FEDERAL COURT OF AUSTRALIA Reliance Carpet Co Pty Ltd v Commissioner of Taxation [2007] FCAFC 99 GOODS AND SERVICES TAX – A New Tax System (Goods and Services Tax) Act 1999 (Cth) – Division 99 – deposit as security – forfeited deposit upon rescission of contract – consideration for a supply – whether supply can be identified by reference to legislative purpose of Division 99 – recourse to text itself and extrinsic materials in identifying supply HELD – no supply could be identified Transfer of Land Act 1958 (Vic) Sch 7, Table A Sale of Land Act 1962 (Vic) s 27 A New Tax System (Goods and Services Tax) Act 1999 (Cth) ss 7-1, 9-5, 9-10, 9-15, 29-5, 99‑5, 99-10 Berger v Boyles [1971] VR 321 cited Beynon and Partners v Commissioner of Customs and Excise [2004] 4 All ER 1091 cited Card Protection Plan v Customs Comr (No. 2) [2002] 1 AC 202 cited Coates v Sarich [1964] WAR 2 cited Commissioner of Taxation v Raymor (NSW) Pty Ltd (1990) 24 FCR 90 applied H P Mercantile Pty Ltd v Commissioner of Taxation (2005) 143 FCR 553 applied Hallstroms Pty Limited v Commissioner of Taxation (1946) 72 CLR 634 cited McDonald v Dennys Lascelles Limited (1933) 48 CLR 457 cited Network Ten Pty Ltd v TCN Channel Nine Pty Ltd (2004) 218 CLR 273 cited Saga Holidays v Commissioner of Taxation (2005) 149 FCR 41 cited Shaw v Director of Housing (No. 2) (2001) 159 FLR 322 cited Sterling Guardian Pty Ltd v Commissioner of Taxation (2006) 149 FCR 255 applied Westley Nominees Pty Ltd v Coles Supermarkets Australia Pty Ltd (2006) 152 FCR 461 applied Justice Graham Hill, To Interpret or Translate? The judicial role for GST cases, paperdelivered at conference on "Interpreting the GST Law", Monash University, Friday, 5 August 2005 RELIANCE CARPET CO PTY LIMITED v COMMISSIONER OF TAXATION VID 724 OF 2006 HEEREY, STONE & EDMONDS JJ 5 JULY 2007 SYDNEY (HEARD IN MELBOURNE) IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY VID 724 OF 2006 ON APPEAL FROM THE ADMINISTRATIVE APPEALS TRIBUNAL CONSTITUTED BY THE HONOURABLE HOWARD OLNEY AM QC, DEPUTY PRESIDENT BETWEEN: RELIANCE CARPET CO PTY LIMITED Applicant AND: COMMISSIONER OF TAXATION Respondent JUDGES: HEEREY, STONE & EDMONDS JJ DATE OF ORDER: 5 JULY 2007 WHERE MADE: SYDNEY (HEARD IN MELBOURNE) THE COURT ORDERS THAT: 1. The appeal be allowed. 2. The decision of the Administrative Appeals Tribunal and the respondent's objection decision both be set aside. 3. The respondent pay the applicant's costs of the appeal. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY VID 724 OF 2006 ON APPEAL FROM THE ADMINISTRATIVE APPEALS TRIBUNAL CONSTITUTED BY THE HONOURABLE HOWARD OLNEY AM QC, DEPUTY PRESIDENT BETWEEN: RELIANCE CARPET CO PTY LIMITED Applicant AND: COMMISSIONER OF TAXATION Respondent JUDGES: HEEREY, STONE & EDMONDS JJ DATE: 5 JULY 2007 PLACE: SYDNEY (HEARD IN MELBOURNE) REASONS FOR JUDGMENT THE COURT: INTRODUCTION 1 This is an appeal from the Administrative Appeals Tribunal ("the Tribunal") affirming an objection decision by the respondent ("the Commissioner") disallowing an objection lodged by the applicant against an assessment of goods and services tax ("GST") for the period 1 July 2003 to 30 September 2003. The issue is whether the applicant is liable to pay GST in respect of a deposit that was forfeited to it upon the rescission of a contract for the sale of real property. THE FACTS 2 The facts are not in dispute. They are set out in the evidence of Graham Lawton, a director of the applicant, and accepted by the Tribunal without cross-examination. They are relevantly summarised in the Tribunal's reasons in the following terms: (1) On 3 December 2001 the applicant entered into an agreement ("the option agreement") with 699 Burke Road Pty Ltd ("the purchaser") whereby, in consideration of the sum of $25,000 ("the option fee"), the applicant granted to the purchaser the option to purchase the applicant's property at 699 Burke Road, Camberwell, Victoria ("the property") for the sum of $3,000,000 less the option fee. (2) The option agreement provided that a further sum of $297,500 would be paid by the purchaser upon the option being exercised, being the deposit payable under the contract for sale ("the deposit"). (3) The option agreement provided for the exercise of the option on or before 3 January 2002 but the parties agreed to extend the time for exercise of the option until 10 January 2002, and for the deferral of payment of the deposit until 31 January 2002. (4) On 10 January 2002 the purchaser gave notice in writing exercising the option to purchase. (5) The purchaser defaulted in payment of the deposit and on 1 February 2002 the applicant's accountant served on the purchaser a rescission notice requiring the default to be remedied, and the payment of interest and costs, within fourteen days. (6) The purchaser paid the sum of $300,679.90 to the applicant's solicitors on 5 February 2002 being the deposit plus interest and legal costs as required by the rescission notice. (7) The applicant and the purchaser subsequently executed a contract for sale of real estate ("the contract") which specified 10 January 2002 as the day of sale of the property to the purchaser for $2,975,000 plus GST. (8) The contract provides, inter alia, that: (i) the purchaser pay a deposit of $297,500 (which had already been paid); (ii) the balance of purchase price, $2,677,500, be paid on settlement on or before 10 January 2003; (iii) the applicant had the option to defer settlement for a period of six months if required to relocate its business; (iv) the provisions of Table A of the Transfer of Land Act 1958 (Vic) ("Table A") were incorporated in the contract. (9) On 27 February 2002 the applicant's solicitors released the deposit to the applicant pursuant to s 27 of the Sale of Land Act 1962 (Vic). (10) On or about 18 October 2002 the applicant exercised its option to defer the date of settlement by six months to 10 July 2003. (11) The purchaser failed to pay the balance of purchase price on 10 July 2003. (12) On 11 July 2003 the applicant caused a rescission notice to be served on the purchaser requiring the purchaser to remedy its default within fourteen days. (13) No action was taken by the purchaser to remedy its default. (14) On or about 26 July 2003 the contract was rescinded and the deposit was forfeited to the applicant. 3 On 18 March 2004 and again on 7 May 2004 the purchaser's accountant wrote to the applicant's solicitors requesting a tax invoice for the forfeited deposit. On both occasions the applicant's solicitors declined to provide a tax invoice on the basis, it was said, that the deposit was retained as damages in part satisfaction of the applicant's loss. 4 By notice dated 9 November 2004 the respondent assessed the applicant as being liable to pay GST in respect of the forfeited deposit in the three month period ending 30 September 2003. By letter dated 29 December 2004 the applicant objected to the assessment and on 21 April 2005 the respondent notified the applicant that the objection was disallowed. THE LEGISLATION 5 GST is payable on "taxable supplies": s 7-1(1), A New Tax System (Goods and Services Tax) Act 1999 (Cth) ("the GST Act"). Section 9-5 of the GST Act provides that you make a taxable supply if, inter alia, "you make the supply for consideration" (para (a)). Section 9-10 defines what is a "supply" as follows: 6 Section 9-10(1) provides: "(1) A supply is any form of supply whatsoever. (2) Without limiting subsection (1), supply includes any of these: (a) a supply of goods; (b) a supply of services; (c) a provision of advice or information; (d) a grant, assignment or surrender of real property; (e) a creation, grant, transfer, assignment or surrender of any right; (f) a *financial supply; (g) an entry into, or release from, an obligation: (i) to do anything; or (ii) to refrain from an act; or (iii) to tolerate an act or situation; (h) any combination of any 2 or more of the matters referred to in paragraphs (a) to (g)." 7 Section 9-15 defines "consideration" and relevantly includes "any payment, or any act … in connection with a supply of anything;" (para (1)(a)). 8 Division 29 of the GST Act provides rules for the attribution of the GST payable on a taxable supply to a tax period. Under the general rule in s 29-5, the supplier becomes liable to pay GST on the earlier of the supplier receiving any of the consideration for the taxable supply and the supplier issuing an invoice relating to the supply. 9 Division 99 of the GST Act provides special rules for dealing with deposits: "99‑5 Giving a deposit as security does not constitute consideration (1) A deposit held as security for the performance of an obligation is not treated as *consideration for a supply, unless the deposit: (a) is forfeited because of a failure to perform the obligation; or (b) is applied as all or part of the consideration for a supply. (2) This section has effect despite section 9‑15 (which is about consideration). 99‑10 Attributing the GST relating to deposits that are forfeited etc. (1) The GST payable by you on a *taxable supply for which the *consideration is a deposit that was held as security for the performance of an obligation is attributable to the tax period during which the deposit: (a) is forfeited because of a failure to perform the obligation; or (b) is applied as all or part of the consideration for a supply. (2) This section has effect despite section 29‑5 (which is about attributing GST for taxable supplies)." 10 At the outset, the following observations may be made about Division 99. (1) Absent Division 99, the payment by the purchaser of a deposit on the sale of land, that is a taxable supply, would trigger the vendor's GST liability under the general attribution rules as a part payment of the purchase price of the land. (2) In the normal course, the contract for sale will be completed by the transfer of the land and the payment of the balance of the purchase price. At that time, there will be a supply (of land) and the deposit will be applied as part of the purchase price. Section 99-5(1)(b) will then permit the deposit to be treated as part of the consideration for that supply. If it is a taxable supply, s 99-10(1)(b) will attribute the GST payable to the tax period in which the application occurs. (3) Alternatively, s 99-5(1)(a) provides that the deposit cannot be treated as consideration for a supply unless the deposit is forfeited because of a failure to perform an obligation in respect of which it is held as security for the performance of that obligation. However, in those circumstances, and contrary to the situation where the contract is completed and the relevant supply is quite clearly the supply of the land, the supply for which the forfeited deposit can then be treated as consideration is not readily apparent. It is the identification of this supply, if it exists, which lies at the heart of the dispute between the parties. (4) The attribution rules in s 99-10 are predicated on there being a taxable supply; that will only be the case where a supply can be identified for which the applied or forfeited deposit can be treated as consideration for that supply and the other conditions of s 9-5 are satisfied. If a supply can be identified for which a forfeited deposit can be treated as consideration so that, subject to satisfaction of the other conditions of s 9-5, there is a taxable supply, s 99-10(1)(a) will attribute the GST payable on that taxable supply to the tax period during which the deposit is forfeited. 11 As will be seen from the submissions of the parties which are set out below, the applicant's position is that it is not possible to identify a supply for which the forfeited deposit can be treated as consideration and that, in consequence, there is no taxable supply. The Commissioner's position is that it is possible to identify a supply for which the forfeited deposit can be treated as consideration; alternatively, if it is not possible, legislative policy and purpose dictate a construction of s 99-5 that deems a notional supply, as well as permitting the forfeited deposit to be treated as consideration for that notional supply. IN THE TRIBUNAL BELOW 12 In seeking to identify the supply for which the forfeited deposit could be treated as consideration, the Tribunal: (1) Accepted that it was open to argument that the discharging of the purchasers from further performance of the contract amounted to "a supply" on the part of the applicant for which the forfeiture of the deposit was consideration. However, the Tribunal observed: "The difficulty with such a proposition is that the deposit was not paid in connection with such 'supply'; it had been paid to the applicant at the time the contract was entered into for an entirely different purpose." (At [16]) (2) Accepted the applicant's argument that the rescission of the contract did not make a supply. According to the Tribunal: "The supply was made when the deposit was paid upon entering into the contract." (At [20]) (3) Found that upon execution of the contract and payment of the deposit by the purchaser, the vendor entered into a number of obligations towards the purchaser. In its words: "The ultimate obligation was of course to transfer title to the purchaser upon payment of the balance of purchase price. But there were other obligations, such as maintaining the property in its present condition (Special Condition 2.1), to pay all rates, taxes, assessments, fire insurance premiums and other outgoings in respect of the land (Table A, clause 9) and to hold the existing policy of fire insurance for itself and in trust for the purchaser to the extent of their respective interests (Table A, clause 10). In the circumstances it may fairly be said that upon execution of the contract the applicant made a supply in that, in terms of s 9-10(2)(g) of the GST Act, it 'entered into an obligation' to do the things it was bound to do under the contract and further that the payment of the deposit was consideration for a supply in that it was a 'payment in connection with a supply' (s 9-15(1)(a))." (At [17]) (4) Rejected the applicant's submission that the forfeiture of the deposit was in effect payment of liquidated damages for the purchaser's breach of contract: "With respect there is no basis for such a proposition. The deposit was not calculated on the basis that it was a genuine pre-estimate of the damages likely to be suffered by the applicant in the event of the purchaser's breach nor was it agreed to as such by the purchaser." (At [21]) SUBMISSIONS ON APPEAL The Applicant 13 The applicant's submissions were structured on three alternative contentions. Primary Contention – there is a single supply of land (1) The applicant's primary contention is that upon completion of the contract for sale between the applicant and the purchaser there is a single "supply" within the meaning of s 9-10 of the GST Act, namely the supply of the real property. As the contract was terminated there is no supply by the applicant for which the forfeited deposit paid by the purchaser could be consideration. Division 99 has no work to do. (2) Upon the execution of the contract, certain rights were created in, and obligations were imposed on, both parties, including those obligations entered into by the applicant referred to by the learned Deputy President at [13] (see [10(3)] above) (defined in para 4(l)(a) of the applicant's Amended Notice of Appeal as the "interim obligations"). Each of these matters was capable of falling within the broad definition of "supply" in s 9-10 of the GST Act. However, the interim obligations should properly be regarded as being ancillary, integral or incidental to the supply of the real property, and therefore as part of a single supply. Where one can identify a supply as being incidental to a principal supply, courts have generally treated the transaction as giving rise to one supply: Westley Nominees Pty Ltd v Coles Supermarkets Australia Pty Ltd (2006) 152 FCR 461 (at 472 [35] and 476 – 477 [58] – [­59]) per Ryan, Heerey and Edmonds JJ. (3) What is supplied under the contract is to be determined by commercial reality and the essential features of the transaction, rather than by artificially splitting the contract into components: Saga Holidays v Commissioner of Taxation (2005) 149 FCR 41 (at 56 [30] and 88 – 90 [108] – [111]). In affirming the decision on appeal, Stone J at [43] (Gyles J agreed) found that the approach of looking at the "social and economic reality" of the transaction adopted by Lord Hoffman in Beynon and Partners v Commissioner of Customs and Excise [2004] 4 All ER 1091was relevant to this issue. This approach is consistent with the following statement of Lord Slynn in Card Protection Plan v Customs Comr (No. 2) [2002] 1 AC 202 at 212G: "… the national court's task is to have regard to the 'essential features of the transaction' to see whether it is 'several distinct principal services' or a single service and that what from an economic point of view is in reality a single service should not be 'artificially split'. It seems that an overall view should be taken and over-zealous dissecting and analysis of particular clauses should be avoided." This approach is also consistent with the view of the Full Court in Westley Nominees at 477.5 [59] that in determining whether expenditure secures an ancillary or incidental supply separate and discrete from the main supply or whether it forms part of the consideration for a single supply one should consider "what the expenditure is calculated to effect from a practical and business point of view, rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process". (4) From a practical and business point of view, the entry by the applicant into the interim obligations should properly be regarded as being ancillary, integral or incidental to the principal supply of real property, and therefore as part of that principal supply. (5) As the only supply under the contract for the purposes of s 9-10 of the GST Act was the land and the contract was terminated, at the time of the forfeiture of the deposit there was no supply for which the deposit could be consideration. (6) The finding of the learned Deputy President that the deposit was consideration for, or in connection with, a supply made by the applicant other than the underlying supply of real property (i.e., a supply of the interim obligations) leads to absurd results which conflict with the purpose and the context of the GST Act, namely that: (a) GST will be payable on the full amount of forfeited deposits paid on the sales of real property which would have been GST-free, input taxed or concessionally taxed under the margin scheme; (b) On completion there will need to be an apportionment of deposits between consideration for the supply of the land and for the supply of the Interim Obligations. Where the underlying sale of real property is a GST-free or input taxed supply, GST will nevertheless be payable on that part of the deposit apportioned to the supply of the interim obligations; (c) Division 99 will not apply to the deposit because it is not held as security for the performance of an obligation but was paid as consideration for a supply made by the vendor (i.e., the supply of the interim obligations). (7) The contention made by the Commissioner before the learned Deputy President that the "ancillary supplies" made by the applicant on entering into the contract "become", on rescission, thesupply made by the applicant to the purchaser and that the forfeited deposit is consideration for that supply, is absurd. Alternative Contention No. 1 – the deposit involved two supplies (8) The deposit is properly regarded as performing two distinct, yet concurrent, purposes: (a) As part payment for the supply of the real property; and (b) As an earnest or guarantee of performance of the purchaser's obligations under the contract. (9) If one is to adopt a strict legal analysis of the payment of a deposit on a sale of land contract in the context of the GST Act, the entry into the contract and payment of the deposit involves two supplies: (a) The vendor agrees to supply the land to the purchaser and the deposit is paid as partial consideration for that supply. The effect of s 99-5 is to prevent the deposit being treated as consideration for the supply of the land until completion (at which time the supply takes place and the deposit is applied as consideration); and (b) The purchaser supplies to the vendor, as a guarantee or earnest of performance, the contractual right to forfeit the deposit on default, in which case the deposit is forfeited in discharge of the purchaser's obligation under the contract. There is no supply to the purchaser by the applicant for which the forfeited deposit could be regarded as consideration. (10) In its capacity as a guarantee or earnest of performance, the deposit operates in a similar way to a guarantee. The deposit is given as security pending completion and is paid as an assurance to the vendor. On entry into the contract for sale, the purchaser supplies, and the vendor acquires, the contractual right to forfeit the deposit on the default of the purchaser. The consideration given by the vendor for that right is the entry into the contract. (11) The definition of "supply" in s 9-10 of the GST Act does not extend to the exercise of an existing right by a party to a contract. By rescinding the contract the applicant simply exercised a right under the contract which had the effect, upon the failure of the purchaser to remedy its default within the stated period, of determining the contract: Victorian Economic Development Corporation v Cloverdale [1992] 1 VR 596 at 602.5; and discharging both parties from further performance of the contract: McDonald v Dennys Lascelles Limited (1933) 48 CLR 457 at 476.9 – 477.2 per Dixon J. (12) The discharge of an obligation by the act of payment is not a "supply" for the purposes of the GST Act: Shaw v Director of Housing (No. 2) (2001) 159 FLR 322 at 326 – 327, [18] – [20]. Thus, the discharge or release of the purchaser's obligation to forfeit the deposit by reason of its forfeiture was not a supply. Any payment received by the applicant as a consequence of the failure of the purchaser to remedy its default was not consideration for a supply made by the applicant as the payment simply discharged the purchaser's obligations under the contract. (13) The Commissioner accepts that no supply (by way of release, surrender or otherwise) is made where a person exercises a right under a contract of guarantee to receive a payment and the receipt of that payment by the payee simply discharges the payer's obligations under the contract. The reasoning behind the treatment of guarantees is entirely apposite to the treatment of a deposit. (14) For there to be a supply to the purchaser in return for the forfeited deposit, the applicant must have done something for the purchaser rather than against the purchaser. The forfeiture and retention of the deposit, because of the purchaser's breach of the contract, was an action against the purchaser by the applicant rather than the supply by the applicant of a right, benefit or advantage to the purchaser. The termination of the contract by the failure to remedy the default upon receipt of the rescission notice was simply the unilateral act of the purchaser which terminated the contract and there was no relevant supply to which the forfeited deposit could be linked. (15) The Tribunal correctly held that on rescission of the contract the applicant did not make a supply for which the forfeited deposit was consideration. Contrary to the Commissioner's contention, the applicant did not make a supply for the purposes of s 9-­10 of the GST Act by seeking to rescind the contract (for a second time) and, upon the failure of the purchaser to remedy its default, thereby surrendering its rights and/or releasing the purchaser from its obligations under the contract. The applicant's "election" to rescind the contract did not involve something moving from the applicant to the purchaser, but simply involved the unilateral act of the purchaser (in failing to remedy the default) which had the effect of discharging both parties from their respective obligations under the contract. (16) If the Commissioner is correct in his contentions, the following absurd results will occur: (a) GST will be payable on the full amount of forfeited deposits paid on the sales of real property which would have been GST-free, input taxed or concessionally taxed under the margin scheme; and (b) the reverse situation to the present case (where the purchaser rescinds the contract due to the applicant/vendor's default) will give rise to a "supply" by the purchaser within the meaning of s 9-10(2) of the GST Act and the purchaser will be paid the deposit as consideration for, or in connection with, that supply. The purchaser will be liable to pay GST on the repayment of its own money. Alternative Contention No. 2 – The forfeited deposit represents a payment in the nature of damages (17) The forfeited deposit was received by the applicant in the nature of damages for the purchaser's breach of contract and as such cannot be regarded as consideration for a supply. (18) The clear intention of a deposit is to compensate the vendor for the many hypothetical losses the vendor may suffer, and is received by the vendor in the nature of damages: see Coates v Sarich [1964] WAR 2 at 14.7 where Hale J stated: "It seems clear that when the implication is made it is treated as being to the intent that the vendor is to retain the deposit as liquidated damages, and in such a case there is no difficulty in treating the deposit as in truth liquidated damages, because it is apparent that if the vendor resells he will be put to some time, trouble and expense in doing so, and if he retains possession he will have lost the benefit of his time, trouble and expense in making the initial sale, and a sum of 5 per cent or 10 per cent of the price can readily be recognised as a genuine pre-estimate of damage which is likely to be suffered but which cannot be accurately quantified in advance." (19) This conclusion is consistent with the principle that the applicant would have been required to account for the receipt of the forfeited deposit in any claim for damages: Berger v Boyles [1971] VR 321 at 330.7. (20) The applicant accepts the Commissioner's view that a claim for damages arising out of the termination or breach of contract, being the substance of the dispute, does not constitute a supply under s 9-10 of the GST Act. There was no supply made by the applicant for, or in connection with, the forfeited deposit because the land was retained by the applicant. The forfeited deposit was paid for, or in connection with, the purchaser's breach of the contract and was paid in the nature of damages to the applicant for that breach. (21) The matter can be tested in this way – if the applicant had sued the purchaser for damages and recovered more than the deposit (i.e., the damages was greater than 10 per cent of the purchase price), on the approach of the Commissioner those additional damages would not be subject to GST but the amount of the forfeited deposit amount would be. This is an absurd result. The Commissioner 14 The Commissioner's submissions were also predicated on three alternative contentions, all of which had one common outcome – the forfeited deposit was "consideration for a supply" made by the applicant. In summary, the Commissioner identified the "supply" for which the forfeited deposit was consideration, as alternatively: (1) a supply of one or more of the applicant's rights and/or obligations under the contract prior to its rescission (what the applicant paraphrases as interim obligations); or (2) a supply of one or more of the applicant's rights and/or obligations arising from the rescission of the contract (rescission supplies); or (3) a supply on forfeiture of the deposit by operation of Division 99 of the GST Act itself (deemed supply). 15 The Commissioner made the following submissions in relation to each of these alternative supplies: Interim Obligations (1) Between the commencement of the contract and its rescission the applicant conferred certain rights and/or entered into certain obligations, or provided a combination of such rights and obligations, to or for the benefit of the purchaser under the contract. In particular the rights granted or the obligations entered into include the provision of a transfer of the land on payment of the balance of the purchase price on the settlement date and to maintain the property, etc. Each was a supply within the ambit of s 9-10. (2) Had the contract settled (and the land been transferred), each of these supplies would have merged to form part of the supply of the land. In that sense each was a supply that pre-existed (or was incidental or ancillary to) the intended supply of the land. Each of those supplies was also subject to the possibility of rescission in accordance with the express provisions of the contract. When the land was no longer to be supplied (because the contract was rescinded) there was nothing with which those supplies could merge. (3) These supplies fall within one or more of the following statutory definitions: (i) the wide meaning of 'supply' in s 9-10; (ii) the provision of a service or services to the purchaser (within s 9-10(2)(b)); (iii) the entry into an obligation to do one or more things, or to refrain from one or more acts (within s 9-10(2)(g)); (iv) the creation of rights (within s 9-10(2)(e)); (v) a combination of these supplies (within s 9-10(2)(h)). (4) Contrary to the applicant's submissions in [11(14)] above, these supplies were made by the applicant to the purchaser and the absurd results asserted by the applicant in [11(16)] above do not arise. In this regard the refund of a deposit is not a supply. Rescission Supplies (5) The applicant made one or more supplies within the ambit of s 9-10 when the contract was rescinded. (6) The purchaser breached the contract when it failed to perform its obligations thereunder, including its failure to pay the balance of the purchase price when due, or to remedy that default. On that breach the applicant had the right to elect to rescind the contract in accordance with the Seventh Schedule to the Transfer of Land Act 1958 (Vic). The applicant exercised that right. By making that election the applicant surrendered some of its rights and/or released the purchaser from some of its obligations, acquired under, or associated with, the arrangementand became entitled to retain the forfeited deposit. (7) By rescinding the contract, the applicant, on and from the date of rescission: (i) created rights in favour of the purchaser in relation to the land; (ii) surrendered rights it otherwise held in relation to the land; (iii) entered into an obligation in favour of the purchaser to refrain from acting inconsistently with the rescission of the contract; (iv) released the purchaser from obligations in relation to the contract, including the obligation to perform the contract; (v) entered into an obligation to tolerate the purchaser's failure to perform the contract; (vi) supplied a combination of any two or more of the above matters. (8) Thus, contrary to [16] of the Tribunal's reasons, the deposit was forfeited in connection with the adjustment of rights and obligations as between the applicant and the purchaser on rescission. (9) These supplies fall within one or more of the following statutory definitions: (i) the wide meaning of "supply" in s 9-10; (ii) the provision of a service or services to the purchaser (within s 9-10(2)(b)); (iii) the entry into an obligation to do one or more things, or to refrain from one or more acts (within s 9-10(2)(g)); (iv) the creation of rights (within s 9-10(2)(e)); (v) a combination of these supplies (within s 9-10(2)(h)). Deemed Supply under Division 99 (10) Division 99 clearly intends to ensure that forfeited deposits are treated as consideration for a supply (s 99-5) and if the other provisions of s 9-5 are met, as here, taxed. Section 99-5 itself operates to satisfy the requirements of s 9-5(a). There is no other point to its enactment in requiring the forfeited deposit to be treated not only as "consideration',but "consideration for a supply"(emphasis added). In other words, the "treatment" extends to the both elements of the dependent relationship between consideration and supply. (11) Therefore, if (contrary to the foregoing submissions) there is no supply under s 9-10 (the interim obligations and rescission supplies), then the application of Division 99 itself requires, on its proper construction, that the deposit be treated as consideration for a supply on forfeiture. (12) This view is supported by the Explanatory Memorandum (para 6.166) in stating that forfeited deposits should be subject to GST and (para 6.169) in stating that the GST payable on the forfeited deposit is attributable to the period in which the deposit is forfeited. ANALYSIS 16 The Tribunal's conclusion (at [17]) that when the applicant entered into the contract for sale with the purchaser, "the applicant made a supply in that, in terms of s 9-10(2)(g) of the GST Act, it 'entered into an obligation' to do the things it was bound to do under the contract and … that the payment of the deposit was consideration for a supply in that it was a 'payment in connection with a supply' (s 9-15(1)(a))", with respect to the Tribunal, has an artificial resonance to it. In Westley Nominees, a Full Court of this Court referred (at [59]) to what was said by Dixon J in Hallstroms Pty Limited v Commissioner of Taxation (1946) 72 CLR 634 at 648, in a totally different context: "What is an outgoing of capital and what is an outgoing on account of revenue depends on what the expenditure is calculated to effect from a practical and business point of view, rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process." as being – "… equally applicable in determining whether expenditure secures an ancillary and incidental supply separate and discrete from the main supply or whether it forms part of the consideration for a single supply." 17 In a different income tax context, we are reminded of a similar response by a different Full Court (Davies, Gummow and Hill JJ), in Commissioner of Taxation v Raymor (NSW) Pty Ltd (1990) 24 FCR 90, to a submission that payments made by a taxpayer under a contract for the purchase of trading stock should be characterised as payments made for the right to acquire trading stock, and thus were on capital account. The Court said (at 99): "Here the character of the advantage sought was the acquisition of trading stock for delivery within a short time after the date the contract was entered into. As a matter of fact, delivery was completed within several months of the date of the contract. It is a misleading half truth to say that what the taxpayer acquired was merely a contractual right to obtain delivery of stock in the future. The answer to the first question posed by Dixon J is not to be obtained by a jurisprudential analysis of the process of entering a contract. It can be said of every payment pursuant to a contract that it secures to the payee the contractual rights under the contract. In that sense every payment made under a contract confers upon the payee a chose in action which can be described as an asset and which contractual right is discharged by the performance of the contract. But such an analysis is of no assistance in the resolution of whether a particular outgoing is on capital or revenue account." 18 When the applicant entered into the contract for sale with the purchaser it entered into a contract for the supply of real property; nothing more and nothing less. We accept the applicant's primary contention ([13](1) – (7) below). That supply did not take place because the contract was rescinded. However, the fact that that supply did not take place is not a warrant to undertake some juristic dissection of the contract to find some other supply, in terms of the GST Act, at the time of entry into the contract. In our view, there was no supply of interim obligations either then or subsequently. 19 The identification of a supply in terms of the "rescission supplies" is, in our view, equally unsustainable. In Westley Nominees the Full Court at [16] said: "The concept of 'supply' in its ordinary meaning in subs 9-10(1) of the GST Act does seem to require some act of provision, furnishment, conferral or giving of some thing. The inclusions in s 9-10(2) specifically identify some of these things, without limitation to subs (1), as goods, services, advice or information, real property and any right, (paras (a) to (e) inclusive). On the other hand, the concept of 'financial supply' in para (f) is defined in the A New Tax System (Goods and Services Tax) Regulations 1999 (Cth) (reg 40-5.09) to include, amongst other things, the acquisition of an interest in or under specified financial instruments, and para (g) extends the concept of 'supply' to include the entry into an obligation to do something, to refrain from doing something or to tolerate an act or situation. For these reasons, the ordinary meaning of 'supply' is arguably extended by paras (f) and (g), if not by paras (a) to (e) inclusive." 20 The mere extinguishment of contractual rights would not, on this view, fall within the ordinary meaning of 'supply'. 21 So far as the rescission supplies are concerned, on the breach of the contract by the purchaser, including its failure to pay the balance of the purchase price when due, the applicant did not have the right to elect to rescind the contract. Rather, the applicant had the right to issue a rescission notice which had the effect, upon the failure of the purchaser to remedy the default within the stated period, of determining the contract. By issuing the rescission notice, the applicant did not surrender any rights or release the purchaser from any obligations. Neither on the occasion of the issue of the notice nor on the effluxion of time in which to cure the default was there a 'supply' by the applicant to the purchaser. 22 In H P Mercantile Pty Ltd v Commissioner of Taxation (2005) 143 FCR 553 Hill J, with whom Stone J and Allsop J agreed, said at [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 Ltd 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." 23 The legislative purpose underlying Division 99 is not readily apparent from the language of the Division itself. On the one hand, it seems clear enough that the legislature intended to defer the time at which a deposit (held as security for the performance of an obligation) could be taken to be all or part of the consideration for a supply until completion of the contract under which the deposit is paid; at that time, the deposit is actually applied as part of the consideration for the supply. In this way s 99-5(1)(b), in conjunction with s 99-10(1)(b), overcomes the general attribution rule in Division 29 which would, in the case of a taxable supply, trigger the vendor's GST liability on the payment by the purchaser of the deposit. But where the deposit is forfeited because of a failure to perform the obligation, what does the language of the Division say about the underlying legislative policy or purpose? Is it to subject to GST all such forfeited deposits irrespective of whether or not the supply, which would have occurred if the contract had been completed, would be a taxable supply? Or is it to subject to GST only those forfeited deposits where the supply, which would have occurred had the contract been completed, would have been a taxable supply? 24 The Explanatory Memorandum to the Bill which became the GST Act, circulated by authority of the Treasurer, suggests the latter. At 6.164 to 6.167, the Explanatory Memorandum provides: "6.164If you make a security deposit, the intention is usually that it will be refunded to you when you meet the obligations to which the deposit relates. The deposit may be consideration for a taxable supply. However, it would be pointless for the supplier to charge GST on the deposit if the deposit is to be refunded, in which case the GST would have to be refunded to the supplier. 6.165 However, some security deposits later become incorporated in the consideration for a taxable supply. At some point the deposit ceases to be held as a security deposit and is offset against the remaining consideration that is payable. GST should be charged on such deposits if they become part of the consideration for the taxable supply. 6.166 Also if a security deposit made in relation to a taxable supply is forfeited, GST should be payable on the deposit. 6.167 For these reasons, Division 99 provides special rules in relation to security deposits." (Emphasis added) 25 Accepting that the underlying legislative purpose was to subject to GST only those forfeited deposits where the supply, which would have occurred had the contract been completed, would have been a taxable supply, the question which arises is whether the language of s 99-5 permits a construction which accommodates that result. In our view, for the reasons set out below, it does not. 26 At best, s 99-5 allows a forfeited deposit to be treated as consideration for an unidentified supply. But if a supply for which the forfeited deposit can be treated as consideration cannot be identified, s 99-5 has no work to do. The Commissioner's submissions, in the alternative, that s 99-5 not only allows the forfeited deposit to be treated as consideration for a supply, but also deems there to be a supply is, in our view, not open on the language of the section. Even if it was, it would not go far enough to accommodate the legislative purposes identified above – to tax forfeited deposits paid in relation to unconsummated taxable supplies but not tax them if paid in relation to unconsummated supplies which were not taxable supplies. 27 Moreover, if s 99-5(1) was intended to operate to deem a supply in addition to allowing the deposit to be treated as consideration for a supply, one would have expected that s 99-5(2) would have said; "This section has effect despite section 9-10 [which is about supply] and despite section 9-15 [which is about consideration]." It only refers to the latter. 28 This is one of those cases in which the language of the statute cannot be "massaged" through the application of modern principles of statutory construction to accommodate the legislative purpose identified through the statute itself and permissible extrinsic materials. As Kirby J said, in dissent, in Network Ten Pty Ltd v TCN Channel Nine Pty Ltd (2004) 218 CLR 273 at 305 – 306: "I accept wholeheartedly that the contemporary approach of this court to the interpretation of contested statutory language is the purposive approach. However, adopting that approach does not justify judicial neglect of the language of the statute, whether in preference for historical or other materials, perceived legal policy or any other reason. A purposive construction is supported by s 15AA of the Acts Interpretation Act 1901 (Cth). But that section also does not permit a court to ignore the words of the Act. Ultimately, in every case, statutory construction is a text-based activity. It cannot be otherwise." 29 We are reminded of what Hill J wrote extra-judicially in a paper entitled: "To Interpret or Translate? The judicial role for GST cases"delivered at a conference organised by Monash University on "Interpreting the GST Law", Friday, 5 August 2005: "It is not often that the courts are given the opportunity of interpreting legislation providing for the implementation of an entirely new tax and especially one which is intended to operate broadly over the entire sphere of economic activity. The tools which permit judges to interpret in a purposive way with an eye to ensuring that the tax works as it may be assumed to be intended to work in the real world are there, but with one exception. There will obviously be unintended consequences which arise in the implementation of a new tax drafted in a way which in many respects differs from comparable legislation in other jurisdictions. While, in part, such unintended consequences can be dealt with by the ruling system that is not a satisfactory long-term solution to problems. There is a need for the legislature to cure defects from time to time. Yet there seems to be a refusal on the part of the government to admit there are defects and to make amendments other than amendments which may be thought necessary to overcome avoidance. In some cases, the courts may be able to resolve difficulties by applying a purposive construction but in the Australian constitutional context where there is a sharp separation of the legislative and judicial powers there is a limit to what one can expect of the courts. Ultimately the courts can not act as legislators. Parliament can not stand by and then blame the courts if a decision is one that does not favour the revenue when the problem lies not in how the legislation is to be interpreted in a common sense way, but in how it is written." 30 In conclusion then, we are unable to identify a supply upon the rescission of the contract for sale for which payment of the forfeited deposit may be treated as consideration, nor do we think s 99-5 operates so as to deem there to be a supply in such circumstances – a taxable supply in cases where the unconsummated supply would have been a taxable supply and a supply but not a taxable supply in other cases. 31 In any event, we do not see the conclusion we have reached as inconsistent with the legislative purpose. At its most general level, the purpose of the GST Act was described in the Executive Summary to the Explanatory Memorandum in these terms: "broadly speaking, the GST is a tax on private consumption in Australia … [which] is generally achieved by imposing tax on supplies …" 32 See also Sterling Guardian Pty Ltd v Commissioner of Taxation (2006) 149 FCR 255 at [15] where a Full Court of this Court said: "In economic terms it may be correct to call the GST a consumption tax, because the effective burden falls on the ultimate consumer. But as a matter of legal analysis what is taxed, that is to say what generates the tax liability (and the obligations of recording and reporting), is not consumption but a particular form of transaction, namely supply; see generally H P Mercantile Pty Ltd v Commissioner of Taxation (2005) 143 FCR 553 at [10] – [15]." 33 "Supply" in the context of goods and services is a word which in its ordinary meaning covers a vast range of transactions, as is clear from by the emphatic terms of s 9-10(1): "any form of supply whatsoever". As such, the ordinary meaning readily achieves the stated legislative purpose. Section 9-10(2) contains some additional specific definitions, some of which would go beyond the ordinary meaning. However, to the extent that a transaction, from a practical and business point of view, is not a "supply" within the ordinary meaning, we do not see that a court should stretch the language of s 9-10(2) to give a strained construction to terms which are themselves an extension. 34 It follows, in our view, that the appeal must be allowed with costs. I certify that the preceding thirty-four (34) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Court. Associate: Dated: 5 July 2007 Counsel for the Applicant: Mrs J J Batrouney SC and Mr C M Sievers Solicitor for the Applicant: Ambry Legal Counsel for the Respondent: Mr T Murphy SC and Mr P Sest Solicitor for the Respondent: Australian Government Solicitor Date of Hearing: 13 February 2007 Date of Judgment: 5 July 2007