Ruling Compendium

For GST purposes the entity may still make a supply in the absence of enforceable obligations, provided there is something else, such as goods, services or some other thing, passing from the supplier to the recipient.

This statement may not appear to be entirely consistent with the draft Ruling. The comment centres on the word 'enforceable' and the fact that in the draft Ruling, it is said that the entry into obligations may constitute a supply even where those obligations are not legally binding.

For example in paragraph 49 of the draft Ruling it states:

49. Alternatively, under an arrangement not involving a formal contract, the supplier may be obliged to do certain things in the expectation, but with no certainty, that the intended supply will take place. For example, in the case of some appointments,...the supplier may be obliged to set aside an allotted time to see the customer on the understanding that the customer will pay a cancellation fee if they fail to turn up or cancel the appointment.

It appears that Tax Office is moving away from the focus on 'enforceable' obligations which was taken in GSTR 2006/9.

165. The Commissioner takes the view that package tour operators are travel agents for the purposes of the GST Act.

Whether the reference to travel agents is a reference to the nature of the activities that package tour operators undertake and not that all travel agents only act in the capacity as agents for GST purposes.

Paragraph 163 in the final Ruling clarifies that 'travel agent' referenced in section 38-360 includes a package tour operator that act as agent or as principal or both.

There is a contradiction in the Commissioner's statement in footnote 70 and paragraph 171 of the draft Ruling. The Commissioner draws the conclusion that a 'facilitation supply' is the supply of 'arranging for other supplies to be made' which can also be treated as the supply of the right to receive a future supply and therefore, covered by subsection 9-30(1) or 9-30(2). We do not believe the same supply can be characterised as both the arranging of a future supply and the right to receive a future supply. We assume that the Commissioner considers that in some instances the supply may be an arranging supply and other instances the supply is of a right to receive a future supply. If this assumption is correct, then the Commissioner needs to provide some guidelines as to what it believes are the indicators to identify each supply. Without such guidelines, taxpayers do not have any surety that they have correctly treated a cancellation as a taxable supply (the 'facilitation supply') or as input taxed supply (the right to receive a future supply).

The Tax Office view is that the facilitation supply is broader than a supply of a right. A facilitation supply can include a supply of a right. In which case, the supply of the right may be a dominant part of the facilitation supply and paragraph 9-30(1)(b) or (2)(b) will apply.

The tables include five variables: whether package tour or airline/travel agent; booking cancelled; consideration; cancellation fee paid; and supply for GST purposes. Yet none of these variables has any impact on the GST status of supply. The only variable which impacts on the GST status is whether or not the service involves international or domestic tours.

The Reliance Carpet decision was heavily reliant upon the principles of property law, which means caution should be adopted in extending it application to non-property related transactions and transaction which are not executed under formal contracts.

Paragraphs 77 to 84 in the final Ruling under the heading 'Security deposits as cancellation fees' are consistent with the principles established in the Reliance Carpet case.

The use of the 'facilitation' label is also confusing as it encompasses a range of different scenarios and tends to blur the distinction between the acts of 'arranging' (as agent) and that of supplying (as principal on your own behalf).

The draft Ruling is inconsistent with the Commissioner's established views with respect to having due regard to the substance and commercial reality of a transaction when characterising supplies made for GST purposes.

With reference to paragraph 83 in the draft Ruling, it is not necessary to go beyond the concept that upon entry by two parties into an arrangement involving the doing of things, the supplier enters into an obligation to do certain things (that is, a paragraph 9(10)(2)(g) supply) or alternatively a paragraph 9-10(2)(e) supply so the analysis of whether section 9-30 can then be undertaken.

However, if a payment can be viewed as potentially having a number of different characteristics, due consideration should be given to the most direct connection with regard to the true economic character and commercial intent of the payment.

For example, where a payment can either be construed as compensation or potential consideration for a supply, the fact that an indirect connection could be established between the payment and a supply, should not, where a direct connection exists with a compensation payment, automatically override the true nature of the payment for GST characterisation purposes.

Perhaps after paragraph 100 in the draft Ruling, there could be a statement that states that it is the substantive characteristic which is determinative.

Such an approach would lead to a position where the more direct connection would take precedence with respect to forming the basis for the characterisation of the supply for GST purposes (for example, a direct and established connection would be preferred to an indirection connection in determining whether there is a supply for consideration).

This approach is also consistent with the High Court's comments in the Reliance Carpet decision that it is not appropriate to fix on one characteristic of a payment to suggest that it cannot be consideration for another supply.

We consider that the creation of an appointment where there is no contract made between a customer and a service provider merely amounts to the creation of an expectation that the services would be provided to the customer upon presentation for the appointment, which in the absence of anything else (with reference to the Commissioner's stated position) would not be sufficient to create a supply for GST purposes.

The final Ruling has been amended to remove references to 'unenforceable obligations' to improve clarity.

We consider that this method of analysis to determine whether a supply for consideration exists in a particular circumstance is technically weak on the basis that the conferral of a 'benefit' (which is a relative concept) is not determinative of the existence of a supply for GST purposes.

The approach adopted by the draft Ruling in introducing the concept of a 'facilitation supply' being a separate and distinct supply until it is 'subsumed' into the 'intended supply' appears inconsistent with the Commissioner's analysis in GSTR 2001/8 in relation to composite and mixed supplies.

We consider that the better view is that the 'facilitation supply' (or as outlined above, the obligation to provide certain things) will always be a separate supply to the 'intended supply' that is made.

However, if the intended supply does proceed, the consideration paid by the recipient attaches fully to the intended supply (for example, no separate consideration is attributable to the facilitation supply/the obligation to provide certain things). That is, the better view is that the 'facilitation supply' still remains, but on the basis that there is no consideration attributable to it, it will not constitute a taxable supply for the purposes of the GST Act (as considered in paragraph 105 of the draft Ruling).

We also note that to introduce the concept of a 'facilitation supply' being subsumed into the 'intended supply' on completion of the service, could lead to the unintended consequence of the potential aggregation of otherwise distinct supplies.

The Tax Office view in the final Ruling is that where the intended supply does occur, there is still a separate facilitation supply that was made. However, the consideration has nexus with the intended supply and not the facilitation supply. Where the intended supply does not proceed, the consideration (cancellation fee) has nexus with the facilitation supply.

With reference to the package tour discussion and Example 18 provided in the draft Ruling, we would assume that where the concept of the 'facilitation services' can be validly applied, the value of the 'facilitation services' provided would not vary substantially in the period prior to the intended supply being made (for example, the cost/value of arranging the travel booking would not be altered by how late the customer cancels).

However, we note that the increasing scale of the cancellation fee (depending on how late the package tour is cancelled) lends itself more readily to a liquidated damages characterisation (that is, it appears that the amount payable reflects the opportunity cost of the cancellation and is effectively determined by the ability to re-supply the cancelled package tour to limit the costs incurred/economic loss suffered as a result of the cancellation).

Paragraphs 64 to 67 in the final Ruling explain that if a payment is characterised as liquidated damages, this is not determinative of the treatment under the GST Act. That is, regard must be had to all the relevant factors in deciding whether the payment is consideration for a supply.

The Tax Office view is that the cancellation fee is consideration for the facilitation supply made by the package tour operator in arranging for other supplies to be made (see paragraph 169 of the final Ruling). The cancellation fee is imposed regardless of whether the package tour operator is able to resell the cancelled tour.

This would appear to be at odds with the basic principles of when an adjustment event is deemed to arise under subsection 19-10(1), which states that amongst other things, a cancellation of a supply is an adjustment event.

Presumably, with reference to section 19-10, there would be potential scope for the travel provider to adjust its output tax position if applicable in the tax period in which the cancellation occurs and then attribute any output tax liability (if applicable) in the tax period in which the subsequent re-booking occurs. There may be corresponding adjustments for recipients in these circumstances.

It is assumed that the professional services are provided to Mining Giant under a letter of engagement, which would allow for Capri to charge any work in progress up to the point where the project is cancelled. As such, the amount payable by Mining Giant would represent consideration for the services provided under the engagement, albeit that no Report is ultimately produced, as opposed to constituting a cancellation fee.