Case S54 (1996) 17 NZTC 7,354

Taxation 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 are
financial services within the definition of that term in ss 3(1)(c) and (ka) of the Goods and
Services Tax Act 1985. If they are then the services are exempt from payment of output tax
and 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 other
extensions 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 of
agreed sums of money and to provide a service which enhances the public patronage which
the restaurant may enjoy. The money paid is an amount which the objector considers a given
restaurant will earn from provision of food and drink in an agreed period usually 1214
weeks 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 has
separately contracted. The card is honoured at those restaurants by allowing the card holder
to 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 to
immediately 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 and
the 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. The
restaurant gets an advance payment which assists its cash flow, it is left with no bad debts
from card holder customers, and there is a good prospect of enhanced business as card
holders gravitate to those restaurants which are clients of the objector. The objector receives a
fee of $72 +GST from every card holder member plus 25% of the cost of all meals eaten by
members. 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 services
which are an exempt service pursuant to s 3. In particular the Commissioner relies on ss
3(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 the
customer is a taxable supply and must be returned at the full retail price plus GST. The
arrangements by which the customer obtains a discount are the supply of a financial service
and therefore exempt [from] GST.
The objection and the issue
This has been expressed in various ways by the objector's legal and accounting advisers, but
it is accepted for the purposes of this decision that the issue in dispute narrows to one
question, which may be expressed in this way:
Do the documents evidencing the transactions between the parties disclose the provision by
the 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). If
no, then he fails under both.
Viewed in that way it is possible to focus on the construction of the documents to ascertain
whether 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. The
restaurant will receive only half the retail value of its meals. The other half will be shared
equally 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 between
them 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 termination
of the agreement for any of the reasons set out in it all outstanding credits due to (the
objector) as prescribed by the business account with (the objector) shall be payable in each in
full in one lump sum upon demand. It is clear that the credits referred to is the balance
owing 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 business
account 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 argument
runs, pre-payment to the restaurant by the objector for those meals. That in turn creates an
obligation on the part of the restaurant to give to the objector a credit for the full retail value
of the meals sold. Viewed in that way there is no debtor and creditor relationship between the
restaurant and the card holder but there is a debtor and creditor relationship between the
restaurant and the objector. The restaurant must sell meals at 1/2 price to card holders until it
extinguishes the advance from the objector. In that way by a process of debiting and crediting
a 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 the
objector 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 character
of the transaction. The further fact that the quantum of the advance is calculated by reference
to estimated future sales by the borrower is also irrelevant in my view to the character of the
arrangement. The parties to a loan transaction are free to structure the amount to be borrowed
and lent in any lawful way they wish. The fact is that in common commercial parlance the
objector has advanced to the restaurant an amount of working capital which it must repay
according to the terms of the agreement. That is a loan. It is therefore within the definition of
a debt security because in the hands of the objector it is a right to be paid money that is
owing 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 acceptance
endorsement or transfer of a debt security ie an interest in or right to be paid money that is
owing by any person.
It is difficult to see how the arrangements between the objector and the restaurant are within
that description. What the definition is clearly intended to refer to is transactions such as the
issue of stock (public or private) or a debenture, or shares which can be negotiated. The
definition is not apposite to include the creation of a simple debtor and creditor relationship
in 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 it
relates issue, allotment, drawing, acceptance, endorsement, transfer of ownership.
This is strongly suggestive that Parliament intended the term financial services in s 3(1)(c) of
the GST Act to apply to the type of transactions referred in more detail in s 2(1) of the
Securities 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 reference
to 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 debt
security. The only remaining question is, does this transaction fit any of the other categories
in s 3(1)(ka). The short answer is that the Commissioner rests his case solely on the debt
security question and does not, rightly in my view, pray in aid any of the other elements of s
3(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 the
card holder and the objector is the obligation of the card holder to pay to the objector a sum
equivalent 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 not
in any sense a loan to the card holder by the objector. It is payment for services provided by a
third 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 not
meet the basic requirement that there be a loan in existence between the parties. Absent that
ingredient 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 described
as the provision of a financial service.

Determination
The respondent acted incorrectly in treating the supply of services by the objector as financial
services in terms of the definition in ss 3(1)(c) or (ka) of the Goods and Services Tax Act
1985.