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NATIONAL JET SYSTEMS PTY LTD v FC of T

Members:
Justice Downes P
F O'Loughlin SM

Tribunal:
Administrative Appeals Tribunal, Melbourne

MEDIA NEUTRAL CITATION: [2011] AATA 766

Decision date: 31 October 2011

Justice Downes, President Senior Member Frank O'Loughlin

Introduction

1. In the course of its business, National Jet Systems Pty Ltd acquired rights, as a lessee, to commercial aircraft and provided those aircraft together with operational and maintenance services, including staff to perform the services, to Airlink Pty Ltd, a wholly owned subsidiary of Qantas Airways Limited.

2. The terms of the lease between National Jet and Airlink, which included provision of the ancillary services, were restated in a document dated 24 June 1999 shortly before the date of royal assent to the A New Tax System (Goods and Services Tax) Act 1999 (Cth) which was 8 July 1999. Those terms were amended on a number of occasions between 24 June 1999 and 30 June 2005.

3. The lease terms expressly allowed some, but not all, of the components of the consideration payable by Airlink to be increased if Goods and Services Tax was payable on those components of the lease consideration. From 1 July 2000 to 30 June 2005, these components were increased to reflect GST and National Jet paid corresponding amounts of GST to the Commissioner. National Jet paid $48,314,320.35 in GST in respect of the lease from 1 July 2000 to 30 June 2005.

4. Following the decisions in
DB Rreef Funds Management Limited v Commissioner of Taxation 2005 ATC 4302 ; [2005] FCA 509,
Commissioner of Taxation v DB Rreef Funds Management Ltd 2006 ATC 4282; (2006) 152 FCR 437 and
Westley Nominees Pty Ltd v Coles Supermarkets Australia Pty Ltd 2006 ATC 4363; (2006) 152 FCR 461 National Jet claimed that s 13 of the A New Tax System (Goods and Services Tax Transition) Act 1999 (Cth) applied and that GST was not payable at all. National Jet sought refunds totalling $40,284,647 which the Commissioner has refused.

5. Section 13 of the Transition Act is, relevantly, as follows:

  • "13 Existing agreements: no opportunity to review
    • (1) This section applies if:
      • (a) a written agreement specifically identifies a supply and identifies the consideration in money, or a way of working out the consideration in money, for the supply; and
      • (b) the agreement was made before the day on which this Act received the Royal Assent.
    • (2) The supply is GST-free to the extent that it is made before the earlier of the following:
      • (a) 1 July 2005;
      • (b) if a review opportunity arises on or after the day of Royal Assent - when that opportunity arises.

        …

    • (5) In this section:

      review opportunity , for an agreement to which this section applies, means an opportunity that arises under the agreement:

      • (a) for the supplier under the agreement (acting either alone or with the agreement of one or more of the other parties to the agreement) to change the consideration directly or indirectly because of the imposition of GST; or
      • (b) for the supplier under the agreement (acting either alone or with the agreement of one or more of the other parties to the agreement) to conduct, on or after 1 July 2000, a general review, renegotiation or alteration of the consideration; or
      • (c) for the supplier under the agreement (acting either alone or with the agreement of one or more of the other parties to the agreement) to conduct, before 1 July 2000, a general review, renegotiation or alteration of the consideration that takes account of the imposition of the GST."

6. Where not prevented by limitation periods, National Jet has filed objections to obtain the refunds it seeks, the decisions on which are before the Tribunal in these proceedings. For some of the refunds sought National Jet did not lodge an objection within the requisite period. National Jet has sought an extension of time within which to lodge an objection and the decision in relation to that extension request is also before the Tribunal in these proceedings.

Issues for determination

7. The issues to be determined are:

  • (a) whether s 13 of the Transition Act applied to render GST-free, supplies made under the lease during the periods:
    • (i) July to October 2000, December 2000 and October 2004 (the first relevant period); and
    • (ii) November 2004 to June 2005 (the third relevant period).
  • (b) if the answer to (a) is yes, whether National Jet notified the Commissioner in the requisite manner and time of its refund entitlements for the first relevant period as required by s 105-55 of Schedule 1 to the Taxation Administration Act 1953 (Cth) and item 16(2) of Schedule 2 to the Tax Laws Amendment (2008 Measures No 3) Act 2008 (Cth);
  • (c) for the first relevant period if the answers to both (a) and (b) above are yes and for the third relevant period if the answer to (a) above is yes, whether the discretion in s 105-65 of Sch 1 to decline to pay a refund that would otherwise arise:
    • (i) is capable of being exercised if supplies are GST-free by operation of s 13 of the Transition Act; and
    • (ii) if the answer to (i) above is yes, whether the discretion ought to be exercised; and
  • (d) for GST paid for the periods from February 2001 to September 2004 (the second relevant period) for which National Jet did not lodge an objection in time, whether the discretion in s 14ZW(2) of the Administration Act ought to be exercised to extend time for an objection to be lodged.

Summary of conclusions

8. We have decided that National Jet had given the Commissioner a valid notice for the purposes of s 105-55 of Sch 1 to the Administration Act and item 16(2) of Sch 2 to the Amendment Act, but that s 13 does not render the applicable supplies GST-free, that, if they were, the Commissioner had available and correctly exercised a discretion to refuse refunds, even though complying objections were made in time, and that it is not appropriate to grant extensions of time to make other objections.

Were the lease supplies GST-free under s 13 of the Transition Act?

9. To understand the context in which this issue arises some preliminary facts are required.

10. The lease provided for National Jet to lease "Aircraft Packages" to Airlink (cl. 4.1). Aircraft packages comprised aircraft individually "identified and described in Sch 1A to the lease including the relevant Airframe, Aircraft Documents and all Engines and Parts installed in or on or attached to that Airframe… and… Spare Engines" (cl. 1.1).

11. When the terms of the lease were restated on 24 June 1999, before the royal assent date, there were 13 individually identified aircraft and eight spare engines which were the subject of the lease (Schedule 1A). By way of illustration, one of the entries in the schedule was as follows:

Aircraft Manufacturer and Model Serial Number Registration Number Engine Manufacturer and Model Engine Serial Numbers
BAe 146
Series 100		 1005 VH-NJY Textron Lycoming ALF502-R3A LFO 5004
LFO 5023
LFO 5030
LFO 5047

12. The lease contained particular provisions relating to options over individually identified aircraft that might become part of the lease and the termination of leasing arrangements for other identified aircraft (cl. 4.4).

13. National Jet also agreed to provide services necessary to operate the aircraft with suitably experienced and qualified flight and cabin crews, ground engineers, maintenance, technical and other engineering staff (cls. 1.1 and 6.1).

14. Airlink was required to pay consideration for the leasing of the relevant aircraft and performance of the other services, which had three components (cl. 7.1):

  • (a) the leasing component;
  • (b) a standing charge; and
  • (c) a maintenance provision for each aircraft.

15. In addition, Airlink was obliged to pay expenses incurred by National Jet for which Airlink was responsible (recharged expenses).

16. The leasing component of the consideration was identified on an aircraft by aircraft basis and was to be paid by Airlink, at the direction of National Jet, to the rent payee nominated for each aircraft (cl. 7.3 and Schedule 4). The rent payees were the parties from whom National Jet leased the aircraft packages.

17. The standing charge was determined by reference to costings and agreed guidelines (item 2 Sch 4 and Sch 7)

18. The maintenance provision was determined by reference to a formula on an aircraft by aircraft basis (items 3 and 4 Sch 4)

19. The lease required Airlink to pay or reimburse to National Jet any "stamp duty (including rental business duty) payable in respect of the… lease" and "all rates, taxes (excluding income tax payable by National Jet), licence fees, stamp, import or other duties and registration fees and assessments whether federal, state, municipal, local government or parliamentary" charged upon National Jet or the lessors to National Jet (cl. 7.7).

20. The lease also required the amounts of the standing charge, the maintenance provision and recharged expenses to be increased by any GST imposed on those supplies. Reductions in sales tax, duties or imposts associated with the introduction of GST were to be passed back to Airlink (cl. 7.8A).

21. The lease could only be altered by agreement in writing (cl. 18.3).

22. On 31 August 1999, after the royal assent date, the lease was amended by replacing the maintenance provision table in the document. The changes were principally to include amounts for five components of the maintenance charge that had been designated as "TBA" (presumably "to be agreed" or "to be advised") in the 24 June 1999 document for one aircraft and to make different provision for options over rights to another of the identified aircraft. A new cl. 4.4(e), dealing with an extension option for a particular aircraft, was substituted and other provisions, relating to that aircraft, were amended. The amendment agreement confirmed that all other terms and conditions in the 24 June 1999 document remained unchanged.

23. On 7 December 1999 the lease was amended again. The amendments included changes to the nominated rent payees, changes to the increase in the standing charge on inclusion of an identified aircraft in the lease and replacing the maintenance provision table which formed part of the basis for calculating the maintenance provision component of the lease consideration. Clause 4.4(e) was deleted. Further specific provision was made with respect to the aircraft covered by that clause and other aircraft. Once again, the amendment agreement confirmed that all other terms and conditions of the 24 June 1999 document remained unchanged.

24. On 23 December 1999 the Agreement was amended again and aircraft number 2034, a BAe 146 Series 200 with four Textron Lycoming ALF 502-R5 engines, was added to the suite of leased aircraft under the lease and the leasing component of the lease consideration, for all aircraft, was restated. The restatement included an additional leasing component of $US120,000 per month for the new aircraft and the leasing components for all other aircraft were restated without change. Each of Schedules 1A, 1B, 1C and 5 were replaced. Other amendments were made to the body of the lease. A mobilisation fee of $275,000 was imposed for the delivery of the new aircraft. The standing charge component was increased by $292,000 per month for the new aircraft. A sum for maintenance provision for the new aircraft was specified by handwritten amendment to a provision suggesting the amount remained to be agreed. Again, the amendment agreement confirmed that all other terms and conditions of the 24 June 1999 agreement remained unchanged. A revised schedule was appended which referred to the new aircraft as follows:

BAe 146
Series 200		 2034 VH-FRB Textron
Lycoming
ALF 502-R5		 LFO 5110
LFO 5167
LFO 5192
LFO 5202

25. There were a range of further amendments addressing a variety of matters from 5 May 2000 to 23 December 2005. Given the changes made up to December 1999 it is not necessary to deal with them.

The contentions

26. National Jet claims that s 13 applied to all supplies under the lease, which were GST-free until 30 June 2005. It claims that the date the lease was last restated (24 June 1999) governs the outcome of this question, that the relevant supplies were made pursuant to that agreement and no other agreement, that any and all amendments made to the terms of that agreement do not affect the date of the agreement, that cl. 7.7 and 7.8A do not constitute a review opportunity within the meaning of s 13(5) of the Transition Act and that actions of the parties that were not consistent with the terms of the written agreement do not mean that the agreement was varied or that supplies were made pursuant to a different agreement.

27. The Commissioner contends that supplies made under the lease are not GST-free on four bases:

  • (a) after amendments were made to the lease, supplies made by National Jet were not made with the requisite connection with a written agreement entered into before the royal assent date (the Supply Identity Basis);
  • (b) Airlink and National Jet's conduct made all post 1 July 2000 supplies taxable (the Conduct Basis). The Commissioner contends that when Airlink made payments to rent payees that included GST either:
    • (i) clause 7.8A of the lease was varied to include GST on the leasing component; or
    • (ii) the parties departed from the terms of the lease and supplies made from 1 July 2000 were not relevantly made under the pre-royal assent date lease with the result that s 13 did not apply;
  • (c) the amendments to the lease meant that there was a new agreement entered into after the royal assent date and supplies made after the amendments fall outside s 13 (the New Agreement Basis); or
  • (d) clauses 7.7(b) and/or 7.8A of the lease constituted a review opportunity for the purposes of s 13(5) of the Transition Act (the Review Opportunity Basis).

28. The only basis upon which National Jet can seek recovery of the GST it has paid is to proceed on the footing that the lease provided for a single supply. If there were multiple supplies it would be necessary to address the supplies separately. The Commissioner accepts that the lease provided for a single supply. If the lease provided for multiple supplies, for example aircraft, possibly on an individual basis, and operational and maintenance services (ie. the services other than the leasing component), National Jet cannot be entitled to any refund of GST paid with respect to those supplies because the lease provided for a review opportunity for the consideration payable for operational and maintenance services.

29. The common approach of the parties that the bundled services provided pursuant to the lease are a single supply can be accepted as consistent with authority (
Federal Commissioner of Taxation v Reliance Carpet Co Pty Ltd 2008 ATC 20-028; [2008] HCA 22, (2008) 236 CLR 342 and
Travelex Ltd v Commissioner of Taxation 2010 ATC 20-214; [2010] HCA 33, (2010) 241 CLR 510).

30. These approaches to determining the relevant taxable supply are consistent with authorities suggesting that GST is a business tax and is to be administered in a practical way. The approach to the operation of the GST system is that it is a tax on business, although ultimately borne by consumers, assessed and paid by businesses, and is to be administered and interpreted in accordance with the understanding of business people (see
Saga Holidays Ltd v Federal Commissioner of Taxation 2006 ATC 4001; [2005] FCA 1892 at [29], (2005) 149 FCR 41 at 56 per Conti J and on appeal
Saga Holidays Ltd v Commissioner of Taxation 2006 ATC 4841; [2006] FCAFC 191 at [29] and [30], (2006) 156 FCR 256 at 264 per Stone J with whom Gyles J agreed and at [70] per Young J;
Reliance Carpet Co Pty Ltd v Federal Commissioner of Taxation 2007 ATC 4650; [2007] FCAFC 99 at [31] to [33], (2007) 160 FCR 433 per Heerey, Stone and Edmonds JJ;
Sterling Guardian Pty Ltd v Commissioner of Taxation 2005 ATC 4796; [2005] FCA 1166 at [39] per Stone J;
Secretary to the Department of Transport (Victoria) v Commissioner of Taxation 2009 ATC 20-140; [2009] FCA 1209 at [42(7)] per Gordon J;
International All Sports v Commissioner of Taxation 2011 ATC 20-268; [2011] FCA 824 at [29] per Jessup J;
Multiflex Pty Ltd v Commissioner of Taxation 2011 ATC 20-284[2011] FCA 1112 at [22] per Jessup J). This approach to determining the relevant supply can inform the proper approach to the construction to be accorded to s 13 of the Transition Act.

Does s 13 apply?

31. In their submissions, both National Jet and the Commissioner explored the legal relationship between the parties to the lease and whether and how that relationship changed after the royal assent date. One should not, however, lose sight of the fact that the question is ultimately not one rooted in questions relating to the law of contract, but rather in the question of whether a particular statutory description does or does not apply to a particular written agreement.

32. Section 13(1) refers to "a written agreement" that:

  • 1. "specifically identifies a supply"; and
  • 2. "identifies the consideration in money, or a way of working out the consideration in money, for the supply".

The "agreement" that does both of these things must have been made before the royal assent date.

33. The primary issue in this case ultimately falls to be determined by whether there was supply under such an agreement for consideration determinable under the agreement and not how the common law characterises the agreement over the course of time. If the supply does not answer the statutory description then it is not GST-free however the common law treats the agreement.

34. The language of the Transition Act, consistently with the object of the section to avoid injustices or unfairness that would arise in some circumstances, focuses on terms and conditions of agreements that were agreed or set in place before the royal assent date. The date of the agreement or the framework within which particular terms and conditions are agreed from time to time is not the focus of attention.

35. The supplies in question are supplies made after 1 July 2000. The phrase "the agreement was made" in s 13(1)(b) refers to the agreement identified in s 13(1)(a) - the agreement under which the supply in question must be specifically identified together with the consideration for that supply. That agreement must identify the supply and the consideration for post 1 July 2000 supplies.

36. Approaching the question for determination on the basis that the legislative scheme requires an examination of what the consideration after 1 July 2000 was, as a matter of substance, really paid for, the necessary enquiry is whether the consideration paid after 1 July 2000 was for supplies made after that time that were specifically identified for a consideration that can be identified in the terms of a written agreement where those terms were operative before the royal assent date. It is those supplies that are the subject of the relief conferred by s 13. The section does not apply to situations where a pre-royal assent date agreement does not identify post-royal assent date supplies and consideration, whatever be the explanation of the lack of connection between agreement and supply. The supplier in such an agreement and in such a circumstance is taken by the legislative scheme to have been in a position to include the impact of GST in decisions concerning consideration to be charged. Such a person does not need the relief afforded by s 13 and is not intended to get it.

37. The goods and related services to be provided pursuant to the lease were neither fungible goods, nor were they described in general terms, for example, "provision of 13 aircraft and related operational maintenance services." The goods and related services were specified in particular detail in the terms of the lease on an aircraft by aircraft basis and the consideration to be paid was specified, at least in part, on an aircraft by aircraft basis.

38. After the royal assent date the suite of goods and related services, viewed as a single supply, specifically identified in the lease, was materially different to the supply identified before the royal assent date, as was the consideration for it. To begin with, there was an additional aircraft. This altered the leasing component, the standing charge and the maintenance provision. Other amendments were made to the body of the lease. Other significant amendments have been identified above. In the result, the single supply was varied in each of the critical respects concerning aircraft lease, standing charge and maintenance. The pre-royal assent date agreement no longer sufficiently identified the post royal-assent date supply or consideration. What the consideration that was paid after 1 July 2000, viewed as consideration for a single supply, was really for, was, in substance, different to what was identified to be supplied in the agreement that was in place as at the royal assent date and different to the consideration identified or capable of being worked out. In these circumstances, supplies made pursuant to the lease were not subject to s 13 of the Transition Act and were subject to GST whatever was the reason for the lack of identity between agreement and supply

39. This conclusion effectively determines the result in this case. Questions of notification, refund and extension of time are contingent on the s 13 question being answered differently.

The Commissioner's bases for contending s 13 does not apply

40. Given the conclusion reached above, it is not strictly necessary to address the precise bases upon which the Commissioner contends that s 13 of the Transition Act does not apply. However, because analysis of those submissions further elucidates our opinion we will now address them.

The supply identity basis

41. This is the basis which is closest to the ground on which we have found that s 13 does not apply. Ultimately we have dealt with the matter simply by reference to the words of the section. An associated way of putting the same position might be to say that the requisite connection between the "written agreement" and the supplies was not present. It is to be noted that by inserting a clause in each of the amendments stating that all other terms and conditions of the lease remained unchanged the parties were both acknowledging that changes of substance had been made and stating that they were addressing the whole of the agreement, by affirming it.

The conduct basis

42. The Commissioner contends that Airlink's conduct in paying grossed up GST inclusive amounts to the rent payees in satisfaction of its obligations to National Jet for the leasing component either:

  • (a) varied the terms of cl. 7.8A of the lease to include GST on the leasing component such that s 13 does not apply; or
  • (b) indicated that National Jet and Airlink had departed from the terms of the lease so that supplies made from 1 July 2000 were not made under the pre-royal assent date lease and s 13 does not apply.

43. If, contrary to our conclusion, this matter is to be determined by issues of contract law, these assertions are not consistent with the fact that the lease agreement could only be altered in writing signed by each party and are also inconsistent with Airlink having recovered amounts it had overpaid, on account of GST, from National Jet.

44. There may be a number of explanations for the fact that Airlink paid more by way of the leasing component than the document provided for; and mistake is one possibility. There is insufficient evidence to base a finding that there was a variation as contended for by the Commissioner.

45. This alternative is, however, close to the Commissioner's first argument which, in turn, is close to the reasons which have led us to our conclusion. The difference lies in the greater emphasis we have placed on s 13 and the greater emphasis the Commissioner has placed on ideas of contract law.

The new agreement basis

46. The Commissioner contends that amendments to the lease meant that there was a new agreement entered into after the royal assent date and supplies made after the amendments fall outside s 13.

47. The Commissioner accepts that variations to the lease do not, as a matter of contract law, terminate that agreement. The concession is correctly made as the variations do not go to the root of the agreement. Nevertheless he contends that s 13 is concerned with agreements and there is nevertheless a new agreement when a contract is varied in the way that the current lease was varied. Accordingly, when the lease was amended, there was a new agreement which post-dated the royal assent date and supplies made under that new agreement do not attract the protection of s 13.

48. This contention reflects the Supply Identity Basis expressed differently. The analysis set out above applies. Section 13 does not call for an enquiry as to whether there is a new agreement. It calls for an enquiry as to whether there is a pre-royal assent date agreement in writing that specifically identifies a supply and consideration for the supply. The identified supply and consideration must relate to both supply, and the consideration for it, made after 1 July 2000. It is the disconnect between the supplies actually made and the consideration paid after the royal-assent date, on the one hand, and the pre-royal assent date agreement, on the other, which determines this case, not the status of the agreement after 1 July 2000. .

The review opportunity basis

49. To answer this question it is first necessary to determine whether cl. 7.7 extended to allow National Jet to increase the lease consideration to recover from Airlink amounts equal to any GST liabilities because, on its face, cl. 7.8A does not extend to all of the consideration payable under the lease, nor does it extend to nearly all of it.

50. Clause 7.8A is a specific provision dealing with GST. Clause 7.7 is a more general provision. In construction of lease documents specific provisions prevail over more general ones and in commercial agreements and deeds the expressio unius est exclusio alterius concept can have a role to play. Applying these principles, an objective analysis of the lease document suggests that the parties to it intended that cl. 7.8A should deal with the impact of the introduction of GST and that cl. 7.7 was not so intended. For these reasons it does not seem to us that if s 13 otherwise applied cl. 7.7 could be said to give "an opportunity… to change the consideration… because of the imposition of GST". It is simply not a provision relating to consideration or to GST. That is the role of cl. 7.8A.

51. Accordingly, the Commissioner cannot rely on cl. 7.7 as the basis for there being a review opportunity.

52. If cl. 7.8A is a review opportunity it would only be by operation of s 13(5)(a) of the Transition Act. As noted, cl. 7.8A specifically allows increases in consideration to allow for GST charges on some aspects of the supplies made under the lease. However, the leasing component of the consideration could not be altered. It is to be noted that the leasing component was substantially in excess of $1 million per month.

53. In DB Rreef at [82] and Westley Nominees at [66] the Full Federal Court confirmed that a general review of nearly all of the consideration could be regarded as a general review of the whole of the consideration for a supply for s 13 purposes. If a small part of the consideration could not be reviewed, in that case 0.53 per cent of the total consideration for a 12 month period, then that could be ignored. If a material part of the consideration could not be reviewed then there would be no review opportunity. Similar ideas were expressed in DB Rreef.

54. The Commissioner contends that the Westley Nominees and DB Rreef decisions only concern general reviews of consideration for supplies for the purposes of s 13(5)(b) and (c) and not s 13(5)(a), the provision in issue for National Jet. We do not accept that contention.

55. It is now a well-trodden path that s 13 is a provision designed to avoid unfairness that would arise if GST is payable on supplies made in respect of contracts for which the supplier was not in a position to accommodate the impact of GST in setting prices.

56. The importance of an ability for review of the whole of the consideration is consistent with the taxing feature of the GST system whereunder the whole of the consideration is taxed, if it is taxed at all.

57. The Commissioner's contention that the Westley Nominees and DB Rreef decisions only concern general reviews of consideration for supplies for the purposes of s 13(5)(b) and (c), and not s 13(5)(a), is not consistent with the underlying basis for the conclusions reached in DB Rreef and Westley Nominees and earlier authorities. The authorities that have explained the rationale for s 13 in terms of avoiding unfairness have addressed those comments to the whole of s 13, not parts of it. There would be an unfairness that arises if the whole of the consideration for a supply is subject to GST and only part of that consideration for the supply could be altered because of the imposition of GST. Accordingly, the principles espoused in the DB Rreef and Westley Nominees decisions apply equally to s 13(5)(a). It is necessary for the agreement to allow changes to all or nearly all of the consideration for a supply, because of the imposition of GST, for a review opportunity to have arisen. In the present circumstances the lease provided for adjustments to GST for only part, and not nearly all, of the consideration. A review opportunity within the meaning of s 13(5) did not arise.

Was the 25 June 2008 advice to the Commissioner an effective notice of an entitlement to a refund for the purposes of s 105-55 of Sch 1 and item 16(2) of Sch 2 to the amendment act?

58. National Jet's 25 June 2008 advice specified the period 1 July 2000 to 30 June 2008 for its GST refund claim and described the circumstances as:

"The entity noted above has mistakenly overstated it's [sic] net amount for the relevant tax periods quoted above, by:

  • - mistakenly treating supplies made within the periods as being subject to GST, where in fact they were GST-free pursuant to section 13 of the GST Transition Act.
  • - understating its input tax credit entitlements on acquisitions made throughout the relevant periods."

59. The Commissioner contends that the notification given by National Jet was deficient. He contends that it was too general, provided no details that were specific to National Jet's circumstances, failed to set out the nature of the supply, failed to identify the recipient/s of the supply or the nature of the contracts pursuant to which the supply was made and failed to explain how the relevant entitlement related to the specified tax periods. In aid, the Commissioner called in decisions concerning notices of assessment, Sales Tax recoveries and director penalty notices which were required to set out details of the unpaid amount of the liability referred to in s 222AOE of the Income Tax Assessment Act 1936 (Cth). Each of these cases concerned different statutory regimes and are of little support for the contentions raised beyond noting that the content of a notice must be sufficient to allow the notice to serve the purpose it was intended to serve; a proposition confirmed in the context of the present provisions by Gordon J in
Central Equity Ltd v Commissioner of Taxation 2011 ATC 20-274; [2011] FCA 908 at [77]. Her Honour considered whether an advice in the following terms, at [72]:

"The entity noted above has mistakenly paid GST in error in relation to the supply of real property transactions where the contract was entered into prior to 1 July 2000, and has overpaid GST on supplies made where the GST was calculated under the margin scheme as the acquisition price was used rather than a 1 July 2000 valuation.

The entity is currently in the process of quantifying the amount by which it has overstated its net amount and will notify the ATO of the precise amount of the GST refund it will be seeking in due course."

was a notification for the purposes of s 105-55 of Sch 1 and item 16(2) of Sch 2 to the Amendment Act. Her Honour observed that the notice given identified the period of the claim (and an eight year period was not too long a period), that the legislation did not require a specific form of notification, the form of notification stated that details of the refund claim including "the specific nature of the refund" and "the circumstances under which the refund arise" were to be provided. Further, her Honour noted that alleged deficiencies equivalent to those asserted by the Commissioner in the present matter are not needed for the notice to serve its purpose.

60. In the present matter the Commissioner does not take issue with the absence of specification of an amount claimed and he was advised or put on notice that a refund entitlement was asserted concerning mistaken application of the transitional rules. In a regime under which neither s 105-55 of Sch 1, nor item 16(2) of Sch 2 to the Amendment Act, calls for specificity, the advice dated 25 June 2008 is enough to be a valid notice.

61. The Tribunal's conclusion is that National Jet's advice dated 25 June 2008 to the Commissioner was an effective notice of an entitlement to a refund for the purposes of s 105-55 of Sch 1 and item 16(2) of Sch 2 of the Amendment Act.

Is the Sch 1, s 105-65 discretion capable of being exercised?

62. National Jet contends that the s 105-65 discretion allowing the Commissioner to decline to refund over payments of GST does not apply to amounts affected by s 13 of the Transition Act. In support of this contention National Jet notes that a number of the Commissioner's officers at one stage, before the present applications were commenced, appeared to think that s 105-65 did not allow the Commissioner to decline to refund over payments of GST that arose through mistaken application of s 13. Section 105-65 is, relevantly, as follows:

  • "105-65 Restriction on GST refunds
    • (1) The Commissioner need not give you a refund of an amount to which this section applies, or apply (under Division 3 or 3A of Part IIB) an amount to which this section applies, if:
      • (a) you overpaid the amount, or the amount was not refunded to you, because a *supply was treated as a *taxable supply, or an *arrangement was treated as giving rise to a taxable supply, to any extent; and
      • (b) the supply is not a taxable supply, or the arrangement does not give rise to a taxable supply, to that extent (for example, because it is *GST-free); and
      • (c) one of the following applies:
        • (i) the Commissioner is not satisfied that you have reimbursed a corresponding amount to the recipient of the supply or (in the case of an arrangement treated as giving rise to a taxable supply) to an entity treated as the recipient;
        • (ii) the recipient of the supply, or (in the case of an arrangement treated as giving rise to a taxable supply) the entity treated as the recipient, is *registered or *required to be registered.

      Note: Divisions 3 and 3A of Part IIB deal with payments, credits and RBA surpluses.

    • (2) This section applies to the following amounts:
      • (a) in the case of a *supply:
        • (i) so much of any * net amount or amount of *GST as you have overpaid (as mentioned in paragraph (1)(a)); or
        • (ii) so much of any net amount that is payable to you under section 35-5 of the *GST Act as the Commissioner has not refunded to you (as mentioned in paragraph (1)(a)), either by paying it to you or by applying it under Division 3 of Part IIB of this Act;
      • (b) in the case of an *arrangement:
        • (i) so much of any net amount or amount of GST to which subparagraph (a)(i) would apply if the arrangement were a supply; or
        • (ii) so much of any net amount to which subparagraph (a)(ii) would apply if the arrangement were a supply."

      Note: Division 3 of Part IIB deals with payments, credits and RBA surpluses.

63. There are threshold conditions that must be met before the Commissioner can apply s 105-65 to decline to refund an over payment.

64. On the assumption that s 13 of the Transition Act did apply to the supplies made under the lease, National Jet would be able to say that it has overpaid several of its periodical GST liabilities and those overpayments were the result of National Jet treating the supplies it made under the lease as taxable supplies when they were GST-free. The first two conditions necessary to enliven s 105-65 are met.

65. The remaining question is whether s 105-65 is intended to embrace amounts that are not subject to GST because there is not a taxable supply by operation of s 13 of the Transition Act. Section 13 provides that where the section applies, supplies made are "GST-free". It will immediately be observed that both s 105-65 and s 13 use the same term "GST-free", a term defined to mean a supply that is GST-free under Division 38 of the GST Act or under a provision of another Act. It is beyond controversy that supplies can be GST-free within the meaning of s 105-65, and therefore affected by the s 105-65 discretion, by operation of the GST Act and other statutes. The Transition Act is another statute that, in unequivocal and unambiguous terms, renders certain supplies GST-free in the same sense as that term is used by s 105-65.

66. National Jet's contrary contention cannot be accepted. The thinking of the Commissioner's officers does not affect this threshold question.

Should the Sch 1 s 105-65 discretion be exercised?

67. There are two alternative conditions that are relevant to the exercise of the s 105-65 discretion. They are that the Commissioner is not satisfied that the refund claimant has reimbursed a corresponding amount to the recipient of the supply or the recipient of the supply is registered or required to be registered for GST.

68. Dealing with the second condition first, the recipient of the supplies under the lease, Airlink, was part of the Qantas group and through that group was registered for GST. The second condition is met.

69. National Jet has not paid any amount corresponding to the refund it seeks to Airlink. National Jet has entered an agreement with Airlink that it would pay to it any amount that was recovered less a fee, the calculation or magnitude of which was not apparent on the evidence. Ordinarily, reimbursement requires payment, not an agreement to pay. Accordingly the first threshold condition for exercising the s 105-65 discretion is also met, albeit only one of the two is necessary.

70. For reasons discussed below, it is necessary to consider whether a refund will produce a windfall gain for either National Jet or Airlink.

71. Upon introduction of the GST, the amounts paid for the standing charge and maintenance provision components of the lease consideration and recharged expenses were increased to reflect what was then assumed to be National Jet's GST liability for these supplies, National Jet invoiced Airlink for these charges and Airlink paid on each invoice. National Jet paid GST to the Commissioner on these components of the lease consideration. Accordingly, the amounts of GST claimed to have been overpaid were passed on by National Jet to Airlink through increases in charges to account for GST borne by National Jet. In this sense any refund to National Jet, before any payment to Airlink, would be a windfall gain to a party who has not born the real cost of the GST overpaid.

72. There is no direct evidence that Airlink did not claim input tax credits in respect of the supplies reflected in the tax invoices for the standing charge and maintenance provision components of the lease consideration and recharged expenses. In the ordinary course it can be expected it would have done so. Given the voluntary disclosure concerning claiming input tax credits in respect of the leasing component of the lease consideration referred to below, it is apparent that Airlink did claim input tax credits in respect of at least some of the supplies made under the lease. In the circumstances, there is every reason to believe that Airlink claimed input tax credits in respect of all supplies under the lease. Similarly, there is no direct evidence that Airlink did not include the impact of GST in its charges to its customers and, again, in the ordinary course it can be expected it would have done so. National Jet has not led any evidence that GST was not so included.

73. In implementing the lease requirement that the leasing component of the lease consideration be paid by direction to the rent payees, the practices adopted between the rent payees, National Jet and Airlink varied. Some of the rent payees sent their tax invoices for supplies made to National Jet directly to Airlink and sent a copy to National Jet and others sent their tax invoices to National Jet who forwarded them to Airlink without adjustment. At least some of these rent payees' invoices included amounts in respect of GST. Airlink paid the amounts shown on the invoices. The total paid direct to rent payees by Airlink for the period from July 2000 through June 2005 was $118,995,911.03 of which amounts in respect of GST totalled $7,872,206.15. It is apparent that the GST component of the $118,995,911.03 exceeded Airlink's obligations set out in the lease document. National Jet did not itself pay GST on the leasing component of the lease consideration.

74. On 15 October 2009 National Jet refunded $462,180 of the $118,995,991.03. Airlink had made a voluntary disclosure to the Commissioner that it had incorrectly claimed input tax credits of this amount in the January 2005 through June 2005 tax periods (earlier periods being statute barred) and was assessed by the Commissioner accordingly. Airlink recovered the $462,180 from National Jet on the basis that it was not obliged to pay the additional amounts in respect of the leasing component of the lease consideration because it was GST-free.

75. The voluntary disclosure made by Airlink and subsequent repayment to the Commissioner of over claimed input tax credits and recovery from National Jet is evidence that suggests that Airlink claimed input tax credits in respect of all of the $7,872,206.15 that it paid to the rent payees in excess of what the lease document stipulated. National Jet's advisors accepted that it did in correspondence with the Commissioner before the present applications were made. In these circumstances it is probable that Airlink did claim the benefit of input tax credits. In the ordinary course it can be expected it would have done so.

76. There is no evidence that Airlink has reimbursed, or intends to reimburse, any amount it would receive from National Jet from any GST refund to those customers to whom it made supplies that were connected to the supplies made to it by National Jet, nor whether those customers could be identified, nor whether Airlink factored GST liability into its prices charged for supplies it made to its customers. In these circumstances the Tribunal must proceed on the basis that these facts have not been established by National Jet and that any payment to Airlink will be a windfall gain to it.

77. The s 105-65 discretion does not have specifically defined criteria or considerations which are relevant to its exercise albeit the threshold conditions to be met before it can be exercised may throw some light on matters to which regard must be had. In these circumstances the Tribunal is not at large, must have regard to relevant considerations, disregard irrelevant ones, and if it is to be exercised, exercise the discretion for a purpose for which it exists and, while not always bound by it, is entitled to take into account government policy (
Drake v Minister for Immigration and Ethnic Affairs (1979) 2 ALD 60, at 69 per Bowen CJ and Deane J)

78. The intention of the legislature in enacting the s 105-65 discretion included preventing windfall gains (Explanatory Memorandum to the Tax Laws Amendment (2008 Measures No 3) Bill 2008 at [2.2] to [2.4]) and the Commissioner and the Tribunal standing in his shoes are permitted to have regard to this intention in deciding whether that discretion ought to be exercised in a particular circumstance. This intention manifests itself not just in the Explanatory Memorandum but also in the threshold conditions necessary before the discretion can be exercised. Having regard to the legislative intention, prevention of windfall gains is the principal criterion to be addressed before any exercise of the discretion. .

79. In the present circumstances, there would be a windfall gain if a refund were to be made. Either National Jet would receive a windfall, or Airlink would, in circumstances where neither of them are or have been out of pocket on account of any overpaid GST. Ultimately, customers of Airlink have born the impact of GST and they would not enjoy any refund made. In these circumstances, if there was an amount refundable without consideration of the s 105-65 discretion, that discretion ought to be exercised and no refund made. A practical business approach to administration of the GST laws is not consistent with allowing windfall gains. And to the extent that community standards and expectations have a role to play, those standards and expectations would require denial of windfall gains for two large company groups where the real cost of the overpaid GST has been born by the wider community paying fares for airline travel and transportation.

Should National Jet be allowed an extension of time to lodge an objection for the second relevant period?

80. For the tax periods from 1 February 2001 to 30 September 2004, the Second Relevant Period, the Commissioner issued assessments to National Jet pursuant to s 105-5 on 28 January 2005. These assessments were the consequence of an earlier audit of National Jet's compliance with the GST system to correct an error made by it in a matter unrelated to s 13 of the Transition Act. The period within which to object to these assessments expired on 28 January 2009.

81. Because of these assessments the Commission declined to issue an assessment under s 105-10 as requested on behalf of National Jet in respect of the present s 13 Transition Act issue.

82. On 6 January 2010 National Jet sought an extension of time to object to the 28 January 2005 assessments failing which it has no opportunity to contest its entitlement to refunds of amounts it claims were overpaid. The Commissioner did not allow the extension.

83. National Jet contends that an extension is appropriate in the circumstances because the earlier assessments had nothing to do with the present matters, the Australian Tax Office had conducted an extensive review and did not identify the present matter, the decision of the Full Court of the Federal Court in DB Rreef given on 8 June 2006 was the source of events that led to National Jet's request for an assessment that led to the response that assessments had already been issued, the Tribunal and the Commissioner are considering the same facts and issues in relation to other periods and there is no prejudice.

84. It can be accepted that National Jet only became aware of the potential for a refund claim upon completion of the PricewaterhouseCoopers review of long term contracts that was commenced in April 2008. That review led to steps being taken to claim the refunds promptly thereafter, beginning with the notification on 28 June 2008.

85. The sequence of events that followed was:

  • (a) on 29 July 2008 the Commissioner acknowledged the 28 June 2008 communication;
  • (b) on 3 October 2008 the Commissioner advised National Jet, amongst other things, that National Jet should note legislative amendments to the 4 year limit for refunds and that notifications received on or after 1 July 2008 may be affected by these amendments if the tax periods were outside 4 years as at 1 July 2008. The letter also touched upon the s 105-65 discretion to the effect that refund claimants who had not reimbursed the recipient of the supply an amount corresponding to the refund claimed, or who had made supplies to a business that was registered or required to be registered for GST, would need to provide reasons why the Commissioner should pay a refund. The advice called for refund claimants to finalise their claims by the end of November 2008 or explain why further time was required;
  • (c) on 21 November 2008 the Commissioner advised that the 25 June 2008 communication was not a notification for the purposes of s 105-55 of Sch 1 and sub-item 16(2) of Sch 2 to the Amendment Act;
  • (d) on 27 November 2008 National Jet sought from the Commissioner a GST private ruling. In the correspondence National Jet noted that the Commissioner had required claimants to quantify and finalise their claims to GST refunds by the end of November 2008 and confirmed that the GST refund claims had been quantified in the private ruling request. Also on 27 November 2008 National Jet requested that the Commissioner make assessments pursuant to s 105-10(1) of Sch 1 of the net amounts for each of the tax periods 1 July 2000 to 30 June 2005;
  • (e) on 20 February 2009 National Jet lodged with the Commissioner another notification of entitlement to GST refund of $3,909,198.48 for the period 1 January 2005 to 30 June 2005, without any admission that the previous notification lodged on 25 June 2008 was invalid;
  • (f) on 2 April 2009 the Commissioner issued a private ruling to National Jet in which he ruled that the aircraft and services provided under the lease were separate supplies - the former GST-free and the latter taxable;
  • (g) on 21 April 2009 National Jet requested an informal review of the private ruling and that its request for assessments not be actioned until a review of the 2 April 2009 private ruling was completed;
  • (h) on 21 May 2009 the Commissioner confirmed that the private ruling application received on 27 November 2008 included sufficient detail to constitute a notification of entitlement to a credit or refund and that for the monthly tax periods from 1 November 2004 to 30 June 2005, the notification had been made within the appropriate time but for the monthly tax periods from 1 July 2000 to 31 October 2004 the notification had not been made within the appropriate four year period;
  • (i) on 5 June 2009, National Jet requested that assessments only be issued when the review of the private ruling was completed;
  • (j) on 29 June 2009, the Commissioner advised National Jet that his policy where an assessment of a net amount under s 105-5 had already been made the Commissioner will not make an assessment under s 105-10 and that the Commissioner had previously issued assessments under s 105-5 for National Jet for the tax periods covering 1 February 2001 to 30 September 2004 and that following the finalisation of the outstanding private binding ruling, he would issue assessments under s 105-10, as per the request dated 27 November 2008, other than for the February 2001 through September 2004 periods;
  • (k) on 30 July 2009 the Commissioner informed National Jet that following an informal review of the private ruling, it would be withdrawn and replaced with a revised private ruling that the supplies made under the lease were GST-free under s 13 for the period 1 July 2000 to 30 June 2005;
  • (l) on 13 November 2009 the Commissioner made assessments of net amounts for the tax periods 1 July 2000 to 31 October 2000, 1 to 31 December 2000 and 1 to 31 October 2004, but did not make further assessments of net amounts for the tax periods February 2001 to September 2004;
  • (m) on 6 January 2010 National Jet objected against the assessments of net amounts made by the Commissioner in respect of the tax periods July 2000 to October 2004 (excluding November 2000 and January 2001), and requested an extension of time within which to lodge an objection for the period February 2001 to September 2004 pursuant to s 14ZW(2) of the Administration Act; and
  • (n) on 14 May 2010 the Commissioner withdrew the revised private ruling and determined that the supplies under the lease to Airlink were taxable and made assessments of net amounts for the tax periods 1 November 2004 to 30 June 2005 pursuant to s 105-5(1) of Sch 1. National Jet objected to those assessments on 4 June 2010 and the commissioner disallowed the objection on 30 August 2010.

86. National Jet asserts that it has explained the delay and that there is no prejudice to the Commissioner.

87. The Commissioner contends there is a prejudice in that he has an inability to recover input tax credits that may have been allowed inappropriately to the recipients of the supplies and that the delays have been excessive without adequate explanation and that time limits are provided for a purpose to bring litigation to an end.

88. The principles relevant to the exercise of a discretion to extend time to lodge objections were set out by Hill J in
Brown v Commissioner of Taxation 99 ATC 4516; [1999] FCA 563 at [58]; 42 ATR 118. An applicant for an extension must adequately explain the delay; the prospects of success of the objection have a bearing as do prejudice to the Commissioner and National Jet. It is necessary to balance these factors in the knowledge that the Parliament has stipulated a time in which objections are to be lodged and has created a power to extend that time in appropriate circumstances which is an ameliorating provision intended to avoid injustice.

89. In the present circumstances, from the time that National Jet became aware of the potential entitlement to a refund of GST it has taken consistent and relatively timely steps to that end in a series of events in which it appears that the Commissioner has been uncertain as to the appropriate GST liability. This is not a matter in which National Jet has sat on its claim.

90. The pivotal considerations are, however, the prospect of National Jet achieving a favourable result if it is permitted to object out of time, and prejudice to the Commissioner. The Commissioner points to the prejudice of being out of time to recover any over allowed input tax credits from Airlink. It is true that there may be some prejudice but the s 105-65 discretion at least in part, if not wholly, is directed to dealing with the windfall gains that arise if the Commissioner is required to refund over paid GST and unable to recover over allowed input tax credits. The substantive issues that would be agitated are identical to those for which National Jet has not succeeded either on the substantive application of s 13 of the Transition Act or by operation of the s 105-65 discretion. There is no warrant in these circumstances to allow a further objection. The extension should be refused.


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