In a special promotion, a taxpayer offered a discounted price for spectacle frames if the lenses were acquired with the frames. The supply of the lenses was a GST free supply and the price of this supply was full price without a discount. The supply of the frame was a taxable supply but sold at a heavily discounted price. The effect of the transaction was effectively to skew the proportion of the total price to the GST free component of the supply.

The Commissioner did not apply the general anti-avoidance rule to the transaction although this may well have failed given the AAT’’s findings that there were sound commercial reasons for the discounting of frames. there was no commercial imperative for the discounting of lenses and that there was nothing contrived or artificial about the pricing methodology adopted by the taxpayer in its promotional arrangements.

The Commissioner argued that the discount allowed to customers should be deducted from the combined purchase price of the frame. The taxpayer however argued that the discount should be deducted from the frame price only.

The GST legislation recognises that a single supply may be comprised of components that are classified differently for GST purposes and provides for an apportionment of the components based on the value of those components.

The AAT had found in favour of the taxpayer and said a commonsense approach should be taken to the apportionment. This approach meant that the taxable proportion of the single supply was to be calculated by dividing the discounted frame price (less GST) by the actual selling price of the complete pair of spectacles (less GST) and regard was not to be had to what the full price of the frame might have been but for the discount. It regarded “value” as commensurate with “price”.

The Full Bench of the Federal Court held that the AAT’s determination as to the method of apportionment of the value being based on actual price did not involve any error in law on its part.

Therefore the decision of the AAT stands. The taxpayer was therefore able to charge GST only on the part of the overall price that was the price allocated for the taxable supply i.e. the heavily discounted price for the frames.

Notwithstanding the general antiavoidance rule, in a proper commercial context, this decision now affirmed by the Full Bench, may give rise to tax planning opportunities for retailers in incentivising sales.