Decision impact statement
Commissioner of Taxation v Luxottica Retail Australia Pty Ltd
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Court citation:
[2011] FCAFC 20
2011 ATC 20-243
(2011) 191 FCR 561
(2011) 79 ATR 768
Venue: Federal Court of Australia
Venue Reference No: 2007/3489, 3490 and 2009/4027 (AAT) NSD 134 of 2010 (Federal Court)
Judge Name: Ryan, Stone and Jagot JJ
Judgment date: 23 February 2011
Appeals on foot:
No
Impacted Advice
Relevant Rulings/Determinations:
Subject References:
apportionment
calculation of taxable value
conditional discount
GST
GST-free
GST payable
sale of prescription spectacles
supply of taxable frames at a discounted price conditional upon purchase of complete spectacles
supply of GST-free lenses
taxable proportion
value of taxable supply
Précis
Outlines the ATO response to the decision of the Full Federal Court in respect of the calculation of the taxable value of spectacle frames when sold at a discounted price conditional upon the purchase of a complete pair of prescription spectacles.
Brief summary of facts
Luxottica Retail Australia Pty Ltd (Luxottica) is the GST group representative for a number of spectacle retailers.
The retailers offered various discounts on the supply of frames for prescription spectacles, for example 50%, or $100, off the normal selling price of the frames.
The common feature of these discounts was that they only applied to customers who also purchased a pair of prescription lenses to be fitted into the frames. The discounts were not available if frames only were purchased.
It was held out to the customer that the frames were being sold to the customer at a discount, the lenses were sold without any discount, and the price of the complete pair of spectacles was the aggregate of these two amounts. There was no additional charge for fitting the lenses into the frame.
The dispute concerned the GST treatment of the discounts. Luxottica submitted that the taxable value of the frames should be based on their normal selling price less the whole of the discount. The Commissioner submitted that the discounted selling price for the spectacles should be apportioned according to the relative values of the frames and the lenses represented by their undiscounted prices.
The Administrative Appeals Tribunal decided the matter in favour of Luxottica. The Commissioner appealed to the Federal Court. The appeal was heard by a Full Court which dismissed the Commissioner's appeal.
Issues decided by the court
The issues decided by the Full Federal Court were:
- (i)
- whether the supply of spectacles (comprising a frame fitted with lenses) is a single supply, as the Commissioner contended, or two supplies, being a supply of the frame and a supply of the lenses;
- (ii)
- how to calculate the value of the taxable supply upon which GST is payable.
One supply or two supplies
The Court held that the sale of spectacles was a single supply.
Calculation of the value of taxable supply of frames
The Court held that the value of the taxable supply of frames must be determined under section 9-80, not section 9-75.
However, their Honours held that an element of the formula in section 9-80, the taxable proportion, used to work out the value of a taxable supply for supplies that are partly taxable and partly either GST-free or input taxed, is circular and therefore does not work.
Further, as that proportion cannot be determined by application of the formula in subsection 9-80(2), the apportionment must be undertaken as a matter of practical commonsense. The decision maker must take into account the relevant circumstances of the particular case and reach a conclusion as to value and the relationship it has to the price of the supply in question.
The Court noted that the Tribunal, in the absence of any other measure of value, regarded value as commensurate with the price of the frames and that the fact that the discounted price was conditional on the purchase of the lenses "does not undermine the reasonableness of the calculation of the taxable proportion in this way".
The Court concluded that the Tribunal made a "considered decision as to the value of the taxable supply based on the findings of fact that it was entitled to make. Any error made by the Tribunal in determining the value would be an error of fact, not of law, and as such does not give rise to a question of law enlivening the jurisdiction of this Court".
Tax Office view of Decision
One or two supplies
The Court's conclusion that there was a single supply is consistent with the Commissioner's submissions.
Calculation of the taxable value of the supply
The Court's conclusions that section 9-80 is the relevant provision to calculate the value of the taxable component of a supply that is also partly GST-free or input taxed and section 9-75 applies to supplies that are wholly taxable are also consistent with the Commissioner's submissions.
In GSTR 2001/8 the Commissioner stated that you may use any reasonable method of apportionment which can be supported by the facts in the particular circumstances. The Commissioner respectfully accepts that it was open to their Honours to conclude that the apportionment adopted by the taxpayers was a reasonable basis of apportionment in the circumstances as found by the Tribunal.
Accordingly, the Commissioner will not seek special leave to appeal to the High Court against the decision of the Full Federal Court.
Administrative Treatment
GST refund requests
Some optical suppliers may seek refunds of overpaid GST on the basis of the decision of the Court.
Supplies of spectacles are typically made to customers that are not registered for GST. In that circumstance, the supplier must satisfy the Commissioner that an amount corresponding to the GST refund has been passed on to the customer.
In limited circumstances, the Commissioner may exercise his discretion to pay a refund even though the reimbursement requirement has not been satisfied. (This is discussed in MT 2010/1 Miscellaneous tax: restrictions on GST refunds under section 105-65 of Schedule 1 to the Taxation Administration Act 1953 ('the TAA')).
However, the Commissioner will not generally exercise the discretion in cases where the supplier has not reimbursed the unregistered recipient a corresponding amount of the overpaid GST, unless there are other countervailing reasons for doing so. For example, the Commissioner may exercise the discretion if the supplier did not intend to charge or pay an amount of GST, but did so as a result of making an arithmetic or recording error. In that circumstance, the supplier bears the cost of the GST, not the customer.
Suppliers cannot self-assess the exercise of the discretion and would need to make a request, in writing, to the Commissioner seeking the exercise of that discretion. The request can be lodged via the GSTmail@ato.gov.au mailbox. If you have an Indirect Tax Client Relationship Manager, you may wish to let them know that you have lodged that request.
A GST refund claim must also be made within the four-year time limit for GST refunds (section 105-55 of Schedule 1 to the TAA). Taxpayers may preserve their entitlement to a possible refund by lodging a Notification of entitlement to GST refund (NAT 11719) form within the time limits for recovery of refunds.
Notifications should be sent to the ATO via the email address - GSTmail@ato.gov.au or to the address or fax number shown on the notification form. If you have an Indirect Tax Client Relationship Manager, you may wish to let them know that you have lodged a notification.
Implications on current Public Rulings & Determinations
The ATO intends to amend GSTR 2001/8 to reflect the decisions of the Full Federal Court in Luxottica and the AAT in the Food Supplier case.
In particular, the amendments will make clear that discounts need not necessarily be apportioned in proportion to the relative amounts of the undiscounted prices for components of a supply comprised of taxable and GST-free or input taxed components. The apportionment must be undertaken as a matter of practical, commonsense having regard to the circumstances of the particular case. In doing so, a conclusion must be reached as to value of each component and the relationship it has to the price of the supply.
In Luxottica, the following circumstances supported the allocation of the discount to the taxable frames only:
- •
- the vendor offered to sell and the purchaser agreed to buy the frames at a discounted price and the lenses at full price without discount; and the price of the pair of spectacles is the aggregate of the two amounts;
- •
- there were sound commercial reasons for the discounting of frames;
- •
- there was no commercial imperative for the discounting of lenses; and
- •
- there was nothing contrived or artificial about the pricing methodology adopted in the promotional arrangements.
The Tribunal found the fact that the discounted price was conditional on the purchase of the lenses did not undermine the reasonableness of the apportionment.
Implications on Law Administration Practice Statements
None
Legislative References:
A New Tax System (Goods and Services Tax) Act 1999
9-5
9-10(2)
9-40
9-70
9-80
Indirect Tax Legislation Amendment Act 2000
Schedule 11, item 4A
Case References:
IAC (Finance) Pty limited v Courtenay
(1963) 110 CLR 550
Kmart Australia Ltd v Commissioner of Taxation of the Commonwealth of Australia
[2001] FCA 1540
(2001) 114 FCR 353
2001 ATC 4675
(2001) 48 ATR 302
Re Food Supplier and Commissioner of Taxation
[2007] AATA 1550
2007 ATC 157
66 ATR 938
Other References:
Notification of entitlement to GST refund (NAT 11719) form