FEDERAL COURT OF AUSTRALIA ACP Publishing Pty Ltd v Commissioner of Taxation [2004] FCA 874 TAXATION – goods and services tax – whether supply "tax-free" pursuant to s 13 of A New Tax System (Goods and Services Tax Transition) Act 1999 (Cth) – whether agreement identified a supply and identified a way of working out the consideration in money – whether supply must be made pursuant to the agreement and pursuant to a legal obligation imposed by the agreement – whether price may be determined after Royal Assent to A New Tax System (Goods and Services Tax Transition) Act 1999 (Cth) WORDS AND PHRASES – 'identifies a supply', 'identifies the consideration in money, or a way of working out the consideration in money' A New Tax System (Goods and Services Tax) Act 1999 (Cth) ss 9-5, 9-30, 11-1, 11-5, 29-70 A New Tax System (Goods and Services Tax Transition) Act 1999 (Cth) s 13 Braham v Walker (1961) 104 CLR 366 referred to Elmslie v Commissioner of Taxation (1973) 46 FCR 576 distinguished Commissioner of Taxation v Sara Lee Household & Body Care (Australia) Pty Ltd (2000) 201 CLR 520 distinguished Godecke v Kirwan (1973) 129 CLR 629 applied Powell v Jones [1968] SASR 394 referred to ACP PUBLISHING PTY LIMITED v FEDERAL COMMISSIONER OF TAXATION Q 205 OF 2003 DOWSETT J 7 JULY 2004 BRISBANE IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY Q 205 OF 2003 BETWEEN: ACP PUBLISHING PTY LIMITED APPLICANT AND: FEDERAL COMMISSIONER OF TAXATION RESPONDENT JUDGE: DOWSETT J DATE OF ORDER: 7 JULY 2004 WHERE MADE: BRISBANE THE COURT ORDERS THAT: 1. The appeal be dismissed. 2. The applicant pay the respondent'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 QUEENSLAND DISTRICT REGISTRY Q 205 OF 2003 BETWEEN: ACP PUBLISHING PTY LIMITED APPLICANT AND: FEDERAL COMMISSIONER OF TAXATION RESPONDENT JUDGE: DOWSETT J DATE: 7 JULY 2004 PLACE: BRISBANE REASONS FOR JUDGMENT 1 The applicant ("ACP Publishing") appeals against an objection decision made by the respondent (the "Commissioner") on 2 December 2003. The relevant circumstances arose out of the operation of the A New Tax System (Goods and Services Tax) Act 1999 (Cth) (the "GST Act"). Facts 2 ACP Publishing and ACP Magazines Pty Limited ("ACP Magazines") are both members of the Australian Consolidated Press group of companies (the "ACP Group"). Both companies are members of a GST group under Division 48 of the GST Act. ACP Publishing is the representative member of that group. This means that ACP Publishing effectively stands in place of ACP Magazines and other group members for the purposes of the GST Act. 3 Immediately prior to 6 August 1980, Australian Consolidated Press Ltd ("ACP"), the parent company of ACP Publishing and ACP Magazines, was entitled to all of the goodwill, trademarks, business names and other rights which permitted it to publish the magazine titles "TV Times" and "TV Guide". Those rights will be described as the "ACP rights". At that time News Ltd ("News") and/or Southdown Publications Pty Ltd ("Southdown 123") were entitled to all of the goodwill, trademarks, business names and other rights which permitted them to publish the magazine title "TV Week" (the "News rights"). On 6 August 1980 News, Southdown 123 and ACP executed a deed (the "1980 Deed"), pursuant to which ACP sold the ACP rights to News. The ACP rights and the News rights were subsequently utilized in connection with the obligations imposed by cl 2.1 of the 1980 Deed which provided that: 'Subject to this deed, News or [Southdown 123] shall continue to publish edit produce and distribute the magazine presently called "TV Week" or arrange for that to be done but under the title of "TV Week incorporating TV Times and TV Guide" ... .' 4 The ACP rights and the News rights are hereinafter collectively referred to as the "Rights". Pursuant to cl 3.1 News was to pay half of the net profits of the merged operation to ACP, and ACP was to bear half of any net loss. News or Southdown was to have 'full control and the sole and exclusive management as against ACP of all operations relating to the Business'. Clause 7 of the deed (the 'Savoy Clause') provided: '7.1 Either News or ACP (hereinafter called "the offeror party") may at any time after the date six months from the date of this Deed offer in writing to sell or procure the sale to the other party (hereinafter called "the offeree party") the offeror party's interest under this Deed for the sum of money specified by the offeror party in the said offer. If the offeree party shall not have accepted the offer by giving notice in writing within fourteen (14) days after the making of the offer the offeror party shall thereupon be deemed to have notified the offeree party that the offeror party will purchase from the offeree party all of the offeree party's interest under this Deed for the sum specified in the offeror party's original offer and the offeree party shall in that case be bound to sell to the offeror party. Completion of any sale or purchase pursuant to this Clause 7 shall take place within twenty-one (21) days after acceptance of the offer by the offeree party or the deemed notice by the offeror party as the case may be, and this Deed shall subject to Clause 7.3 cease to operate. 7.2 In this Clause 7 any reference to the interest of any party under this Deed shall mean in the case of ACP the right to receive the share of the net profits of the Business as provided in Clause 3.1 and shall mean in the case of News the right title and interest of News in and to the Rights including (but without limiting the generality of the foregoing) in respect of the new title and of each of the separate titles "TV Week", "TV Times" and "TV Guide" and of the goodwill attached to any or all of those titles. 7.3 If pursuant to an exercise of the Savoy Clause the purchaser is ACP and ACP should continue publication of the magazine then for a period of one (1) year from completion (or such lesser period as publication continues) Downlands or News or a related corporation of News (as News may nominate prior to completion and from time to time) shall be engaged by ACP to print and bind the magazine for a price that is no more than that which would otherwise be generally available to ACP from other printers for the printing and binding of a similar magazine in similar quantities.' 5 On 13 February 1992 certain novation deeds were executed. As a result, ACP Magazines acquired the rights, and assumed the obligations of ACP pursuant to the 1980 Deed, and Southdown Publications Pty Ltd ("Southdown 266") acquired the rights, and assumed the obligations of News and Southdown 123. Save where the context otherwise indicates, subsequent references to the 1980 Deed should be taken as referring to that deed as amended by the novation deeds. 6 On 19 June 2002 ACP Magazines offered, pursuant to the Savoy Clause, to sell to Southdown 266 its interest under the 1980 Deed for the sum of $60 million. The offer was not accepted. By operation of the Savoy Clause, ACP Magazines was therefore deemed to have offered to purchase the interest of Southdown 266 for the sum of $60 million, and Southdown 266 was bound to sell its interest accordingly. 7 On 24 July 2002 five deeds were executed. Pursuant to the first of those deeds, Southdown assigned to ACP Magazines 'all of its right, title and interest in and to the Rights including (but without limiting the generality of the foregoing) in respect of each of the titles "TV Week", "TV Guide" and "TV Times" and of the goodwill attaching to any or all of those titles.' Clause 2 of this deed indicated that the assignment was '[p]ursuant to Clause 7' of the 1980 Deed. The term "Rights" had the same meaning as in cl 1.2 of the 1980 Deed. 8 By the second deed, Pacific Publications Pty Ltd ("Pacific Publications") and Southdown 266 assigned to ACP Magazines their interests in copyrights over past issues of TV Week, the typographical layout of such issues and the templates for its current layout. By the third deed between Southdown 266 and ACP Magazines, the former assigned certain Australian trademarks to the latter. By the fourth deed Southdown 266 assigned to ACP Magazines the former's New Zealand trademarks. By the fifth deed, Pacific Publications assigned to ACP Magazines the former's interest in a Domain Name. No point is taken concerning the involvement of Pacific Publications in these transactions. It is therefore not necessary to explain the way in which this occurred. 9 The first of the five deeds gave effect to the obligations arising under the 1980 Deed as a result of the activation of the Savoy Clause. It is not clear to me that the other four deeds were necessary. Perhaps they were designed to satisfy registration requirements. Alternatively, there may have been some doubt as to whether the assets assigned by them were strictly within the Rights as described in the 1980 Deed. In any event, it seems that the transaction was completed to the satisfaction of the parties. 10 On 24 July 2002, Mr David Gardiner, the Chairman of ACP Magazines, wrote to Southdown 266, asking for a 'tax invoice for the taxable supply made by Southdown to ACP Magazines pursuant to the above Deed.' The reference to the 'above Deed' appears to be to a deed dated 24 July 2002, probably the first of the five deeds described above. On 19 August 2002, Mr Gardiner received such a "tax invoice" which stated: Description Amount GST Supply of interest as defined under Deed dated August 6, 1980 $60,000,000.00 $0.00 11 On 19 August 2002 the solicitors for ACP Magazines applied to the Commissioner for a GST private ruling, effectively seeking a determination that its acquisition was a "creditable acquisition" pursuant to the GST Act, and that as a result, it was entitled to an input tax credit in respect of its acquisition in the amount of $5,454,545, attributable to the July 2002 tax period. At some stage ACP Publishing submitted a business activity statement for the month of August 2002 claiming an input tax credit based upon that alleged creditable acquisition. 12 On 22 August 2002. Mr Gardiner wrote to Southdown 266, asserting that the amount of GST payable should be shown in the tax invoice as 'exactly 1/11th of the total price (ie. $5,454,545)'. On 28 August 2002 Mr Gardiner received a letter from the Chief Financial Officer of Pacific Publications asserting that: 'Section 29-70 of A New Tax System (Goods and Services Tax) Act 1999 provides that a supplier must issue a tax invoice for a taxable supply. The supply made by Southdown to ACP Magazines is GST-free pursuant to section 13 of A New Tax System (Goods and Services Tax Transaction) Act 1999. We have received a private ruling from the Australian Tax Office confirming this position.' 13 The Commissioner subsequently determined that ACP Magazines had not made a creditable acquisition. In October 2002, following the Commissioner's unfavourable ruling, ACP Publishing lodged a revised business activity statement for the month of August 2002 which reflected that ruling. The Commissioner issued an amended GST assessment upon that basis. On 14 November 2003 ACP Publishing objected to the assessment upon the grounds which had been canvassed in the application for the private ruling. The objection was disallowed, and ACP Publishing now appeals against such disallowance. The legislation 14 In the Explanatory Memorandum issued in connection with the enactment of the GST Act, it was said (at p 6) that the imposition of GST is achieved by: '· imposing tax on supplies made by entities registered for GST; but · allowing those entities to offset the GST they are liable to pay on supplies they made against input tax credits for the GST that was included in the price they paid for their business inputs.' 15 ACP Publishing asserts that ACP Magazines became entitled to an input tax credit by virtue of its acquisition under the Savoy Clause. Pursuant to s 11-1 of the GST Act, a person who makes a creditable acquisition is entitled to an input tax credit. Section 11-5 provides: 'You make a creditable acquisition if: (a) you acquire anything solely or partly for a creditable purpose; and (b) the supply of the thing to you is a taxable supply; and (c) you provide, or are liable to provide, consideration for the supply; and (d) you are registered, or required to be registered.' 16 As I understand it the only relevant dispute for present purposes is whether ACP Magazines received a taxable supply. That term is defined by s 9-5 as follows: 'You make a taxable supply if: (a) you make the supply for consideration; and (b) the supply is made in the course or furtherance of an enterprise that you carry on; and (c) the supply is connected with Australia; and (d) you are registered, or required to be registered. However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.' 17 The relevant question is whether the supply to ACP Magazines was GST-free. Section 9-30 provides: '(1) A supply is GST-free if: (a) it is GST-free under Division 38 or under a provision of another Act; or (b) it is a supply of a right to receive a supply that would be GST-free under paragraph (a).' 18 Section 13 of the A New Tax System (Goods and Services Tax Transition) Act 1999 (Cth) (the "Transition Act") provides: '(1) This section applies if: (a) a written agreement specifically identifies a supply and identifies the consideration in money, or a way of working out the consideration in money, for the supply; and (b) the agreement was made before the day on which this Act received the Royal Assent. (2) The supply is GST-free to the extent that it is made before the earlier of the following: (a) 1 July 2005; (b) if a review opportunity arises on or after the day of Royal Assent—when that opportunity arises. (3) If all of the consideration was paid before 2 December 1998, the supply is also GST-free to the extent it is made on or after 1 July 2005 but before a review opportunity has arisen as mentioned in paragraph (2)(b) (4) However, if the recipient of the supply would not be entitled to a full input tax credit for it, treat the references in paragraphs (1)(b) and (2)(b) to the day of Royal Assent as references instead to 2 December 1998. (4A) For the purposes of this section, a Commonwealth entity is to be treated as if it were entitled or not entitled to a full input tax credit (whichever is relevant) if it would be so entitled or not entitled if it were an entity other than a Commonwealth entity. (5) In this section: review opportunity, for an agreement to which this section applies, means an opportunity that arises under the agreement: (a) for the supplier under the agreement (acting either alone or with the agreement of one or more of the other parties to the agreement) to change the consideration directly or indirectly because of the imposition of GST; or (b) for the supplier under the agreement (acting either alone or with the agreement of one or more of the other parties to the agreement) to conduct, on or after 1 July 2000, a general review, renegotiation or alteration of the consideration; or (c) for the supplier under the agreement (acting either alone or with the agreement of one or more of the other parties to the agreement) to conduct, before 1 July 2000, a general review, renegotiation or alteration of the consideration that takes account of the imposition of the GST.' 19 Royal Assent was given on 8 July 1999, that is after execution of the 1980 Deed and the novation deeds, but before the activation by ACP Magazines of the Savoy Clause. The question is whether the supply to ACP Magazines satisfied the requirements of subs 13(1) of the Transition Act. The Commissioner concluded that the 1980 Deed was a written agreement, identifying the supply and identifying a way of working out the consideration in money for that supply. The supply was therefore GST-free. As a result, there was no taxable supply, no creditable acquisition and no input tax credit. The appeal 20 ACP Publishing submits that the supply was not GST-free pursuant to s 13 of the Transition Act because there was no relevant written agreement identifying the supply or the consideration for the supply, or a way of working out such consideration. "...identifies a supply" 21 ACP Publishing submits that cl 7.1 of the 1980 Deed: '...does no more than contemplate the possibility of one of four alternative (binding) agreements coming into existence pursuant to which one of two alternate supplies would be made for one of two alternate considerations in the following circumstances: (a) Consequent upon an offer by ACP Magazines to sell to Southdown 266 the ACP Profit Entitlement, and the acceptance of that offer, a supply of the ACP Profit Entitlement by ACP Magazines to Southdown 266 for the consideration nominated by ACP Magazines (the "ACP Profit Entitlement Consideration"). (b) In the alternative to sub-paragraph (a), should the offer to sell by ACP Magazines not be accepted by Southdown 266, a supply by Southdown 266 of the Rights to ACP Magazines for a consideration equal to the ACP Profit Entitlement Consideration. (c) Consequent upon an offer by Southdown 266 to sell to ACP Magazines the Rights, and an acceptance of that offer, a supply of the Rights by Southdown 266 to ACP Magazines for the consideration nominated by Southdown 266 (the "Southdown 266 Rights Consideration"). (d) In the alternative to sub-paragraph (c), should the offer to sell by Southdown 266 not be accepted by ACP Magazines, a supply by ACP Magazines of the ACP Profit Entitlement to Southdown 266 for a consideration equal to the Southdown 266 Rights Consideration.' 22 The argument seems to be that par 13(1)(a) of the Transition Act requires that the supply be pursuant to a legal obligation imposed by the relevant written agreement and that the 1980 Deed did not satisfy this requirement. There are two aspects to this submission: that the supply must be made pursuant to the agreement; and that the supply must be made pursuant to a legal obligation imposed by the agreement. 23 It is submitted that the 1980 Deed merely contemplated 'one of four alternative (binding) agreements coming into existence ... '. It may be more accurate to say that it conferred upon each party an option to terminate the joint venture by offering to sell at a nominated price. In taking that step, either party would necessarily accept the possibility that it may, itself, have to buy at that price. Upon the making of such an offer by one party, the other party acquired the right to decide which of those two events would occur. Whether or not a new agreement was created by the activation of the Savoy Clause is a question similar to that referred to by Dixon CJ in Braham v Walker (1961) 104 CLR 366 at 376. It will only be necessary to consider this question if subs 13(1) is to be construed in accordance with ACP Publishing's submissions. It submits that two cases (both of which are said to be 'not directly in point') support this construction. The first is the decision of Wilcox J in Elmslie v Commissioner of Taxation (1973) 46 FCR 576. That case concerned the liability to capital gains tax of the profits from the sale of shares in a company. Under the relevant legislation the amount was not liable to tax if the shares were acquired prior to 20 September 1985 and: 'Where the asset was acquired or disposed of under a contract, the time of acquisition or disposal shall be taken to have been the time of the making of the contract.' 24 The shares were allotted pursuant to heads of agreement entered into prior to the relevant date. They contemplated the execution of a formal agreement but nonetheless, themselves, had contractual force. The contemplated agreement was not executed until after 20 September 1985. The question was whether the allotment was "under" the heads of agreement. At 591 Wilcox J observed: 'Section 160U sets out the rules for determining that date. ... Section 160U(3) substitutes a different rule where the asset "was acquired ... under a contract". In that case the date of "the making of the contract" applies. It will be noted that the word "contract" is in the singular. The assumption is that a contractually-acquired asset will be acquired under only one contract, the date of which will precisely fix the date of acquisition of the asset. This assumption is irreconcilable with the notion that it is enough that there be a contract that envisages or requires the acquisition of the asset. In a particular case there may be several contracts that contemplate or require a party to acquire an asset. Those contracts may bear different dates. If subs (3) extends to all those contracts, and not just to the contract that directly got in the asset, it would provide a multiplicity of dates in respect of one asset.' 25 The decision concerned legislation which spoke of 'assets ... acquired ... under a contract'. Where a later contract purports to create rights and obligations similar to those created under an earlier contract, it may be a reasonable inference that the parties intended that their rights and obligations under the earlier contract be subsumed in those arising under the later contract. In those circumstances it may be difficult to say that performance under the later contract was "under" the earlier contract, even if such performance was required by both. However the words 'assets ... acquired ... under a contract' are quite different from the words 'identifies a supply'. Use of expressions such as 'under a contract' or 'pursuant to a contract' is so common that it is difficult to avoid the conclusion that it was deliberately avoided in the drafting of s 13. 26 Even if subs 13(1) were construed to mean that the supply must be made "under" the relevant written agreement, it is difficult to see why that description could not be used to describe the relationship between the supply by Southdown 266 and the 1980 Deed. ACP Publishing may be suggesting that the five deeds executed on 24 July 2002 constituted a subsequent agreement as in Elmslie. However that is clearly not the case. Those deeds were all assignments, designed to give effect to pre-existing obligations. The assignment under the first of them (as referred to above) was expressly said to be '[p]ursuant to clause 7' of the 1980 Deed. The parties' rights under the 1980 Deed were merged in the settlement of that transaction, which settlement was effected by the deeds of assignment, but that is a different matter. It cannot be said that the deeds of assignment were pursuant to themselves. Alternatively, it might be argued that the assignments were pursuant to an unwritten agreement arising out of the activation of the Savoy Clause. That argument is also unsustainable. There was no agreement other than that contained in the 1980 Deed. The deeds of assignment gave effect to rights and obligations arising under it. 27 The second case, Commissioner of Taxation v Sara Lee Household & Body Care (Australia) Pty Ltd (2000) 201 CLR 520, addresses the same question as was addressed by Wilcox J in Elmslie and supports the comments which I have made concerning that decision. There is no justification for reading s 13 as requiring that the supply be pursuant to the relevant written agreement. It also follows that subs 13(1) does not require that the supply be pursuant to an obligation imposed by the relevant agreement. In any event, the section does not say that. Further, reference to subs 13(5) suggests the contrary. The subsection deals with review opportunities. A review opportunity is, in effect, an opportunity to review or alter the consideration for a supply identified in a written agreement entered into prior to Royal Assent. Pursuant to subs 13(2) a supply will not be GST-free if it is made after a review opportunity which arises on or after the date of such Assent. If an opportunity to review the price arises after the introduction of GST, it is reasonable to expect that the parties will take that matter into account in fixing any new price. In other words, the legislation contemplates the possibility that future supplies under an agreement to which subs 13(1) applies may be dependent upon further agreement as to price. If price is still to be agreed, there can usually be no obligation to supply. This implies that it was not intended that s 13 apply only to a supply pursuant to a legal obligation imposed by the relevant agreement. 28 The 1980 Deed clearly identified the supply by Southdown 266 to ACP Magazines of the former's interest under that deed. "... identifies the consideration in money, or a way of working out the consideration in money ..." 29 ACP Publishing seems to submit that to leave the calculation of the consideration to one of the parties is not to identify a relevant "way" for the purposes of subs 13(1). Although counsel did not say so expressly, the argument seems to owe something to the cases concerning contracts where terms are left for determination by one or other of the parties. It was at one stage thought that such an "agreement" might fail for uncertainty of terms or absence of agreement. However, in Godecke v Kirwan (1973) 129 CLR 629, Walsh J said at 642 (Mason J concurring): 'It is clearly established that a binding agreement may be made which leaves some important matter, e.g. the price, to be settled by the decision of a third party. I agree with respect with the view of Bray C.J. that, subject to the qualifications to which he refers, there is no reason in principle for holding that there cannot be any binding contract if some matter is left to be determined by one of the contracting parties.' 30 The reference to the decision of Bray CJ is to his Honour's decision in Powell v Jones [1968] SASR 394, particularly at 398. The "qualifications" to which Walsh J referred are not relevant for present purposes. It is true that in Godecke, Gibbs J (as his Honour then was) took a contrary view (at 646-647), but the view of the majority is clear. Such a mechanism may accurately be described as a 'way of working out the consideration in money'. Conclusion and orders 31 In my view the 1980 Deed identified the supply and a way of working out the consideration in money. The appeal must be dismissed with costs. I certify that the preceding thirty-one (31) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Dowsett. Associate: Dated: 6 July 2004 Counsel for the Applicant: Mr R F Edmonds SC Mr J H Momsen Solicitor for the Applicant: Gilbert + Tobin Counsel for the Respondent: Mr G T Pagone QC Mr M K Moshinsky Solicitor for the Respondent: Australian Government Solicitor Date of Hearing: 2 June 2004 Date of Judgment: 7 July 2004