In a test case involving stakes payments in the racing industry, the High Court has held that the Canterbury Jockey Club Inc (the Club) was entitled to GST input tax deductions for stakes payments paid to GST-registered trainers and jockeys in horse races conducted by the Club. (The stakes payments made to horse owners and riding fees paid to riders were not in dispute). The High Court found that stakes payments to trainers and riders were consideration for the services provided and were treated as such both under the rules and in practice, because in the hands of GST-registered participants, the stakes payments were GST liable.
The Club was located in Canterbury. It was an incorporated society and a “racing club” as defined in s 5 of the Racing Act 2003 and was registered for GST with a taxable activity of horse racing.
The Club was also registered with New Zealand Thoroughbred Racing (NZTR) and was subject to the Rules of Racing 2013 (the Rules) which were enforced by NZTR.
The Rules prescribed that those receiving stakes payments and who were GST-registered must pay GST on the stakes payments. NZTR, on behalf of the clubs, paid the stakes to trainers and riders directly, deducted GST from the stakes payments to trainers and riders and issued the necessary tax invoices on the club’s behalf. The clubs collected the GST on the payments for payment to Inland Revenue. The clubs filed their own GST returns and made any required GST payments to Inland Revenue directly.
The Club filed its GST return for the return period ended 30 September 2013. They excluded a claim for input tax credits for stakes payments made by the Club to GST-registered trainers and riders. This followed an agreement between the parties that the Club would adopt a conservative approach in self-assessing its tax position with the intention of proposing an adjustment increasing the Club’s total purchases and expenses (including GST) by the amount of the relevant stakes. The Club would then dispute and challenge the adjustment claimed, by way of a test case, as a representative club for the racing industry.
On 18 December 2013, the Club issued a notice of proposed adjustment (NOPA) to the Commissioner under s 89DA of the Tax Administration Act 1994. It proposed to adjust its return by increasing the total purchases and expenses (including GST) to reflect the GST component on stakes payments made to trainers and riders that year. This proposed adjustment would increase the GST refund due to the Club for the relevant period.
On 13 February 2014, the Commissioner rejected the Club’s NOPA and issued a notice of response (NOR) the next day. In the NOR, the Commissioner stated its position that trainers and riders did not supply services to the Club but supplied services to owners. The Club was, therefore, not entitled to GST input tax deductions.
The issues were as follows:
- Whether trainers and riders supply services to the Club?
(a) What is the legal arrangement among the Club, trainers and riders?
(b) What services do trainers and riders provide on race day and to whom?
(c) Is the contribution of trainers and riders to the Club on race day a “benefit” rather than a “supply”?
- Whether the stakes payments to trainers and riders were consideration for the services provided?
(a) Is there the necessary nexus or reciprocity in the payment of stakes to qualify as consideration?
(b) Are stakes payments rewards by way of “prize money”, not fees for services?
The High Court’s decision
The High Court held that the Club was entitled to GST input tax deductions for stakes payments made to GST-registered trainers and riders in horse races conducted by the Club. The Court found as follows:
Whether trainers and riders supply services to the Club?
- The legal arrangement among the Club, trainers and riders was governed by the Rules of Racing which imposed enforceable and reciprocal obligations on each of the Club, trainers and riders. Those obligations were capable of giving rise to a supply for GST purposes, even in the absence of a contract.
- Trainers and riders supplied services to the Club on race day. The Club paid stakes in exchange for those services, together with GST. Consistent with that supply, trainers and riders (where GST-registered) had GST deducted on their stakes payment, if their horse was finished in a stake-bearing place.
- Participation by the trainers and riders in Club races on race day was a supply of services, for which the Club paid stakes money to the successful trainers and riders and from which the Club also derived a benefit. This benefit did not alter the position that there was a supply of services.
Whether stakes payments to trainers and riders consideration for the services provided?
- Stakes were paid to riders and trainers as consideration for the services they provided in participating and succeeding in obtaining a stake-bearing place at race meetings and in races on race day.
- The Club paid riders and trainers as an inducement to participate in the Club’s races. There was a reciprocal relationship because riders/trainers participated and provided their services to the Club on race day for which they received stakes payments, if they were successful.
- Stakes payments to trainers and riders were not treated as “prize money” but were treated as consideration for services provided because in the hands of GST-registered participants, the stakes payments were GST liable.