By Sean Neary, Director – Neary Consulting
This article deals with the decision in the Commissioner of Taxation v Crown Melbourne Limited dealing with the application of the GST rules on gambling to casino “junkets” at Crown Casino in Melbourne. The decision also encompasses the same issue in relation to Crown Casino in Perth, heard as Commissioner of Taxation v Burswood Nominees Ltd as trustee for the Burswood Property Trust.
GST – the Basics
First a quick step through the GST building blocks. Assume a clothing shop purchases shirts for $16.50 and sells for $22, with both amounts including GST. On the Business Activity Statement (BAS) the shop will disclose $2 GST collected on sales, less $1.50 input tax credits on purchases and remit the net $0.50 to the Australian Taxation Office. The $0.50 is exactly 1/11th of the $5.50 margin between the GST inclusive value of sales less purchases.
The above illustrates the multistage operation of GST, with GST being charged on all goods and services – with input tax credits available where those items are used in a business. The multistage application of GST is administratively heavy (i.e. a lot of effort to collect $0.50 in the above example), with the benefit of the system being the “compliance dividend” that arises because all businesses demand Tax Invoices from all other businesses in order be entitled to input tax credits. The compliance dividend is the extra tax collected post GST implementation which couldn’t be explained by a simple change in tax systems (i.e. the multistage tax forced underground operators into the tax system).
The multistage nature of the GST works fabulously in most industries but has issues at the margin. For example, requiring casinos to issue Tax Invoices to all players who have placed bets would rather dull the ambiance around a roulette wheel. As such, special rules in Division 126 apply to gambling.
GST on Gambling
As GST is a tax on margins, Division 126 seeks to tax the margin on gambling by requiring casinos to pay GST at a rate of 1/11th of the margin between wagers placed and winnings paid. Sounds simple!
In casino terms, a junket refers to an arrangement where an organized group of gamblers, usually international high rollers, visits the casino. To attract junkets in an internationally competitive market, Crown offers commissions and/or rebates to the junket operators. A commission is an amount paid based on total gambling turnover and a rebate is an amount paid based on the net gambling loss. Either way, the casino refunds a portion of the proceeds from gambling (although the case is silent on just how wisely the money is spent the second time around).
The issue arises as to the GST treatment of the commissions and rebates. Crown treated these amounts paid as winnings, based on being a contractual obligation under which the junket participants played. Is that fair game, or the tax equivalent of dealing from the bottom of the deck? Crown took a punt and lodged BAS on that basis, with the ATO disagreeing and issuing amended assessments. Crown went “double or nothing” and took the matter to the Federal Court.
The Federal Court in the first instance found in favour of the taxpayer, for the following reasons:
1. The commissions and rebates were a central part of the contracts under which junket participants gambled. The Court found GST should apply to the gambling margins achieved under those contracts;
2. Similarly the commissions and rebates were part of one integrated and indivisible transaction that also included gambling. As the commissions and rebates were inseverable components of the overall arrangement, they couldn’t be somehow segregated for GST purposes; and
3. In quite a technical reasoning, the Court examined the old Qantas GST case and found the commissions and rebates were part of the GST consideration. The Qantas case related to the airline claiming GST shouldn't apply where a passenger purchased a ticket but didn’t turn up for the flight (i.e. without a flight there was no supply and nothing upon which to levy GST). The Court in the Qantas case found GST did apply because the supply in the event of a no-show was the right to fly (as opposed to the flight itself). GST thus applied to all ticket sales, some of which resulted in flights whilst others effectively purchased, but didn’t utilize, the right to fly. The link to Crown is that the net amount retained by the casino was the gambling margin retained by the casino, without the need to delve into the constituent components.
Dissatisfied, the Commissioner called “all in” and appealed.
Full Federal Court
The Full Federal Court took the matter back to the words of the legislation, which states GST should be paid at the rate of 1/11th of the difference between the “total amounts wagered” and “total monetary prizes”. Applying the ordinary meaning of those words, the Full Court found “the commissions and rebates were of a different character from the losses and winnings”. The Full Court found the casino’s own marketing literature described the commissions and rebates as consideration to the junket operator for marketing and other services (activities different to gambling wins and losses).
Referring to the Qantas precedent, the Full Court held the commissions and rebates weren’t mere adjustments to the gambling wins and losses. Rather they were a separate component designed to reward the marketing and other services of the junket operators.
Overall the original decision had taken what would be described as a broad reading of Division 126, that is adjusting the meaning of the legislation to fit the context of Crown’s junket operations. There is no question Crown’s margin was impacted by the commissions and rebates. The question was whether it was the gambling margin that was impacted (and thus the GST on gambling under Division 126) or whether those components separately reflect the cost of marketing.
The Full Court took a narrow reading, meaning they took the words of the legislation literally in finding the commissions and rebates weren’t monetary prizes from gambling. Often courts take liberty in reading legislation broadly where there is ambiguity (often arising from issues not specifically considered by whoever drafted the legislation). However, legislation should only be read broadly to address ambiguity or some unjust or unintended outcome. In this instance, the Full Court held the wording of Division 126 was clear with the intent to be applied to gambling only (with the general GST provisions handling all other transactions). It was a pair of sevens up against four aces. The Full Court found in favour of the Commissioner, including costs.
If you’re seeking clarity on taxation matters, contact Sean Neary on (+618) 6165 4900 or firstname.lastname@example.org.