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Case S54 (1996) 17 NZTC 7,354Taxation Review Authority; TRA No 95/11, 2/96.Hearing: 7 Dec 1995; Decision: 3 Jan 1996.

Willy DJ:

Background

This case concerns the question of whether or not the services offered by the objector arefinancial services within the definition of that term in ss 3(1)(c) and (ka) of the Goods andServices Tax Act 1985. If they are then the services are exempt from payment of output taxand the objector is unable to claim any refunds of input tax paid by it.

The facts

The objector is in the business of offering services to restaurant patrons. There are otherextensions to the services but they can be ignored for the purposes of this decision.

The structure is as follows: The company contracts with restaurants to make payments ofagreed sums of money and to provide a service which enhances the public patronage whichthe restaurant may enjoy. The money paid is an amount which the objector considers a givenrestaurant will earn from provision of food and drink in an agreed period usually 1214weeks ahead.

The company separately contracts with members of the public who wish to use its services.The effect of that contract is to sell to the customer for an annual fee of $72 plus GST a

plastic card which may be used at any of the restaurants with whom the objector hasseparately contracted. The card is honoured at those restaurants by allowing the card holderto buy food and drink at a 50% discount on advertised menu prices.

The card holder must also own a pre-agreed credit card and agrees to allow the objector toimmediately debit that credit card with the cost of the meal incurred plus 25% of that cost.The result is that the 50% discount on the meal is shared equally between the customer andthe objector, and along with the $72 card fee becomes its source of income.

There are advantages to all concerned. The customer gets a substantially cheaper meal. Therestaurant gets an advance payment which assists its cash flow, it is left with no bad debtsfrom card holder customers, and there is a good prospect of enhanced business as cardholders gravitate to those restaurants which are clients of the objector. The objector receives afee of $72 + GST from every card holder member plus 25% of the cost of all meals eaten bymembers. In fact the company has been in existence in New Zealand for three years and has

reached a break-even after three years trading losses.The assessment

The Commissioner considers that the objector does not have a taxable activity as defined by s 6 of the Goods and Services Tax Act because it is making a supply of financial serviceswhich are an exempt service pursuant to s 3. In particular the Commissioner relies on ss3(1)(c) and (ka). In its initial assessment the Commissioner also relied on other parts of s 3

but no longer seeks to do so.

The Commissioner takes the view that the supply of the meal by the restaurant to thecustomer is a taxable supply and must be returned at the full retail price plus GST. Thearrangements by which the customer obtains a discount are the supply of a financial serviceand therefore exempt [from] GST.

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The objection and the issue

This has been expressed in various ways by the objector's legal and accounting advisers, butit is accepted for the purposes of this decision that the issue in dispute narrows to onequestion, which may be expressed in this way:

Do the documents evidencing the transactions between the parties disclose the provision bythe objector of a financial service in the nature of a debt security?

If the answer is yes, then the Commissioner succeeds under both s 3(1)(c) and s 3(1)(ka). Ifno, then he fails under both.

Viewed in that way it is possible to focus on the construction of the documents to ascertainwhether they give rise to the creation of a debt security.

This is the formula which the parties have used to express the agreement between them. Therestaurant will receive only half the retail value of its meals. The other half will be sharedequally between the objector and the card holder. It is an obscure way of achieving that end,

but counsel are agreed that is what the agreement achieves. The question at issue betweenthem is whether or not the arrangement is for the provision of a financial service.

The only other relevant fact is that the agreement provides that in the event of the terminationof the agreement for any of the reasons set out in it all outstanding credits due to (theobjector) as prescribed by the business account with (the objector) shall be payable in each infull in one lump sum upon demand. It is clear that the credits referred to is the balanceowing by the restaurant of any monies advanced by the objector.

The question is does that transaction evidence a loan by the objector to the restaurant?

The objector says not. Counsel countered that the money credited and debited in the businessaccount is a predetermined estimate of the value of meals which a particular restaurant will

sell to card holders over a future agreed period (1012 weeks). It is therefore, the argumentruns, pre-payment to the restaurant by the objector for those meals. That in turn creates anobligation on the part of the restaurant to give to the objector a credit for the full retail valueof the meals sold. Viewed in that way there is no debtor and creditor relationship between therestaurant and the card holder but there is a debtor and creditor relationship between therestaurant and the objector. The restaurant must sell meals at 1/2 price to card holders until itextinguishes the advance from the objector. In that way by a process of debiting and creditinga running account between them it is constantly reducing the amount of the original advance.

That in my view bears all of the hallmarks of a loan. It is a sum of money advanced by theobjector which must be repaid to it by the restaurant on the terms and conditions provided for

in the agreement. The fact that those terms are unusual does not alter the essential characterof the transaction. The further fact that the quantum of the advance is calculated by referenceto estimated future sales by the borrower is also irrelevant in my view to the character of thearrangement. The parties to a loan transaction are free to structure the amount to be borrowedand lent in any lawful way they wish. The fact is that in common commercial parlance theobjector has advanced to the restaurant an amount of working capital which it must repayaccording to the terms of the agreement. That is a loan. It is therefore within the definition ofa debt security because in the hands of the objector it is a right to be paid money that isowing by any person.

It does not follow however that the transaction between the objector and the restaurant is the provision of a financial service. That requires the issue, allotment drawing acceptanceendorsement or transfer of a debt security ie an interest in or right to be paid money that isowing by any person.

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It is difficult to see how the arrangements between the objector and the restaurant are withinthat description. What the definition is clearly intended to refer to is transactions such as theissue of stock (public or private) or a debenture, or shares which can be negotiated. Thedefinition is not apposite to include the creation of a simple debtor and creditor relationshipin the nature of a loan, unless perhaps it is an incident of the loan that it become negotiable

into the hands of third parties. There is no suggestion that is so here.I am fortified in this view of s 3(1)(c) by the description of the various activities to which itrelates issue, allotment, drawing, acceptance, endorsement, transfer of ownership.

This is strongly suggestive that Parliament intended the term financial services in s 3(1)(c) ofthe GST Act to apply to the type of transactions referred in more detail in s 2(1) of theSecurities Act 1978: Debentures, debenture stock, bonds, notes, certificate of deposits,convertible notes, and similar transactions.

I therefore do not consider that the Commissioner's assessment can be supported by referenceto s 3(1)(c). I now turn to s 3(1)(ka).

I have already held that the transaction between the objector and the restaurant is not a debtsecurity. The only remaining question is, does this transaction fit any of the other categoriesin s 3(1)(ka). The short answer is that the Commissioner rests his case solely on the debtsecurity question and does not, rightly in my view, pray in aid any of the other elements of s3(1)(ka).

I therefore find for the objector that the transaction between it and the restaurant is not the provision of a financial service and is therefore not an exempt supply.

It follows from the earlier analysis of the facts that the essence of the agreement between thecard holder and the objector is the obligation of the card holder to pay to the objector a sumequivalent to half of the retail cost of every meal eaten at a restaurant which accepts the card,

plus half of the balance and an annual fee of $72.This is a simple creditor/debtor relationship between the card holder and the objector. It is notin any sense a loan to the card holder by the objector. It is payment for services provided by athird party to the contract, liability for which has been assumed by the objector in advance.

It follows therefore applying the approach taken by Fisher J in the DFC case it does notmeet the basic requirement that there be a loan in existence between the parties. Absent thatingredient the transaction is not in the nature of a debt security and cannot therefore be the

provision of a financial service.

In addition for the reasons given earlier the transaction between the card holder and the

objector is so clearly outside of anything contemplated by s 3(1)(c) that it cannot be describedas the provision of a financial service.

Determination

The respondent acted incorrectly in treating the supply of services by the objector as financialservices in terms of the definition in ss 3(1)(c) or (ka) of the Goods and Services Tax Act1985.