BACKGROUND
The case involved two Amex entities, American Express International Inc (Amex) and American Express Wholesale Currency Services Pty Limited, however, it is not necessary to differentiate between these entities for the purpose of the decision and this article refers only to Amex. Amex provided credit cards and charge cards to cardholders. Charge card holders were obligated to pay an identified amount as "liquidated damages" if payments to Amex were not made on time. Similarly, credit card holders were liable for a "late payment fee" in certain circumstances (together the fee payments).
The case concerned Amex's entitlement to input tax credits on its various expenses. Amex made various types of supplies, including taxable and input taxed supplies, and therefore calculated its entitlement to claim input tax credits (referred to as its extent of creditable purpose or ECP in section 11-30(3) of the GST Act) using the following formula:
This formula is based on a formula approved by the Commissioner in GST ruling GSTR 2000/22 (later replaced by GST ruling GSTR 2006/3, which contains minor changes to the formula). The parties agreed that the formula was a fair and reasonable method to determine Amex's ECP.
At first instance, the parties had equated revenue with consideration in the above formula and the case centred on whether the fee payments were consideration for input taxed financial supplies made by Amex. There is a complex definition of financial supplies in the GST Regulations (Regulation 40-5). Relevantly, a financial supply requires that there is the provision, disposal or acquisition of an interest in or under a credit arrangement or right to credit (regulation 40-5.09, emphasis added). However, the supply of, or the supply of an interest in or under, a payment system is excluded from the definition of 'financial supply (Regulation 40-5.12, emphasis added).
Emmett J held that the fee payments were not consideration for input taxed financial supplies. This was on the basis that there had not been any provision of credit merely as a result of the benefit derived from the cardholder in deferring the time when the cardholder must depart with money for the purchase of goods. Accordingly, the fee payments were not consideration in connection with the supply of a debt, credit arrangement or right to credit. Instead, the fee payments were better characterised as payments for a failure to perform the cardholder's obligations. In any event, Emmett J held that the fee payments were consideration for a supply made in or under a payment system and were therefore not a financial supply.
On appeal, the Commissioner changed tack and instead sought to argue that the relevant issue was whether the fee payments constituted 'revenue derived from input taxed supplies' (based on the ECP formula set out above), regardless of whether the fee payments were consideration for financial supplies.
THE ISSUES
A preliminary issue for the Court to decide was whether the Commissioner should be granted leave to argue that the fee payments constituted 'revenue derived from input taxed supplies' (leave was needed since the Commissioner had not raised this argument at first instance). The majority of the Court (Kenny and Middleton JJ) permitted the amendment, while Dowsett J (in dissent) refused the Commissioner leave to amend.
The divergence of the Court on this issue meant the majority was required to consider whether the fee payments were 'revenue derived from input taxed supplies' so as to be included in the numerator of the fraction. In contrast, Dowsett J was required to consider whether the fee payments were consideration for input taxed financial supplies.
Both the majority and minority judges considered the following issues:
- Whether the supplies of the cards by Amex were input taxed
supplies, namely, financial supplies. This involved a consideration
of:
- whether Amex's supply of the right to use the charge cards and credit cards was the supply of an interest; and
- If so, whether it was the supply of an interest in or under a 'credit arrangement or right to credit'; and
- Whether the interest supplied by Amex was an interest in or under a 'payment system' (in which case, Amex's supplies would be excluded from the definition of financial supplies).
The majority also had to consider whether the fee payments were revenue derived from those input taxed (financial) supplies, while Dowsett J had to consider whether the fee payments were consideration for those financial supplies.
THE MAJORITY'S DECISION
The majority identified Amex's supply as "the cardholder's right to present the card as payment to a merchant for goods and services without having to part with money until paying Amex Intl at a later date".
An interest is defined in the GST Regulations as anything that is recognised at law or in equity as property in any form (Regulation 40-5.02). The majority applied a broad interpretation to the term 'interest' and 'property' and held that the cardholder's contractual rights in relation to the card (including the right to present the card as payment and incur a corresponding obligation to pay Amex at a later date) constituted an 'interest'.
The majority further decided that Amex's supply of the right to use the charge card and credit cards to cardholders was the supply of an interest in or under a credit arrangement or right to credit. This interpretation was consistent with the language and examples of credit in the GST Regulations and with ordinary usage of the word 'credit'. Excluding Amex's supply from the definition of financial supply would effectively render these examples in the GST Regulations 'otiose'.
Accordingly, the majority concluded that Amex's supply was a financial supply.
Further, the majority decided that, although Amex operated a payment system, Amex's supply of an interest in or under a payment system was not provided to cardholders. This interpretation was primarily based on the examples of interests in payment systems in the GST Regulations. In particular, the cardholder did not have the requisite interest in the 'payment system' operated by Amex as intended by the Regulations. Rather, it was the merchant that had an interest in or under the payment system (by agreeing to accept Amex's cards and the right to receive payment from Amex).
The final issue for the majority was whether the fee payments were 'revenue derived from input taxed supplies'. The majority held the payments plainly derive from Amex's supplies to cardholders and were therefore revenue derived from input taxed supplies.
DOWSETT J'S DECISION
Dowsett J, in dissent, applied a narrow interpretation of the term 'interest' in the GST Regulations and held that there was no supply of an 'interest' on the basis that the supply of a purely contractual right could not constitute property. In his Honour's view, the cardholder acquired 'possession' of the card (not 'ownership') which is not transferrable and which might be revoked by Amex. His Honour therefore adopted a highly legalistic approach to the concept of an interest under the GST Regulations and expressly discounted the examples of financial supplies in the GST Regulations. As a result, Dowset J concluded that since there is no provision, acquisition or disposal of an 'interest', there could be no financial supply.
Interestingly, absent the requirement that Amex supply an interest, Dowsett J suggested that Amex provides credit to the cardholder and that the fee payments would be consideration for financial supplies (subject to the payment system exception).
Dowsett J also decided that Amex's supply was an interest in or under a payment system. This was primarily on the basis of the decision in Visa International Service Association v Reserve Bank of Australia (2003) 131 FCR 300, which had considered a similar definition of "payment system" under the Payment Systems (Regulation) Act 1998.
IMPLICATIONS OF THE DECISION
There are a number of implications of the decision, which are discussed below.
Approach to GST interpretation
The decision does not resolve the ongoing debate over whether the GST law should be interpreted in a technical legal way or in a more purposive and policy oriented manner. Dowsett J adopted a legalistic approach to the interpretation of the financial supply provisions. His Honour's interpretation of the concept of an 'interest' in the GST Regulations relied on common law and equitable notions of property and expressly ignored the examples of financial supplies in the Schedules to the GST Regulations. A similar analysis was adopted in relation to the interpretation of a payment system in the GST Regulations, regardless that such a conclusion is clearly inconsistent with the examples in the Schedules to the GST Regulations.
In contrast, the majority interpreted the concepts of interest, credit and payment system by reference to the context in which those terms appear in the GST Regulations and their legislative purpose (including the examples in the Schedules to GST Regulations).
The difference in the judgments can be seen in their Honours' comments on Visa International Service Association v Reserve Bank of Australia (2003) 131 FCR 300. That case considered a similar definition of "payment system" under the Payment Systems (Regulation) Act 1998. Dowsett J decided that the Visa case was directly relevant to the interpretation of the phrase 'payment system' in the GST Regulations (and therefore Amex supplied an interest in or under a payment system to the cardholder). In contrast, the majority adopted a different interpretation of the phrase (leading to the opposite conclusion), justified by reference to the statutory context of the GST Regulations.
The GST treatment of damages and compensation Payments
Further, none of the judges analysed the most interesting aspect of the first instance judge's (Emmett J's) decision, namely, his Honour's conclusion that the fee payments by cardholders were not consideration in connection with the supply of a credit arrangement, right to credit or a debt. His Honour held that the obligation to make the fee payments only arose because the cardholder failed to perform that cardholder's obligations under the credit card terms and conditions or the charge card terms and conditions, that is, the default by the cardholder was a "novus actus interveniens" giving rise to the obligation to pay the fee.
The majority did not need to consider the issue on the basis that the relevant issue was whether the fee payments were 'revenue derived from input taxed supplies' (not consideration for financial supplies). However, the majority's reasoning suggests that their Honours may well have concluded that the fee payments were also 'consideration' for Amex's financial supplies. Further, while Dowsett J concluded that Amex did not supply any interest to the cardholder, his Honour commented that, had Amex supplied an interest to cardholders, the fee payments would have been treated as consideration for Amex's supplies of credit to cardholders, as discussed above.
Emmett J's reasoning is analogous to the reasons why damages payments and payments that are compensation for loss are not subject to GST. Historically, the argument has been that such payments are not subject to GST on the basis that such payments are not consideration for any supply. Nevertheless, this approach is being slowly eroded by both the courts and the ATO. While we are not yet at the point where damages payments are subject to GST, parties involved in settlements of disputes should consider whether the decision impacts on their settlements and how those settlements should be treated for GST purposes.
Lessons for apportionment methodologies
Finally, the decision illustrates the clear distinction between a taxpayer's extent of creditable purpose (ECP) as determined under the GST Act and the taxpayer's ECP based on its particular apportionment methodology, the latter being a proxy or indirect method of approximating the taxpayer's credit entitlement. In the light of the decision, taxpayers will no doubt focus on how their apportionment methodologies are developed and whether revenue is an appropriate method in particular circumstances.
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