for GST on contracts for the sale of land.

[33] [1977] 1 All ER 497, 502.

[34] [1981] STC 495, 501.

[35] [1999] 2 All ER 1.

[36] (2001) 20 NZTC 17, 096.

[37] See also R Millar, “GST-free Export of Services – Suzuki New Zealand v Commissioner of Inland Revenue: The Effect of the Characterisation of Supplies on Deciding whether Particular ‘Services’ are Taxable or GST-free” (ATAX, UNSW, “GST 2001 – Tough Issues” 15th Annual GST and Indirect Tax Weekend Workshop, 21-23 April 2003).

[38] [1990] STC 643.

[39] See Sea Containers Ltd v Commissioners of Customs and Excise [2000] BVC 60.

[40] Card Protection Plan Limited v Commissioners of Customs and Excise [2001] UKHL 4.

[41] Card Protection Plan Limited v Commissioners of Customs and Excise [1997] STC 270, 293.

[42] [1996] All ER (EC) 450. Mohr was followed in Landboden-Agrardienste GmbH v Finanzamt Calau [1998] STC 171.

[43] [1988] STC 221.

[44] 67/227/EEC.

[45] While the legislation does not generally make reference to consumption it does so in s 38-190 when dealing with “supplies of things, other than goods or real property for consumption outside Australia”.

[46] A statement to this effect first appeared in GSTD/D38, para 38.

[47] See s 9-10(2)(g)(ii).

[48] A different result followed for the operation of a gun buy-back scheme in the United Kingdom in Stewart v Commissioners of Customs and Excise [2001] EWCA Civ 1988, where Mohr was not followed, but was distinguished. Indeed, the Court of Appeal had no difficulty in saying that the supply of guns to the government constituted consumption notwithstanding the guns were not to be used by it and that the buy back was for the benefit of society as a whole.

[49] R Millar, “Time, Value, and the Attribution of GST: The Effect of Time on Value When Vouchers Are Redeemed” (Paper presented at the 15th Annual Australasian Tax Teachers Association Conference in Wollongong on 30 January-1 February 2003) 2-3. The distinctive characteristics of a VAT are discussed by the European Court of Justice in Dansk Denkavit v Skatteministeriet [1994] 2 CMLR 377.

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