Sex and the single supply

The importance of establishing who is the ‘supplier’ for the purposes of the GST Act.

A fundamental component of the application of the Goods and Services Tax (GST) is that you make a supply for consideration and therefore, are liable to pay the tax. In the majority of cases, identifying who it is that makes the supply is straightforward. However, there are circumstances where it may not be as clear as to who is the supplier or even who is making supplies to whom. The recent decision by the Administrative Appeals Tribunal in the matter of HKYB and Commissioner of Taxation [2018] AATA 4770 (HKYB) demonstrates just how tricky it can become.

In HKYB, the taxpayer operated a brothel and did so on the basis there were two supplies being made to clients – a supply of a sexual service by a sex worker, and a separate supply of room hire. Complicating this approach was the fact the Operator only charged clients a single fee with no breakdown of the various components. For GST purposes, the Operator treated the room hire component as being subject to GST and left the GST treatment of the sexual service up to the sex worker (who were considered to be an independent contractor).

According to the Administrative Appeals Tribunal, there was only a single supply made – that being a supply of the service and the room hire combined and was made by the Operator to the client. In reaching this conclusion, the Tribunal considered a number of determinative facts. Specifically, that payments were always made by the client to the Operator as a gross amount and not split into various components. A further determinative factor was the existence of a contract for the services being made between the client and the Operator. In this regard, the Tribunal went to great lengths to highlight their decision was one based on the specific facts of the case and was not one that should be considered to be resetting the principles of supply within the context of the GST Act.

An interesting part of the decision was the Tribunal’s highlighting that should the Operator and the sex workers have documented their relationship differently, the GST answer may also have been different. Perhaps this was best demonstrated by the Tribunal’s commentary on an alternative business model where factual payments and signed agreements supported each other, which was one of the key factors to justify the GST treatment adopted in the New Zealand Case U26 (1999) 19 NZTC 9243. In contrast with HKYB, the New Zealand Taxation Review Authority concluded that in U26, the owner and operator of a massage parlour supplied the venue and the workers made a separate supply of massage services.

Therein probably lies the lesson from this case – there might have been a chance to achieve a different result had there been two, more detailed arrangements in place. One between the Operator and the sex workers to demonstrate the roles and responsibilities between each other, and the other between the client and the Operator that would provide a more detailed description of what was being supplied and by whom.

The case demonstrates the importance of proper documentation to describe the contractual relationship between parties as well as reviewing the supplies and acquisitions in supply chain transactions to achieving the desired GST outcome.