In Travelex Ltd v Commissioner of Taxation [2010] HCA 33, the High Court held, by a three to two majority, that the supply of foreign currency by Travelex Ltd (Travelex) on the departures side of the Customs barrier at Sydney International Airport was GST-free. In doing so, the court provided guidance on the interpretation of the GST-free exported services rules and their application to financial services.
Background
The case involved the sale of Fijian bank notes by Travelex to a traveller on the departures side of the Customs barrier at Sydney International Airport. The evidence presented established that the traveller was to use the currency outside Australia.
It was common ground by the parties that the supply of foreign currency was a financial supply and therefore input taxed. The main issue for consideration was whether the supply of foreign currency by Travelex was GST-free under the export provisions. In either case, the currency was not subject to GST. Rather, if the sale of the currency was GST-free, Travelex would have a greater input tax credit entitlement on its expenses (since input tax credits can be claimed on expenses related to GST-free supplies, but generally not on input taxed supplies).
The issues
Generally, a supply that is both input taxed and GST-free is treated as GST-free (section 9-30(3)). To be GST-free under Item 4(a) of section 38-190(1), a supply must have the following attributes:
- It must not be a supply of goods or real property;
- It is a supply made in relation to rights; and
- The rights are for use outside Australia.
The case centered principally on whether the supply of foreign currency is a supply made 'in relation to rights' and therefore GST-free under Item 4(a) of section 38- 190(1).
Full Federal Court decision
At first instance in the Federal Court, Emmett J held that the supply in question was a supply of the ownership of the physical notes and not a supply in relation to rights. His Honour considered the essential character of the supply was not one of rights, that is, the supply of rights was merely incidental to, or a consequence of, the supply of the bank notes. By majority, the Full Federal Court (Stone and Edmonds JJ, Mansfield J in dissent) dismissed the appeal (the majority judges generally agreed with Emmett J's reasoning).
The majority's decision
The majority of the High Court (French CJ, Hayne J and Heydon J) held that the supply of foreign currency by Travelex was a supply made 'in relation to rights' under section 38-190 and was therefore GST-free.
In particular, the majority identified the supply in issue as 'the financial supply constituted by the disposal to the traveller of an interest in (here, the ownership of) the currency of the foreign country'. The issue was whether this was a supply made in relation to rights for use outside Australia.
French CJ and Hayne J determined that the supply of foreign currency is a supply made 'in relation to rights' on the basis that 'currency has value only because of the rights that attach to it'. The rights that attach to it are constituted by the transfer of ownership and the subsequent ability of the new owner to use the currency, without which the property in the currency would be worthless. In their Honours' view, this was sufficient to constitute a supply in relation to rights.
Based on the evidence, it was clear that the currency was to be used by the traveller overseas and therefore the rights that attach to the currency were for use outside Australia. French CJ and Hayne J therefore found that the supply of foreign currency by Travelex was GST-free under Item 4(a) of section 38-190(1).
Taking a different approach but arriving at the same conclusion, Heydon J determined that the transaction, in substance, was the supply of rights. Heydon J agreed with the majority that the supply of the rights in respect of the foreign currency were not incidental to the ownership of the foreign currency. Heydon J stated 'the handing over of the pieces of paper constituted, evidenced, and was not capable of disaggregation from, the supply of rights. Apart from those rights, the pieces of paper had little value'. Heydon J hence reasoned that the supply of the currency was a supply 'in relation to the rights'. Since Mr Urquhart acquired the currency with the intention of spending it in Fiji and did spend it there, the rights were for use outside Australia.
Crennan and Bell JJ 's decision
The minority (Crennan and Bell JJ) held that the supply of the foreign currency was not a supply made in relation to rights and therefore was not GST-free. Their Honours equated the concept of rights in Item 4(a) with the narrower concept of rights in the definition of supply (section 9-10(2)(e)), which includes the creation, grant, transfer, assignment or surrender of any right. The minority accepted that the holder or owner of the foreign currency had certain rights in relation to the currency, however, to be a supply made in relation to 'rights' within Item 4 of section 38-190(1), the 'right' must be 'capable of transfer or assignment alone or in combination with other things'. Their Honours reasoned that the rights of the holder or owner of the foreign currency were incidental to the notes and were not separate rights capable of independent supply.
Implications of the decision
There are a number of implications of the decision, which are discussed below.
What are supplies made in relation to rights?
The crucial aspect of the decision was the characterisation of the sale of the currency for GST purposes. French CJ and Hayne J considered that the currency only has value because of the rights that attach to it and the sale was therefore characterised as a supply in relation to rights. Similarly, Heydon J considered that the currency was properly characterised by reference to the rights enjoyed by the holder of the currency as created by the statute law of Fiji, since this was the 'pith and substance' of the transaction.
Item 4 clearly applies to supplies of rights, such as intellectual property licences, insurance, and capacity in a telecommunications network. There is some uncertainty as to the other types of supplies that might be described as supplies in relation to rights. Examples might include cross border leases of goods and the sale of shares.
A further issue is whether services provided in relation to rights are covered by Item 4(a). The Court was not required to consider this issue and it remains contentious. For example, do brokerage services provided in relation to a share transaction constitute supplies in relation to rights?
Rights for use outside Australia
In the case, the currency was acquired by Mr Urquhart on the destination side of the customs barrier, who then travelled to Fiji and used all of the currency there. Accordingly, the parties agreed that the currency was for use outside Australia and this was not an issue in the case.
The Court appeared to accept that whether the currency was for use outside Australia was primarily determined by the subjective intention of the recipient of the supply.
There will be practical difficulties for financial institutions (suppliers) that need to identify the subjective intention of their customers in order to determine whether their supplies are GST-free.
Further, it may not always be clear as to whether supplies are for use outside Australia. For example, foreign currency transactions are often used for hedging purposes and it remains to be seen whether such uses could be described as being for use outside Australia.
GST refunds
Many financial institutions will be entitled to claim GST refunds as a result of the decision. Such institutions will need to consider the extent to which the decision extends to arrangements other than foreign currency transactions which constitute supplies in relation to rights and, further, whether such rights are for use outside Australia.
Such financial institutions should also consider the possibility that the government will amend the GST law to overcome the decision.
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