The Federal Court has provided greater certainty by solving the inherently circular provision of section 9-80 of the GST ACT

In Commissioner of Taxation v Luxottica Retail Australia Pty Ltd [2011] FCAFC 20 the court demonstrated how it is willing to interpret an unworkable provision in the A New Tax System (Goods and Services Tax) Act 1999 (Cth) (“the GST Act”) by applying the agreement as reached between the parties to an arms-length transaction as the basis for interpretation.


Luxottica Retail Australia Pty Ltd (“Luxottica”) owns subsidiaries such as OPSM and Budget Eyewear and deals in eye-wear and eye-care. Luxottica, and its subsidiaries, promoted the sale of frames for glasses at a discount on the condition that the customers purchase the lenses that fit the frames at full price.

Under the Act the supply of lenses is considered a GST-free supply while the supply of a frame is considered a taxable supply. A dispute arose as to the correct application of GST on the promotion.

The inherent circularity of section 9-80

Section 9-80 of the Act contains the equation used to determine the GST payable on mixed-supplies; that is supplies that contain a taxable component and a tax-free component.

Under s 9-80(2), the value of the actual supply must be calculated with reference to the taxable proportion. However, the taxable proportion is calculated using the value of the actual supply. The Tribunal at first instance, and the Federal Court on appeal, confirmed that the drafting of the section was ‘impenetrably circular’ and unsolvable and therefore required a determination by the court to solve the equation.

Value of actual supply

The arguments between the parties turned on the definition of ‘value of actual supply’. Luxottica argued that the GST should be calculated on the agreed discounted cost of the frame, being the taxable component of the supply. The Commissioner of Taxation, on the other hand, argued (by applying section 9-80 in a confusing and convoluted way) that the discount should be equally shared between the frame and the lenses.

The Tribunal at first instance adopted a “common-sense” and “practical approach” and held that the “agreed price” between the parties to an arm’s length transaction could be used as the ‘value of actual supply’ and this should form the basis for completing the calculation. It rejected the commissioner’s approach that essentially adopted an objective ‘market value’ to resolve the issue.

The Federal Court upheld the Tribunal’s finding and dismissed the Commissioner’s appeal on the basis that the determination of the ‘value of actual supply’ was a question of fact and not of law.

What the finding means

The finding demonstrates that the courts are willing to interpret GST legislation in way that is practicable. The court confirmed that the parties’ agreement as to the price of each item was the correct basis for determining the value of those items for the purposes of calculating GST. It dismissed an approach that requested the court to redefine the agreement within an objective framework.

In simple terms, the court confirmed that the GST applicable to a mixed-supply, being lenses and frames, will be based on the price of the composite items that the buyer and seller have agreed upon.

This article is intended to provide general information only and is not a substitute for legal advice. To obtain legal advice tailored to your situation please contact Rudstein Kron Lawyers.