• The impact of this case on ATO policy is discussed in Decision Impact Statement: M3K Services Pty Ltd and Commissioner of Taxation (2021/0940).

M3K Services Pty Ltd v FC of T

Members:
R Olding SM

Tribunal:
Administrative Appeals Tribunal, Adelaide

MEDIA NEUTRAL CITATION: [2021] AATA 4416

Decision date: 26 November 2021

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R Olding (Senior Member)

WHAT IS THIS CASE ABOUT?

1. The applicant, M3K Services Pty Ltd (' Silk Laser '), supplies and administers cosmetic injectables.^[1] The applicant is the representative member of a GST group and thus accounts for GST on supplies by the group members. To avoid repetition, references to supplies and other activities of the applicant should be taken to be references to the group members as appropriate.

2. In the periods which are subject of this review, Silk Laser accounted for GST on these supplies as if they were wholly taxable. It is common ground that these supplies are, in fact, mixed supplies comprising a GST-free supply of cosmetic injectables and a taxable supply of administering the cosmetic injectables.

3. Silk Laser seeks a refund of the amounts it overpaid as GST by treating these supplies as wholly taxable. The Commissioner accepts that Silk Laser overpaid GST and that its apportionment between the taxable component of the supply (10%) and the GST-free component (90%) is reasonable. However, the Commissioner says Silk Laser is precluded by s 142-10(1) of the GST Act^[2] A shorthand reference to the legislation named, with inevitable obsolescence, the A New Tax System (Goods and Services Tax) Act 1999 . All legislative references in these reasons are to this Act unless otherwise indicated. from obtaining a refund because it passed on the excess amounts to its customers and has not reimbursed them for the amounts passed on.

4. Silk Laser maintains that it did not pass on the excess amount. Alternatively, it says it is entitled to the benefit of a decision under s 142-15 treating s 142-10 as never having applied.

5. This is the second time in recent months I have had occasion to consider the GST 'passing on' provisions. The first was in
WYPF and Commissioner of Taxation^[3] [2021] AATA 3050 . (' WYPF '). There has been no other tribunal or court decision concerning the GST passing on provisions. Where appropriate, rather than repeat in similar terms what I said in my reasons in WYPF, I have included relevant extracts in these reasons.

DECISIONS UNDER REVIEW

6. The Commissioner issued notices of assessment for the applicant's tax periods from 1 April 2016 to 31 March 2019 on the footing that the excess amounts were to be treated as payable in accordance with s 142-10. The applicant objected against these

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assessments. On 21 January 2021, the Commissioner disallowed the objection (the ' assessments objection decision ').

7. By decision dated 3 April 2020, the Commissioner also refused to treat s 142-10 as never having applied. The applicant also objected to that decision. The Commissioner disallowed that objection decision on 21 January 2021 (the ' s 142-15 decision ').

8. It is these two objection decisions that are before the Tribunal for review.

STATUTORY FRAMEWORK

GST Act 'passing on' provisions

9. Division 142 of the GST Act relevantly provides:

Division 142-Excess GST

Table of Subdivisions

142-A Excess GST unrelated to adjustments

…

142-C Passed-on GST

142-1 What this Division is about

Excess GST is not to be refunded if this would give an entity a windfall gain.

Note: Refunding excess GST to a supplier will give it a windfall gain if it has already passed on the excess GST in the price of the supply (and not reimbursed the recipient).

Subdivision 142-A-Excess GST unrelated to adjustments

142-5 When this Subdivision applies

• (1) This Subdivision applies if, after disregarding any amounts covered by subsection (2), your *assessed net amount for a tax period takes into account an amount of GST exceeding that which is payable.

  Note: This Subdivision applies whether or not you have paid, or been refunded, the assessed net amount.

  Example: Sunny Co mistakenly reports a negative net amount of $4,000 made up of GST of $10,000 less input tax credits of $14,000. In fact, Sunny Co's GST should have been $8,000 making its negative net amount $6,000. Sunny Co has excess GST of $2,000.

  …

142-10 Refunding the excess GST

For the purposes of each *taxation law, so much of the excess from subsection 142-5(1) (the excess GST ) as you have *passed on to another entity is taken to have always been:

• (a) payable; and
• (b) on a *taxable supply;

until you reimburse the other entity for the passed-on GST.

Note 1: If you reimburse the passed-on GST so that this section ceases to apply there will be an adjustment event under paragraph 19-10(1)(b) or (c). You will have a decreasing adjustment (see section 19-55) and the other entity may have an increasing adjustment (see section 19-80).

Note 2: Any excess GST you have not passed on will be refunded as described in section 155-75 in Schedule 1 to the Taxation Administration Act 1953.

…

142-15 When section 142-10 does not apply

Commissioner satisfied it is inappropriate for that section to apply

• (1) Treat section 142-10 as never having applied to the extent that the Commissioner is satisfied that:
  • (a) applying that section would be inconsistent with the principle that excess GST is not to be refunded if this would give an entity a windfall gain; and
  • (b) you have requested a decision under this subsection in the *approved form.

    Note: Refusing to make the requested decision is a reviewable GST decision (see Subdivision 110-F in Schedule 1 to the Taxation Administration Act 1953).

• (2) The Commissioner must notify you in writing of any decision relating to you

  made under subsection (1).

  …

  Note: If you reimburse the passed-on GST, you will be refunded an equivalent amount as described in

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  section 155-75 in Schedule 1 to the Taxation Administration Act 1953.

  …

Subdivision 142-C-Passed-on GST

142-25 Working out if GST has been passed on

• (1) Some or all of an amount of GST may have been passed on to another entity even if:
  • (a) a *tax invoice is not issued to or by that other entity; or
  • (b) a tax invoice issued to or by that other entity relates to that GST, but does not contain enough information to enable that GST to be clearly ascertained.
• (2) If:
  • (a) you issue a *tax invoice or a notice under section 84-89 to another entity, or another entity issues a *recipient created tax invoice to you; and
  • (b) the invoice or notice contains enough information to enable some or all of an amount of GST to be clearly ascertained; and
  • (c) in a case where you must pay the *assessed net amount for a tax period to which the invoice or notice relates-you have paid that assessed net amount to the Commissioner; the invoice or notice is prima facie evidence of that part of that GST having *passed on to that other entity.

Burden of proof

10. In respect of the assessments objection decision, the applicant has the burden of proving that each assessment is 'excessive or otherwise incorrect and what the assessment should have been'.^[4] Taxation Administration Act 1953 , s 14ZZK(b)(i).

11. In respect of the s 142-15 objection decision, the applicant has the burden of proving the objection decision 'should not have been made or should have been made differently'.^[5] Taxation Administration Act 1953 , s 14ZZK(b)(ii).

12. Because the Commissioner has agreed to confine the issues for the Tribunal's determination to the passing on issues outlined above, for the applicant to succeed it must prove on the balance of probabilities:

• (a) that it did not pass on the excess GST to its customers; or, if it did:
• (b) that a decision should be made under s 142-15(1) to treat s 142-10 as never having applied.

FACTS

13. The background facts are largely undisputed, the controversy between the parties mainly relating to the application of s 142-10 and s 142-15(1) in the factual context of this matter.

14. The Tribunal was assisted by two witness statements by Silk Laser's founder and managing director, Mr Martin Perelman, and his oral evidence. Mr Perelman impressed as a witness who provided his evidence in a straightforward way. He readily acknowledged where his witness statements were found to be partially incorrect or incomplete and corrected his evidence accordingly.

15. One such correction related to the processes employed by Silk Laser for preparing its GST returns. While Mr Perelman had stated in his second witness statement that the returns were prepared by treating trading receipts to Silk Laser's bank account as fully taxable, it emerged in cross-examination that the processes evolved over time as the business grew. Before the issue with cosmetic injectables was corrected, Silk Laser had discovered that it was wrongly paying GST on another product - sunscreen - supplies of which are GST-free. From that time at least, Silk Laser's external accountants were preparing returns from data contained in its accounting software derived from its Point of Sale system.

16. Additionally, in his first witness statement, Mr Perelman had indicated that the Point of Sale system defaulted to treating sales as fully taxable. Even today, there are only two options available under the system - fully taxable or GST-free. The system does not allow for partially GST-free supplies;^[6] Transcript, P-14, lines 19-21. that is, mixed supplies of which the supply and administering of cosmetic injectables is an example. Ultimately, little turns on this as Mr Perelman seemed to agree.^[7] Transcript, P-19, lines 36-47. It was clear from Mr Perelman's evidence that Silk Laser simply assumed, wrongly, that its cosmetic

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injectable supplies were fully taxable, accounted for GST on that basis from the outset, and gave the matter no further thought until a new employee raised the issue.

17. Being, at least in the early stages of the business, a small player, Silk Laser regarded itself as a 'price taker'. In any case, evidence of Silk Laser's pricing policy and regular reviews establishes that it set its prices according to what the market would bear based on the pricing of its major competitors. Silk Laser also had a 'price beat promise' under which it undertook to beat a competitor's advertised price on like products.

18. A key aspect of Mr Perelman's evidence was that Silk Laser conducted regular reviews of its pricing against the prices charged for comparable products by the major players in the industry. The objective was to maximise prices,^[8] Exhibit 1, Statement of Martin Perelman, 16 July 2021 [11]. and therefore, I infer, profits, while ensuring that Silk Laser's prices did not exceed the prices of these competitors. The review documentation did not mention GST and nor was it discussed in the course of the reviews.

19. In setting prices in this way, there was no element of working up from costs and applying a margin. Nor did GST generally appear on terms and conditions, receipts or any other documents provided by Silk Laser to its customers.

20. One exception was that tax invoices, when issued, did show GST payable on the full price of supplies of cosmetic injectables; that is, on both the injectables and administering service components of the supply. However, it was not Silk Laser's practice to issue tax invoices as a matter of course, only when requested by a customer. This occurred rarely, Mr Perelman estimating 3 or 4 times a year. Of course, the Point of Sale history recorded GST on the full value of each and every sale, but this was not seen by customers.

21. In the course of cross examination, Mr Perelman referred to cosmetic injectables being a 'loss leader' while the business developed, including during some of the periods under review, with margins improving over time. However, it is not the applicant's case that across all of the periods under review it did not pass on the excess GST because its sales of cosmetic injectables were unprofitable. Mr Perelman agreed that commercially acceptable returns came to be achieved.

22. In any case, there is no evidence of costs and other specific information relating to the evolving profitability of the product line over the periods under review.^[9] Transcript P-24 line 18 to P-25, line 7. It follows that there is no basis on which I could determine that sales in particular periods were unprofitable and sales in other periods were profitable.

23. In other words, Silk Laser did not set out to prove, and did not prove, that its prices did not recover costs in particular tax periods. I therefore approach the matter on the basis that, while Silk Laser has established that it did not set prices by reference to costs, it has not proved that its prices did not recover all costs, including the excess GST. That Mr Perelman was able to confirm that the product generated commercially acceptable returns at least in the later periods under review indicates he was aware during the relevant periods that this was so. It follows that he was aware that the pricing strategy was covering all costs in those periods.

HAS THE APPLICANT PROVED THE EXCESS GST WAS NOT PASSED ON?

The applicable principles

24. The High Court had occasion to consider the passing on provisions in the former sales tax legislation in
Avon Products Pty Ltd v Commissioner of Taxation.^[10] [2006] HCA 29 ; (2006) 230 CLR 356 .

25. In that regard, I noted in WYPF:

56. The High Court observed that it is in the nature of sales tax for its economic burden to be passed on rather than borne by the entity liable to remit the tax.^[11] [2006] HCA 29 ; (2006) 230 CLR 356 , 362-3 [7]-[12]. Similarly, the scheme of GST law, like value added tax regimes around the world, is for the burden of the tax to be borne by the consumer. This does not mean that GST must always be regarded as passed on. Section 142-10's reference to passing on would be otiose if that were the case.

57. In Avon Products, though, the High Court pointed out that:

…once it is appreciated that it is in the nature of sales tax to be passed on, there is nothing remarkable in the consequence that proof to the contrary will occur comparatively seldom.^[12] [2006] HCA 29 ; (2006) 230 CLR 356 , 363 [12].

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58. These observations suggest it will be a rare case in which GST is not passed on to a customer. However, as Mr Sievers, who presented reply submissions for the applicant, submitted, my task remains to determine whether the applicant has discharged its burden of proof based on the evidence before the Tribunal. In order words, while it may be a rare case in which a taxpayer succeeds in showing excess GST was not passed on, the hurdle the applicant must leap to discharge the burden of proof on this issue remains the civil standard of the balance of probabilities. Nevertheless, I am mindful of the High Court's observations.^[13] [2021] AATA 3050 , [56]-58].

26. I adopt the same approach in this matter. Neither party suggested I should do otherwise.

27. As I also observed in WYPF:

66. Strictly speaking, to observe that GST is usually passed on does not greatly advance an understanding of whether an amount that is not GST has been passed on. However, since passing on only arises as an issue in respect of amounts that were never payable as GST (or sales tax as the case may be), it seems to be implicit in such statements that amounts wrongly treated as GST but not payable as such are also usually passed on.

67. Even so, it does not follow that that principle leads inexorably to a conclusion that an amount that was never payable must be taken to have been passed on. The design of the regime is premised upon the burden of GST being borne by consumers. It is not premised on amounts that are not GST being borne by consumers.^[14] [2021] AATA 3050 , [66]-[67].

Consideration

28. The essence of the applicant's case that it did not pass on the excess GST is that its pricing policy was not based on recovering costs. Rather, the applicant sought to price at a level that maximised its prices but left it able to compete with its major competitors. Additionally, its prices did not change when it commenced paying the correct amount of GST.

29. In support of its argument, the applicant referred to the following comments in WYPF:

68. The applicant determined its prices having regard to its perception of market prices for comparable apartments in the ACT. The relentless logic of market forces means it would be unlikely to have achieved higher than market prices. There is no evidence to suggest otherwise. I infer that it did not. That is consistent with the Director's evidence that the applicant endeavoured to set its prices at the prevailing market value, adjusting them as considered necessary from time to time.

…

70. To operate at a profit, competing developers and other vendors would be taking into account in their pricing of comparable apartments an estimate of the correct amount of GST payable, not an excess amount not payable. A vendor pricing to the market could not rationally expect to recover a price that included a material amount of excess GST when others were not…^[15] [2021] AATA 3050 , [68], [70].

30. However, those comments were made in the context of the particular circumstances in which, crucially, WYPF lodged its GST return on a conservative basis while clarifying the extent of its liability with the Commissioner. As I went on to say:

72. This is not a case where the applicant mistakenly thought a higher amount of GST was payable and should be assumed to have recovered that higher amount in its pricing. Rather, as mentioned earlier, the applicant took the conservative approach of not deducting the value of Preparatory Works in the first instance while it tried to ensure there would be no dispute with the ATO as to the amount to be deducted.^[16] [2021] AATA 3050 , [72].

31. In contrast, Silk Laser did mistakenly think a higher amount of GST was payable. The question is whether it recovered the excess amount from its customers or bore that burden itself.

32. In that regard, I accept Silk Laser's submission that the analysis must begin with its pricing policy and procedures. That is consistent with the High Court's reasoning in the Avon Products case.^[17] [2006] HCA 29 ; (2006) 230 CLR 356 , [10]. However, that is not where the analysis ends. As the High Court also said, the question of the extent to which tax has been passed on 'is not to be answered merely by

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pointing to price as the sole indicator of passing on.'^[18] [2006] HCA 29 ; (2006) 230 CLR 356 , [26].

33. Earlier in my reasons in WYPF, in response to a similar submission to that of the applicant in this case, I had observed that the applicant intended its business to be profitable and it was. For that to be so, it could not be the case that WYPF did not pass on any GST but rather bore the cost of GST itself. A business that does not price its product at a level that recovers its costs over a span of trading will incur losses, contrary to the very reason for embarking upon the business.^[19] [2021] AATA 3050 , [62].

34. Those observations are consistent with the High Court's reasoning in the Avon Products case. Upholding the decision of the majority of the Full Federal Court, the High Court said:

The essence of the majority decision was correctly identified in this Court by the Commissioner as being that, where the facts disclose that the taxpayer has set prices at a level to ensure they exceed cost (including sales tax), it will be difficult for the taxpayer to satisfy its onus under [the equivalent of s 14ZZK of the Taxation Administration Act 1953] to show that it has borne the tax burden itself. This Avon had failed to do.^[20] [2006] HCA 29 ; (2006) 230 CLR 356 , [21].

35. Like Silk Laser, Avon Products Pty Ltd had submitted that its prices remained constant and were fixed by reference to market benchmarks. Since the buyer was no worse off when sales tax was overpaid than it would otherwise have been, and the seller was worse off, the tax was said to have been absorbed by Avon.

36. Those submissions did not find favour with the majority of the Full Federal Court which the High Court noted had due regard to Avon Products' evidence that its pricing remained unaltered whatever the sales tax position. The High Court found no error in the majority's approach.

37. It is true that, unlike Silk Laser, Avon Products' pricing strategy targeted a minimum profit margin on the relevant sales. However, as I have found, Silk Laser's sales were profitable, and Mr Perelman was aware that was so. It must be inferred that it was Silk Laser's expectation that its costs would be recovered, regardless of whether, in setting its prices, it targeted a particular profit margin or explicitly took into account costs in setting its prices. Over time, that expectation was achieved. Silk Laser has not proved it did not recover all of its costs including the excess GST.

38. Both parties also referred me to previous decisions of this Tribunal regarding passing on in the sales tax context. However, as the parties also agreed, and the High Court stated in
Avon Products,^[21] [2006] HCA 29 ; (2006) 230 CLR 356 , [20]. whether tax has been passed on is a question of fact. Conclusions in other cases involving different facts are seldom helpful in resolving disputes which turn upon their own particular circumstances. Further, those cases predate the High Court's judgement in Avon Products which, although a sales tax case, was heard and decided some six years after the date of effect of the A New Tax System (End of Sales Tax) Act 1999.

Summary and conclusion - was excess GST passed on?

39. Throughout the relevant period, Silk Laser assumed that its supplies were wholly taxable. It follows that it assumed that it would be liable for, and it did in fact it did pay, GST on that basis. It has not proved that it did not pass on the burden of this cost in the same way that it must be inferred that it recovered its other costs of doing business in the prices charged to its customers.

40. That Silk Laser set its prices without reference to costs, and its prices did not change when it started paying the correct amount of GST, does not gainsay that conclusion and, as the High Court noted in Avon Products, is not determinative.^[22] [2006] HCA 29 ; (2006) 230 CLR 356 , [30]. Aside from a period of time early which was not identified with precision and for which no costing or profitability data or other evidence was provided, Silk Laser expected to and did recover its costs by trading at a profit.

41. In short, the evidence does not establish facts that take this case outside the usual position that profitable businesses recover all of their costs, which includes GST and amounts mistakenly paid as GST, in the prices charged to their customers. To the extent that a documentary trail exists, it is not inconsistent with that conclusion: on the rare occasions when tax invoices were issued, they recorded full GST payable, as did the group's

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Point of Sale records, both in accordance with decisions taken, albeit mistakenly, by Silk Laser.

42. Accordingly, applying the principles set out by the High Court in the Avon Products case, I am not persuaded that Silk Laser did not pass on the excess GST.

HAS THE APPLICANT PROVED THAT A DECISION APPLYING S 142-15 SHOULD BE MADE?

Construction of s 142-15

43. Section 142-15 is a challenging provision.

44. The section requires s 142-10 be treated as never having applied to the extent that the Commissioner, or the Tribunal on review, is satisfied that 'applying that section [s 142-10] would be inconsistent with the principle that excess GST is not to be refunded if this would give an entity a windfall gain'.

45. It is curious that the drafter chose that form of words when s 142-10 can only apply in a way that is consistent with the stated principle by denying refunds of excess GST. However, it is tolerably clear that s 142-15 is intended to apply where refunding the taxpayer would not result in a windfall gain. Neither party submitted otherwise.

46. However, the correct approach to the two issues with s 142-15 discussed below generated controversy.

Discretion or broad-ranging dispensing power?

47. I touched upon, but did not need to resolve, the first of these issues in WYPF, as follows:

80. The heading to s 142-15(1) speaks of the Commissioner being satisfied 'it is inappropriate for [s 142-10] to apply'. That language is consistent with the conferral of a discretion on the decision-maker.

81. However, the language of s 142-15(1) itself is not suggestive of a discretion. Rather, it contains a statutory command to treat s 142-10 as never having applied to the extent the Commissioner is satisfied that 'applying [s 142-10] would be inconsistent with the principle that excess GST is not to be refunded if this would give an entity a windfall gain.'

82. That language suggests the relevant inquiry is limited to whether the Commissioner is satisfied that refunding excess GST would not be inconsistent with the principle that excess GST is not to be refunded if this would give rise to a windfall gain. If so satisfied, s 142-15(1) requires that s 142-10 be treated as never having applied.

83. At least in its terms, I can see no over-arching discretion in s 142-15(1) to treat s 142-10 as not applying. It must be treated as not applying if the decision-maker is satisfied as stated in s 142-15(1)(a). However, on the face of the matter that seems inconsistent with the terms of the heading to s 142-15(1) which, as indicated above, is suggestive of a discretion, and also with statements in the Explanatory Memorandum to the amending bill that introduced this provision.^[23] Explanatory Memorandum, Tax Laws Amendment (2014 Measures No.1) Bill 2014, 2.58.

84. The distinction may not merely be a curiosity. It may determine the breadth of the required inquiry under s 142-15. For example, the applicant referred to the harshness and perversity of it being denied a refund because it initially took a conservative approach to its GST return. That may or may not be a permissible consideration if s 142-15(1) confers a discretion. It seems unlikely to be a permissible consideration if s 142-15(1) merely requires consideration of whether applying s 142-10 would be inconsistent with the stated principle and does not confer an over-arching discretion.^[24] [2021] AATA 3050 , [80] – [84].

48. Because I determined that the excess GST was not passed on, it was not necessary to resolve this issue in WYPF. My conclusion that Silk Laser has not proved the excess GST was not passed on means that convenient path is not available in the current matter.

49. The Commissioner's submissions did not directly confront the conflicting indicators regarding whether s 142-15 confers a discretion, although his written submissions described it in those terms.

50. Mr Sievers, who appeared for the applicant, sought to draw an analogy with s 85(2) of the Duties Act 2000 (Vic) which appears in provisions imposing conveyance duty on an acquisition of certain interests in what is commonly called a 'land rich' entity, but is referred to in the provisions as a 'landholder'. Section 85(2) provides that:

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An acquisition by a person of an interest in a landholder is an exempt acquisition if the Commissioner so determines, being satisfied that the application of this Part to the acquisition in the particular case would not be just and reasonable.

51. Mr Sievers pointed out that in
Commissioner of State Revenue v STIC Australia Pty Ltd^[25] [2010] VSC 608 . Davies J observed that these kinds of dispensing powers should not be narrowly construed. The broader context in which that observation appears in her Honour's reasons includes:

18 Section 85(2) does not express any limit on the exercise of power other than that the decision maker must be satisfied that the charging of duty on the relevant acquisition "in the particular case would not be just and reasonable". The power is circumscribed only by the terms of the section itself and the scope, purpose and subject matter of the Act.

19 The specific language of s 85(2) does not confine the exercise of discretion other than by reference to the content of the requirement that it would not be "just and reasonable" for duty to be charged on the relevant acquisition. They are relative terms which import the requirement to consider the circumstances of the case as a whole. That is made clear by the requirement that the exercise of the dispensing power be directed to the "particular case", importing the requirement that the individual merits of the particular case are to be considered. Both the conferring of the discretion on the Commissioner and the width of the discretion is deliberate. These kinds of dispensing powers have been considered in many cases and should not be narrowly construed…

It is clear that Parliament provided a dispensing power that is capable of exercise by reference to the widest range of factors, leaving it to the decision-maker to weigh all the circumstances, guided and controlled by the object and purpose of the Act.

(Emphasis added, footnotes omitted)

52. With respect to Mr Sievers' submission, the difficulty as I see it is that, unlike s 85(2), s 142-15 does confine the exercise of the power to treat s 142-10 as never having applied. The power is explicitly confined to the circumstance where the Commissioner is satisfied that applying s 142-10 would be inconsistent with the principle of preventing windfall gains. That seems to me to preclude a broad-ranging inquiry, such as is plainly authorised and required by provisions such as s 85(2) that are cast in terms of what is 'just and reasonable' or like expressions.

53. As I observed in WYPF, the heading to s 142-15(1) is consistent with conferral of a discretion. However, and noting that headings form part of the GST Act,^[26] Section 182-1(1). its reference to being 'inappropriate' for s 142-10 to apply is also reasonably explicable as a less than precise shorthand for the principle set out in s 142-15(1).

54. Aside from the meaning of 'windfall gain,' to which I return below, in my view the required approach to s 142-15 is dictated by s 142-15(1)(a). Although the Explanatory Memorandum to the amending bill introducing the provision (the ' Explanatory Memorandum ')^[27] Explanatory Memorandum, Tax Laws Amendment (2014 Measures No.1) Bill 2014 suggests that s 142-15 confers a discretion, there is ample authority that statements in an explanatory memorandum cannot displace the terms of a legislative provision.^[28] For example, see Re Bolton; Ex parte Beane (1987) 162 CLR 514 , 518 . Applying that principle in this case, I am satisfied that s 142-15 does not confer a broad discretionary power of the type that is unconfined other than in its terms and by reference to its scope, purpose and subject matter.

55. I therefore approach this matter on the basis that my task is to determine whether I am satisfied that applying s 142-10 would be inconsistent with the prevention of a windfall gain and that the answer to that question alone determines whether s 142-15 applies.^[29] The Commissioner accepts that Silk Laser satisfied the requirement in s 142-15(1)(b) by requesting a decision under s 142-15(1) in the approved form.

56. That is a task more easily stated than performed. It requires determination of how 'windfall gain' in s 142-15(1)(a) is to be construed.

Windfall gain

57. Section 142-1 states:

What this Division is about

Excess GST is not to be refunded if this would give an entity a windfall gain.

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Note: Refunding excess GST to a supplier will give it a windfall gain if it has already passed on the excess GST in the price of the supply (and not reimbursed the recipient).

58. Notes form part of the GST Act.^[30] Section 182-1(1). However, this note appears in an Explanatory Section to which reference may be made only for specified purposes none of which assists with the current constructional dilemma.^[31] Section 182-10. Additionally, while the GST Act identifies most defined terms with an asterisk and ‘windfall gain’ is not identified in that way in the note, the absence of an asterisk is to be disregarded in determining whether a definition applies: s 182-1(2).

59. In any case, the meaning of windfall gain suggested by the note to s 142-1 cannot be the meaning it has in s 142-15. To give the expression that meaning would render s 142-15 internally inconsistent. That is because:

• (a) section 142-10 applies to prevent a refund where excess GST has been passed on;
• (b) section 142-15 only applies where section 142-10 would otherwise apply to deny a refund;
• (c) therefore, for s 142-15 to apply it must be the case that excess GST has been passed on ;
• (d) applying the meaning of 'windfall gain' stated in the note would mean s 142-15 could only apply if excess GST has not been passed on ;
• (e) the inconsistency between (c) and (d) is irreconcilable.

60. I therefore conclude that s 142-15 must contemplate that a windfall gain may not arise in particular circumstances even though excess GST has been passed on. Put another way, it must be possible for a taxpayer to demonstrate that, although it has passed on excess GST, refunding the excess GST would not give the taxpayer a windfall gain. A taxpayer who does so is entitled to a favourable decision under s 142-15.

61. That approach, although expressed, wrongly in my view, as the exercise of a discretion, must underpin the illustration of the operation of s 142-15 contained in Example 2.12 in the Explanatory Memorandum. In that example, each of two partners in a tax law partnership paid one-half of the GST on a supply. The Commissioner assessed the partnership for the GST payable. Although the claimant partner had passed on the excess GST, the example indicates that s 142-15 would apply to allow the refund because this would not lead to a windfall gain.

62. More to the point, Parliament must be taken to have intended that s 142-15 would be capable of operation, even if rarely. It is only by taking this somewhat ambulatory approach to the concept of a windfall gain that s 142-15 can do so.

63. It is not necessary or appropriate for me to determine the precise circumstances in which s 142-15 may apply even though excess GST has been passed on. I need only consider whether s 142-15 applies in the circumstances of this case. To do so, it will be necessary to return to the meaning of windfall gain in its context in s 142-15. But first it will be helpful to outline the circumstances which the applicant says engage s 142-15.

Consideration of Silk Laser's circumstances

64. In essence, Silk Laser's submission is this:

• (a) Silk Laser priced its product to the market.
• (b) Silk Laser's competitors should be inferred to have set their prices on the premise that the competing supplies were substantially GST-free.
• (c) Silk Laser charged the same or similar prices to its competitors.
• (d) By paying GST on its entire price, Silk Laser suffered a financial disadvantage in comparison to its competitors. The profit it would otherwise have enjoyed was suppressed by paying excess GST.
• (e) Refunding the excess GST paid by Silk Laser would merely put it in the same position as its competitors.
• (f) As such, it could not be said that Silk Laser would enjoy a windfall gain. Rather, paying the refund would merely remove the disadvantage it suffered by paying GST on the full price of its supplies when its competitors were paying GST on only a small fraction of the price.

65. The Commissioner submitted that there was no evidentiary basis on which an inference that Silk Laser's competitors were paying the correct amount of GST on competing supplies could be drawn. There was certainly no direct evidence to that effect.

66.

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The Commissioner did accept that where a taxpayer, pricing to the market, treated a product that was 'notoriously' GST-free as taxable, that may weigh in favour of a conclusion that excess GST was not passed on.^[32] Transcript, P-8, lines 13-15. However, the Commissioner maintained this was not such a case.

67. The applicant pointed to my approach in WYPF. That case concerned certain 'Preparatory Works' which the parties agreed were part of the consideration provided by a developer for the acquisition of 'Consequent Leases' of development land. The consequence was that a proportionate amount of the substantial value of those works in effect would be deducted from the value on which GST, on sales of residential units constructed on the land, should be calculated. The taxpayer accounted for GST conservatively, not deducting the value of the Preparatory Works when calculating the amount to be included in its GST returns but instead waiting until it had clarified the amount to be deducted with the Commissioner's officers. The Commissioner then refused the taxpayer a refund on the premise that the taxpayer could not prove that it had not passed on the excess GST to the purchasers of the units.

68. In the course of determining whether excess GST was passed on in WYPF, I observed:

It is quite clear that the Preparatory Works were consideration for the acquisition of the Consequent Leases. Completion of the Preparatory Works was a condition precedent to the grant of the Consequent Leases. Having regard to the broad definition of 'consideration', it could not seriously be suggested that the Preparatory Works are not part of the consideration for the Consequent Leases. The Commissioner does not submit otherwise and in fact agrees that the Preparatory Works do form part of such consideration.^[33] [2021] AATA 3050 , [71].

69. It seems to me that this case is, in this respect, similar. The GST-free status of the injectables component of the supply depends upon it being prescribed by a medical practitioner. Silk Laser had doctors available for this purpose. I would infer its competitors had similar arrangements in place since the products could only be supplied with a doctor's prescription.

70. It is, to borrow the Commissioner's expression, notorious that prescription drugs and medicines are GST-free. That the injectables are only able to be provided by a prescribing doctor would make it surprising if the market generally did not treat the injectables as GST-free. That, in my view, provides a basis for inferring that the market generally, or at least the upper end of the market upon which Silk Laser based its prices, would have been treating supplies of injectables as GST-free.

71. On the basis of that finding, I accept that Silk Laser, by paying GST on the injectables component of its pricing, put itself at a financial disadvantage to at least some of its major competitors. But to ask whether Silk Laser would be at a commercial disadvantage to its competitors if the excess GST is not refunded is to ask a different question to that required by s 142-15.

72. The issue is not whether Silk Laser will be at a commercial disadvantage if the excess GST is not refunded. The issue is whether refunding the excess GST would be inconsistent with the principle that excess GST is not to be refunded if this would give Silk Laser a windfall gain.

73. Thus, the question becomes: Does it follow from the circumstance that Silk Laser will suffer a commercial disadvantage relative to its competitors if the excess GST is not refunded that refunding the excess GST would not give Silk Laser a windfall gain? That in turn directs attention to the meaning of 'windfall gain' in its context in s 142-15.

74. Plainly a windfall gain may arise if excess GST is passed on to the customer and not reimbursed. The note to s 142-1 makes that clear. However, for the reasons indicated earlier, s 142-15 envisages that a windfall gain may not arise in particular circumstances even though excess GST has been passed on and not reimbursed.

75. Dictionary definitions indicate that the expressions 'windfall' or 'windfall gain' or the equivalent 'windfall profit' connote a gain which is unexpected, implicitly not arising out of the activities of the recipient of the gain, as the following definitions illustrate:

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profits made unexpectedly as a result of events not directly related to the company, as fluctuations in the currency or on the stock exchange, changes in government policy affecting the market, etc.

(Macquarie Dictionary Online)

windfall profit n. Economics unexpectedly large or unforeseen profit; similarly windfall gain, windfall loss, etc.

(Oxford English Dictionary)

an unexpected gain or profit, generally not related to the efforts and expenditures of the entity that benefits.

(Encyclopaedic Australian Legal Dictionary)

76. It may be that this concept of a gain which is not only unexpected but, for want of a better description, unearned, in the sense that it does not arise out of the recipient's activities, informs the policy behind current proposals at the state level for a tax on windfall profits arising in the property industry out of, for example, favourable zoning changes. The concept of a windfall gain expressed in the note to s 142-1 is consistent with this ordinary meaning - a refund of an amount which has been passed on to another entity would ordinarily, though not always, amount to an unexpected gain.

77. The current matter therefore boils down to this: Does the circumstance that Silk Laser would continue to suffer a commercial disadvantage if the excess GST is not refunded take this case outside the usual case in which excess GST has been passed on? In other words, whether, as Mr Sievers summarised the applicant's argument in oral submissions:

[Silk Laser] wasn't getting a windfall gain; [it] was actually removing a detriment. It was put into the position it should've always been in, as opposed to putting it in a position that it should not be in.^[34] Transcript, P-7, lines 39-43.

78. I acknowledge the force of that argument. It has some resonance with the concept of a windfall being an unearned gain, whereas here a refund would, as Mr Sievers submitted, restore Silk Laser to the position it would have enjoyed but for its error. However, that would always be the case if excess GST is refunded: refunding the excess GST will restore the taxpayer to the position it would have enjoyed if it had accounted for GST correctly in the first place.

79. With some hesitation, I have concluded that it cannot be said that Silk Laser would not obtain a windfall gain if the excess GST were to be refunded. Silk Laser traded in a way that was commercially acceptable to it by passing on its costs including the amount of GST it assumed to be payable. Refunding an amount, the burden of which has been passed on to another entity, will usually result in a windfall gain.

80. Although I would reach the same conclusion without relying upon it, so far as s 142-15 is concerned this conclusion seems more aligned with another example in the Explanatory Memorandum. Example 2.13 involves a supermarket wrongly classifying a GST-free product as taxable. The supermarket accepted that it had passed on the excess GST but said that it suffered a financial disadvantage as a result. The example concludes:

[the supermarket] makes a request in the approved form for the Commissioner to exercise the discretion under subsection 142-15(1) to pay a refund of the excess GST, on the grounds that it was disadvantaged in the market place by its mistake, and has lost sales and profitability as a result.

In order to exercise the discretion, the Commissioner needs to be satisfied that applying section 142-10 would be inconsistent with the principle that a refund of excess GST should not give an entity a windfall gain.

The Commissioner forms the view that a windfall gain would result if Supermarket A were paid a refund. Accordingly, the Commissioner decides not to exercise the discretion under subsection 142-15(1).

81. As with Silk Laser, the supermarket suffering a financial disadvantage did not, according this example, equate with the absence of a windfall gain.

82. In that regard, I mean no disrespect in observing that Silk Laser paying more as GST than its competitors, and consequently achieving a lower profit margin than if it had paid the correct amount, is a consequence of

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Silk Laser's failure to understand the application of the GST law to its supplies. A profit margin that is less than it otherwise would be, and less than that enjoyed by competitors who pay the correct amount, will be a common if not inevitable consequence of paying more as GST than is required. Example 2.13 in the Explanatory Memorandum is consistent with the view that that is not sufficient to take a matter outside the usual case in which refunding an amount that has been passed on is taken to result in a windfall gain. If it were otherwise, s 142-10 would be left with little or no field of operation.

83. It might be argued that there is an element of unfairness or harshness in that result. On the view I have outlined above regarding the correct approach to s 142-15, that is not for me to say. But to so observe returns the focus to the nature of the s 142-15 power. For the reasons already indicated, it does not confer a broad-based discretion to be exercised on the merits in which concepts such as fairness or harshness of outcome may be relevant considerations.

84. As their submissions developed, counsel for both parties agreed that the sole question for determination in respect of s 142-15 is whether applying s 142-10 would be inconsistent with the principle that excess GST is not to be refunded if this would give Silk Laser a windfall gain. For the reasons outlined, I am not persuaded that Silk Laser has discharged the burden of proving that applying s 142-10 would be inconsistent with the principle that excess GST is not to be refunded if this would give Silk Laser a windfall gain.

85. That conclusion is not a reflection on the quality of the submissions made on the applicant's behalf which I respectfully observe thoughtfully navigated the interpretational challenges posed by s 142-15. It is simply the case that, although the civil standard of proof applies, discharging the burden of proving a taxpayer would not be given a windfall gain by a refund of an amount which has been passed on to its customers is a singularly challenging task and only likely to be achieved in a case with peculiar features that take it outside the usual run of cases where excess GST has been passed on. That is not to say that any special standard of proof applies or that exceptional circumstances must be identified; the statute does not specify either. It is merely to acknowledge the reality of the formidable task facing a taxpayer seeking the benefit of a favourable decision under s 142-15.

DISPOSITION OF APPLICATION FOR REVIEW

86. The applicant has not discharged the burden of proving the assessments were excessive or a decision to treat s 142-10 as never having applied should have been made. It follows that both objection decisions must be affirmed.

87. I conclude by recording my appreciation of the helpful written and oral submissions of counsel for both parties.