AXA ASIA PACIFIC HOLDINGS LTD v FC of T

Judges:
Lindgren J

Court:
Federal Court, Sydney

MEDIA NEUTRAL CITATION: [2008] FCA 1834

Judgment date: 3 December 2008

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Lindgren J

Introduction

1. This proceeding relates to the Goods and Services Tax (GST) and the A New Tax System (Goods and Services Tax) Act 1999(Cth) (the Act) (references below to Parts, Divisions, Subdivisions and Sections are references to those things within the Act).

2. The applicant, AXA Asia Pacific Holdings Limited (AXA), is the representative member of a GST group of entities (Group) that has been approved as a GST group by the respondent, the Commissioner of Taxation (Commissioner - I will sometimes refer to ATO) under s 48-5 of the Act for the purposes of Div 48 of that Act.

3. At the time relevant to the present proceeding (February 2002), the Group apparently comprised 40 members, including AXA itself, although I note that as at the date of approval of the Group by the Commissioner (5 October 2000), the Group had comprised 63 companies. Other members of the Group to which I will refer are The National Mutual Life Association of Australasia Limited (NMLA), National Mutual Assets Management Limited (NMAM), and National Mutual Funds Management Limited (NMFM).

4. The present proceeding is brought by AXA as representative member of the Group, but it is the business activity of NMLA with which the proceeding is concerned. I will therefore refer, as the parties did, to NMLA.

The business activities of NMLA

5. NMLA carries on business as an insurer. Lewis Andrew Culliver, AXA's Taxation Manager, explained the nature of the life insurance market generally. According to Mr Culliver, the products made available by NMLA to its customers as at 31 December 2002 fell into the following three broad areas:

• (a) risk products, including term life insurance and income protection policies;
• (b) whole of life and endowment policies; and
• (c) superannuation and retirement products.

6. NMLA's retail activities comprise both life insurance and non-life insurance business. In accordance with the Life Insurance Act 1995 (Cth), the life insurance business was conducted within one or more separate statutory funds. The investments of any of those funds may be used only to meet the liabilities and expenses incurred for the purposes of the business of that fund, to make investments in a way that is likely to further the business of that fund, or for the purposes of distribution when certain solvency and capital adequacy requirements are met: see ss 38 and 43 of the Life Insurance Act 1995. There was evidence of the composition of the respective statutory funds and of the categories of assets within each. One of those categories is "'unit trusts'", being investments by NMLA through a holding of units in a unit trust which usually invests in real property or shares".

7. Affidavit evidence describes in detail the steps that are taken to ensure that NMLA's investments are appropriate to meet its insurance risks and to provide a profit.

Events leading to the present proceeding

8. Under the Act, GST is payable by the representative member, not by any other group member, although each member is jointly and severally liable to pay the GST that is payable by the representative member (s 48-40). Similarly, it is the representative member, not any other group member, who is entitled to a benefit of any input tax credit (s 48-45). The concept of an input tax credit, which is central to the present case, is discussed below. It is the representative member, not any other group member, who is required to furnish GST returns to the Commissioner (s 48-60). For some purposes a GST group is treated as a single entity, and one of those purposes is the working out of the amount of any income tax credits to which the representative member is entitled (s 48-55).

9. In its role as representative member, AXA furnished to the Commissioner a Business Activities Statement (BAS) in respect of the month 1 February 2002 to 28 February 2002.

10. On 23 March 2006, the ATO notified AXA that it had reviewed some of the information reported in the BAS for February 2002 and made an assessment of the net amount for that period, which was a different amount from that claimed by AXA in its BAS.

11. On 22 May 2006, AXA gave a notice of its objection to the ATO's assessment. The Commissioner did not make a decision on the objection within the period of 60 days of the day of lodgement of the notice. By an undated letter, AXA, pursuant to s 14ZYA of the Taxation Administration Act 1953(Cth) (TA Act), required the Commissioner to make an objection decision. The Commissioner did not make an objection decision within the period of 60 days from being given that letter, and by the operation of s s14ZY(3) the Commissioner was taken to have made a decision under s 14ZY(1) to disallow the taxation objection.

12. Against that deemed decision, AXA exercised its right of appeal to this Court under Div 5 of Pt IVC of the TA Act by filing on 11 December 2006 the application that commenced this proceeding.

13. In para 9 of his amended appeal statement, the Commissioner accepts that by reason of the operation of the former s 35 of the TA Act, the amount of indirect tax the subject of the assessment ceased to be payable at the end of four years after the time when it became payable. Accordingly, the Commissioner accepts that for this reason his assessment was excessive and will need to be amended once the issues calling for decision in the case have been determined.

The issue in this proceeding

14. It has been a disappointing feature of the case that the respective positions taken by the parties have changed over time, including several times during the hearing, as they have become more aware of the evidentiary position and of the stances taken by each other. Their changing of positions has made what was already a factually complex contest all the more difficult in terms of judgment writing. Earlier drafts of the reasons have had to be abandoned or substantially amended as I discovered in the transcript successive changes of position of the parties.

15. The issue raised by AXA's appeal is whether NMLA acquired certain things for a "creditable purpose" (s 11-5) and is therefore entitled under Div 11 of the Act to "input tax credits" in respect of those things (s 11-20). This question, in turn, raises the question whether NMLA is denied input tax credits by reason of the fact that the acquisitions related to the making of supplies that "would be input taxed" (s 11-15). The source and significance of these expressions will be discussed below.

16. The "things" acquired by NMLA with which the proceeding is concerned have been variously referred to, somewhat loosely, as "general management expenses", "general administrative expenses" and "overheads". I say "somewhat loosely" because an "expense" or "overhead" is not a thing acquired. For convenience, however, I will conform to the parties' usage. I describe the general management expenses (GME) in more detail at [63]ff below. AXA claims that they are incapable of being allocated directly to distinct identifiable supplies, although no evidence was specifically directed to showing this. The particular question posed, therefore, concerns the extent to which the GME of NMLA in February 2002 related to the making of supplies that would be input taxed.

The statutory framework

17. The Act commenced on 1 July 2000 (s 1-2(1)). GST is payable only on a supply or importation to the extent that it is made on or after 1 July 2000: s 7(1) of the A New Tax System (Goods and Services Tax Transition) Act 1999(Cth). The application of the provisions of that Act to the facts of the present case was not disputed.

18. Chapter 2 (Divs 5-37) is headed "The basic rules"; Ch 3 (Divs 37-42) "The exemptions"; Ch 4 (Divs 45-171) "The special rules"; Ch 5 (Div 177) "Miscellaneous"; and Ch 6 (Div 184-195) "Interpreting this Act". Included in Ch 6 is the Act's Dictionary which is found in Div 195 constituted by s 195-1.

19. Section 182-1 (headed "What forms part of this Act") is within Part 6-1 (headed "Rules for Interpreting this Act"). Section 182-1 provides:

• "(1) These all form part of this Act:
  • • the headings to the Chapters, Parts, Divisions and Subdivisions of this Act;
  • • explanatory sections;
  • • the headings to the sections and subsections of this Act;
  • • the headings for groups of sections of this Act (group headings);
  • • the notes and examples (however described) that follow provisions of this Act.
• (2) The asterisk used to identify defined terms form part of the Act. However, if a term is not identified by an asterisk, disregard that fact in deciding whether or not to apply to that term a definition or other interpretation division."

In these reasons, I omit asterisks from quoted provisions of the Act.

20. Where a provision of the Act uses the expression "you", it applies to entities generally unless its application is expressly limited: s 195-1.

21. GST is payable on "taxable supplies" and "taxable importations", while entitlements to "input tax credits" arise on "creditable acquisitions" and "creditable importations": s 7-1. Taxable importations and creditable importations are not of present relevance, and I will therefore refer only to taxable supplies and creditable acquisitions.

22. Amounts of GST and amounts of input tax credits are set off against each other to produce a "net amount for a tax period" which may be altered to take account of "adjustments": s 7-5.

23. Every entity that is registered or required to be registered has tax periods applying to it: s 7-10. Registration is provided for in Pt 2-5 and tax periods are provided for in Pt 2-6. Relevantly, NMLA, NMFM and NMAM are registered.

24. The net amount for a tax period is the amount that the entity must pay to the Commonwealth or the Commonwealth must refund to the entity in respect of the period: s 7-15. If the GST payable exceeds the entitlement to input tax credits, the entity will owe the Commonwealth money. If the entitlement to input tax credits exceeds the GST payable, the Commonwealth must make a refund to the entity in respect of the period. The matter of "Returns, payments and refunds" is dealt with in Pt 2-7.

25. Part 2-2 is headed "Supplies and acquisitions". It comprises two Divisions: Div 9 which is headed "Taxable supplies" and Div 11 which is headed "Creditable acquisitions". Within Div 9, s 9-5 is headed "Taxable supplies" and provides:

"You make a taxable supply if:

• (a) you make the supply for consideration; and
• (b) the supply is made in the course or furtherance of an enterprise that you carry on; and
• (c) the supply is connected with Australia; and
• (d) you are registered, or required to be registered.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed."

The proviso at the end of the section may be seen to refer to two classes of supplies that are "exempt" from being taxable supplies.

26. Some of the terms used in s 9-5 are defined. Section 9-10 defines "supply" widely to be any form of supply whatsoever and to include, inter alia, a supply of goods, a supply of services, a creation, grant, transfer, assignment or surrender of any right, and a "financial supply". The expression "financial supply", which is important for the purpose of the concept of an input taxed supply (see below) and for the present case, is defined in s 195-1 to have the meaning given by the regulations made for the purposes of s 40-5(2). I discuss those regulations at [42]ff below. Section 9-10(4) provides that a supply does not include a supply of "money" unless the money is provided as "consideration" for a supply that is also a supply of money.

27. Section 195-1 defines "consideration" for a supply or acquisition to mean any consideration within the meaning given by s 9-15 in connection with the supply or acquisition. Section 9-15 gives the following inclusory definition of "consideration":

• "(1) Consideration includes:
  • (a) any payment, or any act or forbearance, in connection with a supply of anything; and
  • (b) any payment, or any act or forbearance, in response to or for the inducement of a supply of anything.
• (2) It does not matter whether the payment, act or forbearance was voluntary, or whether it was by the recipient of the supply.
• (2A) …
• (2B) For the avoidance of doubt, the fact that the supplier is an entity of which the recipient of the supply is a member, or that the supplier is an entity that only makes supplies to its members, does not prevent the payment, act or forbearance from being consideration.
• (3) ….

28. The notion of an "enterprise" is defined broadly in s 9-20. Section 9-20(1) provides:

• (1) An enterprise is an activity, or series of activities, done:
  • (a) in the form of a business; or
  • (b) in the form of an adventure or concern in the nature of trade; or
  • (c) on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property; or
  • (d) …

    …"

Section 195-1 defines the word "business" to include any profession, trade, employment, vocation or calling, but not occupation as an employee.

29. Section 9-20(2) provides that an "enterprise" does not include certain activities or series of activities, such as, for example and in general terms, those done by a person as an employee, as a private recreational pursuit or hobby, or by an individual without a reasonable expectation of profit or gain. Section 195-1 defines "carrying on" an enterprise to include doing anything in the course of the commencement or termination of the enterprise.

30. Section 9-30(1) tells us which supplies are "GST-free" and s 9-30(2) tells us which supplies are "input taxed". A supply is "GST-free" if it is, relevantly, GST-free under Div 38. Of importance in the present case is the category of supply provided for in Subdiv 38-E which is headed "Exports and other supplies for consumption outside Australia". I was not required to consider precisely how Subdiv 38-E was said to apply. It suffices to say that it seems to be common ground that in the case of at least some of the overseas investments made by unit trusts in which NMLA invested, if NMLA had made those overseas investments directly rather than "through" the unit trusts there would have been GST-free supplies which would not have blocked NMLA's entitlement to input tax credits in respect of the GME related to those investments.

31. A supply is input taxed if it is, relevantly, input taxed under Div 40. Examples of input taxed supplies are financial supplies (Subdiv 40-A), residential rent (Subdiv 40-B) and residential premises (Subdiv 40-C). Financial supplies are the particular class of input taxed supplies the focus of the present proceeding. It will be recalled that GST-free supplies and input taxed supplies are not taxable supplies by reason of the proviso to s 9-5 (see [25] above).

32. Section 9-30(3)(a) provides that to the extent that a supply would, apart from that subsection, be both GST-free and input taxed, the supply is GST-free and not input taxed, unless the provision under which it is input taxed requires the supplier to have chosen for its supplies of that kind to be input taxed.

33. Subdivision 9-B within Pt 2-2 makes the maker of a taxable supply liable to pay the GST payable on it: s 9-40. Section 9-75 defines the value of a taxable supply as:

Price

×

10 11

where the "price" is the sum of:

• (a) so far as the consideration for the supply is expressed as an amount of money, that amount without any discount in respect of the GST payable on the supply; and
• (b) so far as the consideration is not expressed as an amount of money, the GST inclusive market value of that consideration.

An example given is the selling of a car for $22,000 in the course of the carrying on an enterprise. The value of the supply is:

$ 22,000

×

10 11

=

$ 20,000

The GST on the supply is therefore $2,000 (ie 10% of $20,000).

34. At the heart of the present case is Div 11 which is headed "Creditable acquisitions". Section 11-1 is headed "What this Division is about" and provides:

"You are entitled to the input tax credit for any creditable acquisition that you make…"

It will be recalled that for the purpose of working out of the amount of any income tax credits to which a representative member is entitled, a GST group is to be treated as a single entity: s 48-55 referred to at [8] above.

35. Section 11-5 provides:

"You make a creditable acquisition if:

• (a) you acquire anything solely or partly for a creditable purpose; and
• (b) the supply of the thing to you is a taxable supply; and
• (c) you provide, or are liable to provide, consideration for the supply; and
• (d) you are registered, or required to be registered."

Section 11-10 gives the meaning of "acquisition" and provides that an "acquisition" is any form of acquisition whatsoever and includes an acquisition of something the supply of which is a financial supply.

36. It is para (a) of s 11-5 which is controversial in the present case: did NMLA acquire the things for which it paid the GME and on which it paid GST at least partly for a creditable purpose?

37. Section 11-15 gives the meaning of "creditable purpose" as follows:

• "(1) You acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise.
• (2) However, you do not acquire the thing for a creditable purpose to the extent that:
  • (a) the acquisition relates to making supplies that would be input taxed; or
  • (b) the acquisition is of a private or domestic nature.
• (3) An acquisition is not treated, for the purposes of paragraph (2)(a), as relating to making supplies that would be input taxed to the extent that the supply is made through an enterprise, or a part of an enterprise, that you carry on outside Australia.
• (4) …
• (5) An acquisition is not treated, for the purposes of paragraph (2)(a), as relating to making supplies that would be input taxed to the extent that:
  • (a) the acquisition relates to making a financial supply consisting of a borrowing; and
  • (b) the borrowing relates to you making supplies that are not input taxed."

  [my emphasis]

I noted the meaning of the expression "enterprise" and the expression "carrying on" in to relation to an enterprise at [28] and [29] above. It is not disputed that NMLA acquired the things for which it paid its GME in carrying on its enterprise.

38. Section 11-15(1) is very broad. It is not necessary that there be an actual "on-supply" by the acquirer. However, subs (2)(a) of s 11-15 is a "blocking" provision. Even if an entity acquires a thing in carrying on its enterprise, it does not acquire it for a creditable purpose to the extent that, relevantly, the acquisition relates to making supplies that would be input taxed.

39. Section 11-20 provides that an entity is entitled to an input tax credit for any creditable acquisition that it makes. Section 11-25 provides that the amount of the input tax credit is an amount equal to the GST payable on the supply of the thing acquired, although the amount is reduced if the acquisition is only partly creditable. The question of apportionment that arises is taken up in s 11-30 which provides in subs (1) as follows:

• "(1) An acquisition that you make is partly creditable if it is a creditable acquisition to which one or both of the following apply:
  • (a) you make the acquisition only partly for a creditable purpose;
  • (b) …"

40. Subsection (3) of s 11-30 provides a formula for the calculation of the input tax credit on an acquisition that is only partly creditable. The formula requires the application of a percentage, namely, the extent to which the creditable acquisition is for a creditable purpose expressed as a percentage of the total purpose of the acquisition. That percentage must be applied to the "full input tax credit", being the amount of the input tax credit to which the acquisition would give rise if the acquisition had been made solely for a creditable purpose.

41. As noted at [31] above, Div 40 deals with input taxed supplies. Section 40-5(1) within Div 40 provides that a "financial supply" is input taxed, and s 40-5(2) provides that "financial supply" has the meaning given by the regulations. Section 195-1 similarly defines the expression "financial supply" to have that meaning.

42. The Regulations are A New Tax System (Goods and Services Tax) Regulations 1999(Cth). Division 40 of the Regulations is headed "Input taxed supplies". Within Div 40, reg 40-5.06 provides:

• "(1) An entity, in relation to the supply of an interest that was:
  • (a) immediately before the supply, the property of the entity; or
  • (b) created by the entity in making the supply;

    is the financial supply provider of the interest.

• (2) The entity that acquires that interest is also the financial supply provider of the interest."

Regulation 40-5.02 defines "interest" as anything that is recognised at law or in equity as property in any form.

43. Regulation 40-5.09 provides as follows:

• "(1) The provision, acquisition or disposal of an interest mentioned in subregulation (3) or (4) is a financial supply if:
  • (a) the provision, acquisition or disposal is:
    • (i) for consideration; and
    • (ii) in the course or furtherance of an enterprise; and
    • (iii) connected with Australia; and
  • (b) the supplier is:
    • (i) registered or required to be registered; and
    • (ii) a financial supply provider in relation to supply of the interest.
• (2) …
• (3) For subregulation (1), the interest is an interest in or under the matter mentioned in an item in the following table: …"

44. Remarkably, under regs 40-5.06 and 40-5.09 an acquisition of an interest can be a supply of the interest (I will use, as the parties did, the expression "acquisition supply" to refer to this type of supply) and the actual acquirer of the interest is called the financial supply provider of the interest.

45. The table in reg 40-5.09(3) contains eleven items. Items numbered 4, 5, 6 and 10 are of present relevance. They are as follows:

"4	A regulated superannuation fund, an approved deposit fund, a pooled superannuation trust or a public sector superannuation scheme within the meaning of the Superannuation Industry (Supervision) Act 1993, or an RSA (retirement savings account) within the meaning of the Retirement Savings Accounts Act 1997
5	An annuity or allocated pension
6	Life insurance business to which subsection 9 (1) of the Life Insurance Act 1995, or a declaration under subsection 12 (2) or section 12A of that Act, applies, or related reinsurance business
10	Securities, including:
	(a) a debenture described in paragraph (a), (b), (c), (d), (e) or (f) of the definition of debenture in section 9 of the Corporations Law; and
	(b) a document issued by an individual that would be debenture if it were issued by a body corporate; and
	(c) a scheme described in paragraph (e), (i), (k) or (m) of the definition of managed investment scheme in section 9 of the Corporations Law; and
	(d) the capital of a partnership or trust."

46. The items in the table in reg 40-5.09 are elaborated upon in reg 40-5.11 and Schedule 7 to the Regulations. Regulation 40-5.11 provides that something mentioned in a Part of Schedule 7 that relates to a financial supply mentioned in an item in the table in reg 40-5.09, is an example of the financial supply mentioned in that item. Schedule 7 is headed "Examples of financial supply". It contains nine Parts numbered 1 to 9. They deal respectively with Items 1, 2, 3, 6, 7, 8, 9, 10 and 11 in the table in reg 40-5.09. Within Part 4 relating to Item 6 ("Life Insurance business…") in the table in reg 40-5.09, one of the examples given is:

"A contract (whether or not a contract of insurance) that constitutes an investment account contract, or an investment-linked contract, within the meaning of section 14 of the Life Insurance Act 1995."

One of the examples in Part 8 relating to Item 10 ("Securities, …") in the table in reg 40-5.09 is:

"Units in a unit trust."

The Australian GST regime

47. The nature of the Australian GST regime was explained in an early article by Professors G S Cooper and R J Vann, "Implementing the Goods and Services Tax" (1999) 21 Syd L Rev 337, and also by Hill J, with whom Stone and Allsop JJ agreed, in
HP Mercantile Pty Ltd v Commissioner of Taxation 2005 ATC 4571; (2005) 143 FCR 553 (HP Mercantile) at [10]-[21]. I discuss each of these is turn.

The Cooper and Vann article

48. I recognise, as the parties pointed out, that the Act has been amended in various respects since the publication of this article. However, the article is useful in explaining in general terms some of the concepts in the legislation.

49. Professors Cooper and Vann give the following description and illustration of the GST regime of tax and credits (at 347-8):

"The operation of the invoice-based credit system is usually demonstrated by a simple numerical example, like that in Table 2 below, with three suppliers in a distribution chain (say a manufacturer, a wholesaler and a retailer). Supplier 1 supplies (sells) to supplier 2 for $100 before GST on which GST of $10 at a 10 per cent rate is charged. Assuming that the original supplier does not purchase inputs on which GST has been paid (which, even allowing that employee labour is untaxed, is more than a little improbable in the real world), there are no GST credits on the inputs used to make this supply, and so supplier 1 remits its net tax liability of $10. Supplier 2 then sells for $200 before GST and pays GST of $20 on the sale. Because supplier 2 purchased from supplier 1 and paid $110, including $10 GST for these inputs, there is a credit of $10 allowed against the output tax liability, which leaves a net tax payable by supplier 2 of $10. Similarly, for supplier 3 selling at $300, the GST on the sale is $30 and there is a GST credit of $20 relating to the purchase of inputs from supplier 2. When supplier 3 sells to a consumer, the price of $330 will include $30 of GST but the consumer is unable to claim tax credits and effectively bears the $30 GST out of the total purchase price of $330.

Table 2

Table 2

		Manufacturer Supplier 1	Wholesaler Supplier 2	Retailer Supplier 3
1	Sale price before tax	100	200	300
2	Sale price after tax	110	220	330
3	GST on sale	10	20	30
4	GST credit on inputs	(0)	(10)	(20)
5	Net tax payable	10	10	10

If this were all that the GST involved, it would be a relatively simple tax to operate, although requiring considerable record keeping by the suppliers. As with any tax, however, there are many complications."

50. Professors Cooper and Vann explain input taxed supplies and GST-free supplies as follows (at 348-9) (footnote omitted):

"Two important sources of complexity arise from so-called input taxed supplies (referred to elsewhere in the world as exempt supplies) and GST-free supplies (Usually referred to elsewhere as zero-rated supplies). The difference between these two concepts is fundamental. They share the feature that no output tax is charged on making these supplies. They differ, however, in regard to the entitlement to claim credits for input tax. Input tax can be recovered for GST-free supplies, but not for input taxed supplies. The effect of input taxation is that a business purchaser is treated as if it is a consumer of the goods and services it acquires.

The rationale for treating different supplies as taxable, input taxed and GST-free depends on the interplay of various policy and administrative arguments."

51. It will be recalled that the present proceeding is concerned with a particular class of input taxed supplies, namely, financial supplies. Financial supplies have been treated as input taxed because it has been found to be administratively difficult to subject them to a valued added tax, such as GST, because of the difficulty in identifying and measuring any value added.

52. Professors Cooper and Vann illustrate the operation of the variations to the normal GST treatment resulting from input taxing in the following table (at 350) which is a variation of Table 2 (set out at [49] above) in which Supplier 2 makes an input taxed supply:

Table 3

Table 3

		Manufacturer Supplier 1	Wholesaler Supplier 2 (Input Taxed Supply)	Retailer Supplier 3
1	Sale Price before tax	100	210**	310**
2	Sale Price after tax	110	210*	341
3	GST on sale	10	0	31
4	GST credit on inputs	(0)	(0)	(0)
5	Net tax payable	10	0	31
*	This is the $200 sale price from Table 1 [a reference to an earlier Table which I need not set out] plus the tax of $10 charged by supplier 1 to supplier 2. As supplier 2 gets no credit for the tax paid by supplier 1, the sale price increases by $10.
**	This treatment assumes a constant dollar mark-up: in normal business practice mark-ups are more commonly calculated by percentage of cost. If the mark-up is based on costs there is mark-up on tax, as well as tax on tax.

53. Where there is an input taxed supply, there is no GST payable on the sale price and no credit for GST that was paid on the things acquired to make that input taxed supply. On the other hand, taxable supplies and GST-free supplies do not "block" entitlement to input tax credits (cf s 11-15 set out at [37] above).

HP Mercantile

54. Both parties called in aid certain passages from the judgment of Hill J in HP Mercantile. In that case, HP Mercantile Pty Ltd (the Trustee) was the trustee of The Recoveries Trust (the Trust). As trustee, the Trustee carried on an "enterprise". A question arose whether the Trustee should acquire a series of debts at a price which apparently was less than their face value. The Trustee paid for professional advice as to whether it should do so (due diligence services). Later, after it had acquired the debts, it paid for professional services connected with the recovery of them (debt collection services). The Trustee paid GST that was included in the amounts that it paid for both of the services mentioned, and claimed input tax credits in respect of that GST.

55. The Commissioner denied the full input credits claimed by the Trustee. The Administrative Appeals Tribunal was of the view that the Commissioner's assessments were correct so far as they disallowed the full input tax credits for the amounts paid in connection with the debt collection services.

56. The Trustee appealed to the Full Court from the Tribunal's decision so far as it related to the disallowance of the full input tax credits for the debt collection services.

57. By reason of reg 40-5.09 (see [43]-[45] above), the acquisition of the debts by the Trustee was a financial supply and therefore input taxed. However, the Trustee submitted that its acquisition of the debt collection services did not relate to making a supply that " would be input taxed" (my emphasis) within s 11-15(2)(a), because the supply in question, the acquisition of the debts, had already taken place. The Full Court disagreed, holding that the words "would be input taxed" in s 11-15(2)(a) did not require futurity.

58. In the course of his Honour's discussion of the statutory scheme and the relevant provisions of the Act, Hill J noted that the Australian GST is a value added tax, the genus of which is that there is ordinarily no cascading of tax and the tax payable by each supplier in a chain is only upon the value added by that supplier (at [13]). His Honour stated in relation to financial supplies (at [16]-[17]):

• "[16] In terms of GST theory, it is generally accepted that there are certain kinds of activities where the basic system of output tax on supplies and input tax credits on acquisitions will not lead to taxation on the value added by each supplier in the chain. The most important example is said to be financial transactions of financial institutions such as, but not confined to, banks, because they constantly borrow and lend and turn over money in a way that amounts, such as interest charged, will not represent the real value added by the financial institutions. Indeed, as the explanatory memorandum distributed with the Bill which, as amended, later became the GST Act (the EM) says in Chapter 1 at [5.140]: "there is no readily agreed identifiable value for supplies consumed by customers of financial services". In such a case, it is the margin or imputed margin that is the real economic subject of the supply. There are other examples where this may be the case, one of which is the leasing of, or other dealings with, residential property (not being new residential property).
• [17] By way of what may be seen as a compromise for the difficulties of applying the normal system of value added taxation to financial supplies and other difficult cases, value added taxation design has created a form of supply which is referred to in Australia as an input taxed supply but which, in international value added tax parlance, is referred to as an "exempt supply". An input taxed or exempt supply (and financial supplies made by financial institutions will be the main example) will not, generally speaking, attract output tax, but the entity which makes financial supplies will, likewise, not obtain an input tax credit for the tax payable on acquisitions it makes in the course of its enterprise of making input taxed supplies. …"

59. At [21], Hill J observed that it was "perhaps, not unremarkable" that s 11-15 of the Act bears, in its structure, some similarity to the general business deduction provisions of the Australian income tax law, ie, s 51(1) of the Income Tax Assessment Act 1936 (Cth) and s 8-1 of the Income Tax Assessment Act 1997 (Cth). His Honour noted that in both the GST provision and the income tax provisions it is necessary first to satisfy a positive test, and that apportionment is called for where the positive test is only partly satisfied. In both cases also there are negative tests which exclude the allowance of a credit in the GST context or the allowance of a deduction in the income tax context.

60. His Honour discussed at length (at [34]ff) the relationship required by s 11-15(2)(a) between the acquisition and the making of the supplies that would be input taxed. The parties before the Full Court appeared to accept that the relationship had to be "real" and "substantial" and not "trivial" (at [35]).

61. Since the relationship between both the due diligence services and the debt collection services on the one hand and the purchase of the debts on the other was direct, there was no question of an indirect relationship as there is in the present case. However, Hill J made the following pertinent observations relevant to the expression "relates to" (at [35]-[38]):

• "[35] …It was common ground that the words "relates to" are wide words signifying some connection between two subject matters. The connection or association signified by the words may be direct or indirect, substantial or real. It must be relevant and usually a remote connection would not suffice. The sufficiency of the connection or association will be a matter for judgment which will depend, among other things, upon the subject matter of the enquiry, the legislative history, and the facts of the case. Put simply, the degree of relationship implied by the necessity to find a relationship will depend upon the context in which the words are found. So much appears from the various cases referred to by the Tribunal when discussing the meaning of these words: …
• [36] That the relationship contemplated here might be indirect follows, probably from s 11-15(5), which provides that an acquisition will not be treated as relating to supplies that are input taxed where the acquisition relates to making a financial supply which consists of a borrowing and the borrowing relates to the taxpayer making supplies that are not input taxed. Hence, input tax credits will not be disallowed if the acquisition which gives rise to them relates to the taxpayer making a borrowing but the borrowing is used by the taxpayer in making taxable or GST free supplies. In other words, s 11-15(5) would appear to contemplate that an acquisition having an indirect connection with a financial supply would otherwise [fall] within s 11-15(2)(a).
• [37] It follows, perhaps more clearly, as well from the requirement of apportionment to be found in the words "to the extent that" which indicate that an acquisition may relate to the making of supplies that are input taxed as well as supplies that are taxable, as would be the case with undifferentiated general overhead outgoings of an entity making both input taxed and taxable supplies (cf,
  Ronpibon Tin NL v Federal Commissioner of Taxation (1949) 78 CLR 47 at 55-6).
• [38] It might be said, as indeed it is by the Trustee, that where the legislature intended to refer to an indirect connection in the GST Act, it did so. This can be seen for example in ss 60-20(1) and (2)(a) as well as s 38-190(2A). With respect, the mere fact that a particular subsection refers to relationships that are direct or indirect does not necessarily reveal that uses of the word "relation" in other subsections will be restricted to direct relationships. Whether that is the case will depend upon context:
  Clyne v Deputy Commissioner of Taxation (1981) 150 CLR 1 at 10, 15."

62. Finally, his Honour made the following observations in relation to the legislative policy that might inform the construction of s 11-15(2)(a) (at [44]-[46] and [49]-[51]):

• "[44] It is clear, both having regard to the modern principles of interpretation as enunciated by the High Court in cases such as
  CIC Insurance Limited v Bankstown Football Club Ltd (1997) 187 CLR 384 and s 15AA of the Acts Interpretation Act 1901 (Cth) that the Court will prefer an interpretation of a statute which would give effect to the legislative purpose, as opposed to one that would not. This requires the Court to identify that purpose, both by reference to the language of the statute itself and also any extrinsic material which the Court is authorised to take into account.
• [45] The language of the GST Act, as seen in the context of value added taxation generally, makes it clear that the legislative scheme is that a taxpayer will be entitled to an input tax credit where it is necessary that a credit be given to ensure that output tax payable by the taxpayer is not imposed upon an amount which already includes tax payable at some early stage in the commercial cycle. Where possible, GST is not to be found embedded in the price or consideration on which output tax is calculated when taxable supplies are made. However, in the case of a taxpayer which makes input taxed supplies, while that taxpayer will not be liable to output tax on the supplies it makes which satisfy the description of input taxed supplies, that taxpayer will be denied an input tax credit for the tax payable on acquisitions it makes where the necessary relationship exists.
• [46] The language of s 11-15 would suggest that it was not intended that there be a tracing between the subject matter of an acquisition and an actual supply. Such a tracing would be necessary were the language of s 11-15(2)(a) to operate to disallow a credit where there was a relationship between the acquisition and an actual supply which was input taxed. That no doubt explains why the relationship which negates the input tax credit was expressed as being between the acquisition and the making of input taxed supplies, rather than between the acquisition and actual input taxed supplies. However, while it is true that the GST Act does not mandate a system of tracing acquisitions to actual supplies, it does not follow that an entity which has embarked upon an enterprise which consists of the making of input taxed supplies, but in fact makes no supplies, will be entitled to obtain input tax credits. Whether it is will depend upon whether the acquisitions are related to supplies which, if made, would be input taxed. If the acquisitions do not, then a credit will be available.

  …

• [49] The policy, as expressed by the Trustee, assumes that the system of input taxed supplies is one where inputs will always be able to be traced to particular outputs. As already noted, many acquisitions may involve generalised overhead expenses which relate to different facets of an enterprise. These acquisitions will not directly relate to particular supplies, yet the enterprise will take them into account in pricing outputs. So too, the fact that particular acquisitions may post date supplies, although be related to them, merely requires that outputs of the enterprise will be priced so as to take into account the costs of these acquisitions, at least in a continuing business.
• [50] If it be necessary here to state a general policy for the application of the GST to enterprises making input taxed supplies, it would be that, to the extent that an entity carries on an enterprise that consists of making input taxed supplies, it will bear the GST on acquisitions without an input tax credit so that its pricing of outputs, if any are made, will take into account, commercially, all GST it will be required to bear on its inputs.
• [51] This must particularly be the case where the financial supply that the enterprise makes consists of an acquisition supply - that is to say, the receipt of a loan, or, as here, the acquisition of debts."

Further facts in relation to the issue in dispute

The "things" acquired by NMLA

63. In the course of its business activities, NMLA incurred expenses in acquiring things, some of which bore GST (such as commissions) and some of which did not (such as wages and salaries paid to NMLA's employees). Some of the expenses were identifiable as relating directly to (1) input taxed supplies; (2) taxable supplies; (3) GST-free supplies; and (4) supplies outside the scope of GST. An example of directly attributable expenses is commissions paid to independent sales agents in connection with the promotion and sale of NMLA's products.

64. As previously mentioned, the appeal does not relate to the manner in which, for GST purposes, NMLA's directly attributable expenses have been allocated, but rather to the manner in which its GME have been allocated. According to Mr Culliver, these included staff salaries, staff on-costs, travel and accommodation, training and recruitment, rent, other occupancy costs, telephone, postage, advertising and audit fees, and cannot be directly attributed to particular activities of NMLA. Obviously, AXA's claim to be entitled to input tax credits in the present proceeding concerns only GME paid in respect of GST bearing supplies to NMLA.

The supplies made by NMLA

65. Acquisitions not forming part of NMLA's GME have been attributed directly to various supplies, and input tax credits claimed or not claimed as the case may be. AXA's claim to those input tax credits in respect of directly attributable acquisitions are not in issue in the present proceeding.

66. The dispute between AXA and the Commissioner concerns (1) whether various supplies made by NMLA were input taxed supplies; (2) the extent to which the GME were related to those supplies; and (3) the proper methodology according to which the "relatedness" between the acquisitions and supplies is to be established.

67. It is not disputed that the various forms of life insurance product issued by NMLA fall within each of Items 4, 5 and 6 in the table contained in reg 40-5.09(3), and are therefore input taxed supplies by NMLA that block entitlement to input tax credits in respect of any GME related to the supply of those products.

68. The dispute largely concerns NMLA's investment in unit trusts of which NMAM and NMFM were the trustees. Those trustees, incorporated in Australia like NMLA, invested the trust funds wholly or substantially overseas. As mentioned at [30] above, it appears to have been accepted that the investment of funds overseas was a GST-free supply by the relevant trustee. It will be recalled that GST-free supplies do not block entitlement to input tax credits.

69. The Commissioner contends that by acquiring units in the unit trusts, NMLA made an input taxed supply, in particular, a financial supply (being an "acquisition supply") that falls within Item 10(d) in the table contained in reg 40-5.09(3) (see [45]-[46] above). The acquisition of the units therefore, according to the Commissioner, blocked any entitlement to input tax credits in respect of GME to the extent that the GME were related to the acquisition of those units.

70. For various reasons, AXA disputes that the acquisition of the units in the unit trusts were input taxed supplies. It also contends that even if they were, they did not block all entitlement to input tax credits. I elaborate on AXA's submissions below.

71. Initially the Commissioner's understanding was that NMLA's investments were made exclusively through the acquisition of units in the unit trusts. AXA asserted, however, that NMLA made some of its investments directly and without the interposition of a unit trust, and that these gave rise to supplies that were not input taxed (and therefore not input credit blocking). On the final day of the hearing the Commissioner accepted that it did appear on the evidence that NMLA made some of its investments directly.

The amount of input tax credits claimed by AXA

72. AXA's case is that there must be an apportionment because some of the things acquired for which it paid GME were related to supplies made by NMLA that were not input taxed or to other enterprise activities.

73. While the Commissioner ultimately accepted that some supplies made by NMLA were not input taxed, and that therefore an apportionment must be made, he submits that none of the apportionment methodologies submitted by AXA are appropriate. Senior counsel for the Commissioner said that it would be necessary for the parties to approach the question of an appropriate apportionment methodology de novo in the light of my reasons on the various questions of law addressed below. I agree.

74. The parties asked that at this stage I simply publish reasons on certain legal issues and allow them the opportunity of exploring the implications of my conclusions in terms of quantification. For this reason, I have chosen not to recount the facts relating to the successive apportionment methodologies used or proposed by AXA.

75. It seems appropriate, however, to indicate that in a case of apportionment of GME under s 11-30, ideally the evidence would specify the nature and use made of the things acquired in some detail, the attempts made to relate them directly to supplies, and the reason why the particular methodology and proxies proposed are most likely to approximate the relatedness between acquisition of the things and the use made of them.

AXA's financial statements

76. In reliance on NMLA's financial statements for the year ending 31 December 2002, the Commissioner submits that the "pool" of GME that is capable of being apportioned for the 2002 year is, at most, $33 million. AXA disagrees and relies on a much higher figure.

77. According to the Commissioner, NMLA was required to prepare its financial statements in accordance with the relevant standards: Actuarial Standard 1.02 entitled "Valuation Standard" and Accounting Standard AASB 1038 entitled "Life Insurance Business". The Valuation Standard required, relevantly, that NMLA apportion its expenses into defined categories of Acquisition Expenses, Maintenance Expenses and Investment Management Expenses. The Valuation Standard stated that for those expenses that could not be directly allocated to particular expense categories, processes of apportionment may be called for.

78. Note 11 to NMLA's financial statements related to "Operating Expenses" and included data on "Administration Expenses", which are summarised in the following table:

Administration expenses (other than commission)	For Year ended 31/12/02	Percentage
Policy acquisition	$84 m	24.56%
Policy maintenance	$225 m	65.79%
Investment management	$33 m	9.65%
Total	$342 m	100%

79. The Commissioner's argument is that NMLA recorded only the amount of $33 million under "Investment Management Expenses", and that all other administrative expenses were attributed to the "Policy Acquisition" and the "Policy Maintenance" categories, which are related to input taxed supplies.

80. AXA has led evidence to the effect that the figure of $33 million was limited to the charges paid to the investment manager, NMFM, and that 90% to 100% of that sum was passed on to Alliance Capital Management Pty Ltd, an unrelated company external to the Group which provided investment management services. AXA claims that its GME relating to supplies that were not input taxed included many expenses not comprised within the $33 million.

81. In my view, the question of AXA's entitlement to input tax credits for the purposes of the Act is not necessarily limited by NMLA's published financial statements, although they are evidence of an admission by NMLA. Whether particular GME are "related to" particular input taxed supplies must be determined not by one piece of evidence or evidence of one particular kind but by reference to all of the evidence before the Court.

Consideration

Unit trusts

82. As noted above, NMLA subscribes for units in unit trusts. In his affidavit, Mr Culliver states:

"Most of NMLA's investment portfolio is held through unit trusts. Each trust is managed as a separate asset pool and each statutory fund of NMLA has varying interests in each unit trust. Most of the unit trusts have a member of the AXA GST Group as the trustee. I took the approach that in calculating the revenue referable to investments in unit trusts, a "look through" approach should be adopted on the basis that NMLA is an active investor with controlling interests in almost all of its unit trust investments with the unit trust serving merely as a convenient vehicle for holding the investments. Accordingly, revenue derived through the holding revenue units in a unit trust should be treated in the same way as if it had been derived directly by NMLA."

The "look through" approach taken by Mr Culliver is relevant to the contested issues concerning the unit trusts.

1. Were the acquisitions of the units by NMLA financial supplies?

1.1 AXA's consideration argument

83. It will be recalled that a financial supply is an input taxed supply, and therefore input tax credit blocking.

84. If the other terms of reg 40-5.09(1) (set out at [43] above) are satisfied, an acquisition of units in a unit trust is a financial supply by the acquirer. One of the conditions specified in reg 40-5.09(1) is that the acquisition be "for consideration" (reg 40-5.09(1)(a)(i)).

85. The Commissioner submits that the fact that NMLA paid for the acquisition of the units satisfies the requirement that the acquisition be "for consideration".

86. AXA submits that the requirement that the acquisition of the units be "for consideration" requires that the "value" or "benefit" constituting the consideration flow to the supplying party, in the present case NMLA because of its being deemed a supplier of the units. Since there was no consideration flowing in this direction, NMLA's deemed supply of the units was not, according to AXA, an input taxed supply because it was not "for consideration".

87. As will be recalled, consideration is defined in s 9-15 (set out at [27] above).

88. Paragraph (a) of s 9-15(1) provides that consideration includes "any payment…in connection with a supply of anything". This provision refers only to a supply, and not specifically to an acquisition. However, the term "supply" is defined to include a "financial supply" (s 9-10(2)(f)) which in turn is defined to include an acquisition of certain interests (reg 40-5.09(1)), including units in a trust (see [46] above).

89. Section 9-15(2) provides that it does not matter whether the payment was voluntary or whether it was by the recipient of the supply (being the entity to which the supply is made: s 195-1).

90. I readily agree that it is odd to think that the payment made by NMLA is to be regarded as the consideration "for" its acquisition (deemed supply) of the units. According to ordinary contractual concepts, one would expect consideration to move from the acquirer to the supplier (because of the deeming, NMLA, the actual acquirer, is the deemed supplier). But ordinary contractual concepts have no application. As the Commissioner points out, consideration in the Act is wider than consideration under the general principles of the law of contract and is an "extended statutory concept". It is not relevant to look to whether there is "discrete factual real world consideration" as AXA suggests.

91. I see no alternative to construing s 9-15 literally: a supply, including an "acquisition supply", is "for consideration" so long as there is a payment, act or forbearance "in connection with" the acquisition. It suffices that there is a payment, act or forbearance furnished by the actual acquirer even though, by reason of the supply being an "acquisition supply", the actual acquirer is a deemed supplier.

92. In my opinion, for the purposes of reg 40-5.09 and the Act, NMLA made a financial supply because it acquired the units for consideration because it made a payment "in connection with" its deemed supply of the units.

93. I think that my construction is consistent with the policy underlying behind the input taxed supply provisions (see [51] above and the comments of Hill J set out at [58] above). It seems to me that by deeming an actual acquisition of an interest mentioned in subreg (3) or (4) of reg 40-5.09 to be a financial supply and defining consideration so widely in s 9-15, the legislature intended to catch an investment of the present kind. In acquiring the units, NMLA added nothing of value on which GST could be assessed.

94. AXA referred to
Visy Paper Pty Ltd v Australian Competition and Consumer Commission (2003) 216 CLR 1 (Visy),
Finanzamt GroΒ-Gerau v MKG-Kraftfahrzeuge-Factory GmbH (C-305/01) [2004] All ER (EC) 454, and
Hagemeyer Ireland Plc v Revenue Commissioners [2007] IEHC 49. With respect, I do not see that any of these cases have any bearing on the present issue. The latter two were concerned with "factoring arrangements" arising under the terms of foreign legislation and the Visy case was concerned with s 47 of the Trade Practices Act 1974(Cth).

95. From the cases referred to, AXA attempted to derive a principle that would limit what I consider to be the plain meaning of the Act. That principle is that in some cases, an acquirer (for example, the factor acquiring a debt as in the two European cases) can be seen to be providing a service to, and conferring a benefit on, the seller. AXA submits that the inclusion of acquisition in the definition of "financial supply" in reg 40-5.09 was intended to be limited in its operation to a situation of that kind.

96. I see no reason to import as authorities on the construction of the Act approaches that were taken in cases concerning different statutory texts and contexts.

97. I note in passing that in HP Mercantile, which concerned an acquisition of a debt as part of a factoring arrangement (see [54]ff above), it seems to have been assumed by the parties and by the Court that the amount paid for the acquisition of the debts was consideration for the purposes of reg 40-5.09(a)(i) (although, as AXA points out, the consideration was apparently less than the face value of the debts and so "value" can also be seen to have passed to the deemed supplier (the actual acquirer) of those debts)..

1.2 AXA's subset argument

98. AXA also argues that input taxed supplies and GST-free supplies are subsets of taxable supplies. Accordingly, to be an input taxed supply, a supply must first satisfy the Act's definition of "taxable supply". The Commissioner disagrees and submits that input taxed supplies, GST-free supplies and taxable supplies are three separate categories of supply.

99. I set out s 9-5's definition of "taxable supply" at [25] above. The proviso at the end of that section (beginning "However, …") does not by its terms require that each of the categories "GST-free supply" and "input taxed supply" lie wholly within the category of "taxable supply". The proviso merely acknowledges the possibility that some taxable supplies may to some extent be GST-free supplies and/or input taxed supplies.

100. However, the word "supply" in s 9-5 bears the meaning given to it by s 9-10 and therefore includes a financial supply (s 9-10(2)(f)) which is a particular species of input taxed supply (s 40-5(1)). It follows that a financial supply (as defined in reg 40-5.09) is taken into s 9-5 by reason of its being included in s 9-10's definition of "supply", and it is then taken out of s 9-5 by the proviso at the end of that section ("However, …").

101. AXA refers to the fact that to be a taxable supply, a supply must, inter alia, be made for consideration (s 9-5(1)(a)). This is not different from the requirement in reg 40-5.09(a)(i) that a provision, acquisition or disposal of an interest be for consideration. For that reason, AXA does not need its subset argument to make its submission based on the words "for consideration". I have dealt with the "for consideration" argument above.

1.3 AXA's "economic activity" argument

102. I also understood AXA to argue that in order for NMLA's acquisition of the units to be a financial supply they must be acquired in the course of an economic activity carried on by NMLA. It is not clear to me whether AXA put this argument independently of the arguments referred to above.

103. While the concept of economic activity is relevant to the cases
Finanzamt Gross-Gerau v MKG-Kraftfahrzeuge-Factory GmbH (C-305/01) [2004] All ER (EC) 454 and
Hagemeyer Ireland Plc v Revenue Commissioners [2007] IEHC 49, to which AXA referred, those cases arose under foreign legislation. The concept of "economic activity" that arose in those cases is not relevant to the Act.

104. The Act requires that the supply, whether a taxable supply or a financial supply, be in the course or furtherance of an enterprise (s 9-5(b) and reg 40-5.09(1)(a)(ii) respectively). I referred to the definition of "enterprise" and "business" at [28]-[29] above.

105. In my opinion, when NMLA acquired the units from time to time it was doing an activity or series of activities in the form of a part of its business. That business included not only supplying life insurance for premiums but also the investment of its policyholders' and shareholders' funds.

2. Are the unit trusts or the trustees of those trusts part of the Group?

106. NMFM and NMAM were trustees of many of the unit trusts. AXA submits that NMFM and NMAM were members of the Group, and that therefore, even if the acquisition of units in the unit trusts is a financial supply, that "acquisition supply" is an "intra-group" supply and must be ignored for the purposes of working out entitlement to input tax credits (see s 48-55 referred to at [8] above).

107. It is common ground that NMFM and NMAM were members of the Group in their personal capacities. However, the Act distinguishes between an entity's personal capacity and its capacity as trustee.

108. Division 184 of the Act, headed "Meaning of entity", distinguishes clearly between a body corporate and a trust, even a trust of which the body corporate is the trustee.

109. Section 184-1 defines "entity" to mean any of the following:

• "(a) an individual;
• (b) a body corporate;
• (c) a corporation sole;
• (d) a body politic;
• (e) a partnership;
• (f) any other unincorporated association or body of persons;
• (g) a trust;
• (h) a superannuation fund."

In ordinary legal parlance, the word "trust" is used to refer to a particular class of relationship or the congeries of rights and obligations constituting such a relationship generally or on the facts of a particular case.

110. Subsection 184-1(2) provides:

"The trustee of a trust or of a superannuation fund is taken to be an entity consisting of the person who is the trustee, or the persons who are the trustees, at any given time."

A note to this subsection states:

"This is because a right or obligation cannot be conferred or imposed on an entity that is not a legal person."

This provision is concerned with continuity irrespective of changes that may occur in the identity of the trustee or trustees from time to time. Under the provisions, a change in the identity of a trustee of a trust does not mark a change in the entity, which is the "trustee of [the] trust".

111. Subsection 184-1(3) provides:

"A legal person can have a number of different capacities in which the person does things. In each of those capacities, the person is taken to be a different entity."

The following example is given:

"In addition to his or her personal capacity, an individual may be:

• • sole trustee or one or more trusts; and
• • one of a number of trustees of a further trust.

In his or her personal capacity, he or she is one entity. As trustee of each trust, he or she is a different entity. The trustees of the further trust are a different entity again, of which the individual is a member."

112. The effect of the above provisions in the present case is plain. Each of NMFM and NMAM is a body corporate and therefore an entity in its own right, but it is also a separate entity in its capacity as trustee of each of the unit trusts of which it is the trustee.

113. Division 48 is headed "GST groups", and I referred to various provisions within Div 48 at [8] above. Section 48-5(1) provides that the Commissioner must approve two or more entities as a GST group if, inter alia, each of those entities "satisfies the membership requirements" for that group (s 48-5(1)(b)).

114. What are the requirements for membership of a group? Section 48-10(1) provides, relevantly, that an entity "satisfies the membership requirements" of a GST group or a proposed GST group, if the entity is, relevantly, a trust that satisfies the requirements specified in the Regulations (s 48-10(1)(a)(ii)) and is registered (s 48-10(1)(c)).

115. Regulation 48-10.03 is headed "Membership requirements for trusts". Regulation 48-10.03(1) provides that, for the purposes of s 48-10(1)(a)(ii) of the Act, the requirements that must be satisfied for a trust to be a member of a GST group are the requirements set out in reg 48-10.03. The evidence does not establish that the unit trusts in question satisfy the requirements, but I need not discuss the nature of these requirements. It suffices to say that the evidence shows that none of the unit trusts were members of the Group.

116. The definition of "entity" to mean, inter alia, a trust, and the distinction between a body corporate in its personal capacity and in its capacity as trustee of a trust leads to the following overlapping results.

117. First, the Group did not include as members either any of the unit trusts or NMFM or NMAM in its capacity as a trustee of any of them. For this reason, the acquisition of units in the unit trusts of which NMFM or NMAM was trustee is not required to be ignored by reason of s 48-55.

118. Second, for GST purposes, each member of the Group, each of the unit trusts and each of NMFM or NMAM as trustee of any of the trusts are separate entities that make their own separate acquisitions and supplies. NMLA is entitled to input tax credits in respect of its acquisitions, except to the extent that, relevantly, they relate to the making of supplies by NMLA that would be input taxed. That relatedness is not shown by a relatedness, if it exists, between acquisitions by NMLA and supplies by NMAM or NMFM as trustee of any of the unit trusts.

119. Third, the enterprise that NMLA or any other member of the Group carried on is not the enterprise that the unit trusts or NMFM or NMAM as trustee for any of them carried on.

3. Is a "look through" approach permitted by the Act?

120. The distinction that the Act makes between an entity in its personal capacity, the entity in its capacity as trustee, and the entity constituted by a trust itself as described above seems to go a long way to contradicting any look through approach.

121. AXA appeared to contend, however, that even accepting that the unit trusts, and NMAM and NMFM in their capacity as trustees of any of them, were not part of the Group, a look through approach was still appropriate. According to AXA's submission, NMLA should be treated as having made the investments directly (and thereby as having made supplies that were not input taxed). AXA's argument appears to be that the Act allows for an acquisition to be related indirectly to a supply, and that where the actual purpose of AXA in investing in unit trust was to make overseas investments, that actual purpose should be determinative.

122. In my opinion, the "look through" approach is inconsistent with the Act.

123. Let it be assumed that the acquisition of the units was merely a "formal mechanism" used in order for NMLA to make investments. This does not mean that the provisions of the Act are to be ignored.

124. The Act entitles an entity to an input tax credit for any creditable acquisition that it makes (s 11-20). To make a creditable acquisition, an entity must have, inter alia, acquired the thing solely or partly for a creditable purpose (s 11-5(a)). Creditable purpose is defined in s 11-15 by way of a positive test (the thing is acquired in carrying on the entity's enterprise - s 11-15(1)) and by way of a negative test or blocking provision (relevantly, the acquisition relates to making supplies that would be input taxed - s11-15(2)(a)). Subsection (1) invokes an objective notion. One might perhaps have hoped for a more apt expression than "creditable purpose" to refer to the simple notion of an acquisition in the course of the carrying on of an enterprise. The expression "the acquisition relates to supplies that would be input taxed" in para (a) of s11-15(2) is likewise objective: it refers to a relatedness as a matter of objective fact between an acquisition and a supply.

125. The Act provides in subss (3) and (4) of s 11-15 for circumstances in which an acquisition that would otherwise be related to making supplies that would be input taxed is not to be treated as such. Investment in a unit trust is not one of those situations.

126. Paragraph 3.26 of the Explanatory Memorandum to the A New Tax System (Goods and Services) Tax Bill 1998 states:

"… you are not entitled to an input tax credit for acquiring a thing if your acquisition of the thing relates to an input taxed supply you are going to make. No tax will be charged on that supply. Therefore, you do not have a creditable purpose if your acquisition of a thing relates, either directly or indirectly, to a supply you make that is input taxed." [my emphasis]

127. The extent to which NMLA acquired the things for which it paid its GME for a creditable purpose is therefore answered by looking to the extent to which those things were acquired in the carrying on of NMLA's enterprise, and then to the extent that the acquisitions related, directly or indirectly, to the making of any input taxed supplies by NMLA . Neither the subjective intention of NMLA, nor the activities of NMFM and NMAM in their capacity as trustees of the unit trusts, is determinative of these questions.

Conclusion

128. As indicated earlier, I will publish these reasons and fix a date for directions as to the progression of the matter to finality.