Kena Kena Properties Ltd v Attorney General
| Jurisdiction | UK Non-devolved |
| Judge | Lord Hoffmann,Lord Hobhouse of Woodborough,Lord Scott of Foscote |
| Judgment Date | 27 November 2001 |
| Neutral Citation | [2001] UKPC 51 |
| Court | Privy Council |
| Docket Number | Appeal No. 44 of 2000 |
| Date | 27 November 2001 |
[2001] UKPC 51
Privy Council
Present at the hearing:-
Lord Nicholls of Birkenhead
Lord Hoffmann
Lord Hobhouse of Woodborough
Lord Millett
Lord Scott of Foscote
[Majority Judgment delivered by Lord Hoffmann]
Kena Kena Properties Ltd ("KKP") used to run the Kena Kena Rest Home at Paraparaumu Beach. The company joined the Rest Home Subsidy Scheme when the Minister of Social Welfare established it in 1989. The purpose of the scheme was to subsidise the cost of providing rest home accommodation for needy elderly people. A rest home proprietor who joined the scheme agreed to provide a resident with a certain level of accommodation and services in return for a fee which did not exceed the "maximum fee-for-service rate" fixed by the Department of Social Welfare. The department would assess the resident's financial eligibility for subsidy. If he was eligible, his national superannuation or guaranteed retirement income would be paid direct to the rest home proprietor. Sometimes the resident or his relatives, if they had the means, would be required to make an additional contribution. The balance of the fee would be paid to the rest home by the department.
KKP joined the scheme on 15 May 1989 by entering into a contract with the department in a standard form headed "Rest Home Subsidy Scheme. Agreement with Participating Rest Homes". It provided in clause 1 that the department "retains [KKP] to provide the services described in Schedule A … in the above-described rest home … and subject to the conditions described in Schedule B". By clause 4, the department agreed to pay KKP "for the services provided under this Agreement in the manner provided in Schedule D". Schedule A set out the standard of accommodation and services to be provided to residents. Schedule B contained a condition that KKP would not charge subsidised residents more than the maximum fee-for-service. Schedule D provided that the "level of subsidy" would be the difference between the maximum fee-for-service rate (or the rate actually charged, if less) and the resident's contributions by way of superannuation benefit or otherwise.
Paragraph 1(c) of Schedule D provided for annual adjustment of the fee-for-service rate on the first payday in April. The rate was fixed by reference to three components: non-labour operating costs, labour operating costs and a return on investment. At each review the non-labour operating cost element was adjusted by reference to changes in the Consumer Price Index, the labour operating cost element by reference to movements in average weekly wages and the return on investment by reference to changes in market rates of return.
When the fee-for-service rate was first determined in 1989, the calculation of labour and non-labour operating costs took into account the fact that goods and services tax ("GST") would be payable by the rest home proprietor. At that time the rate of tax on dutiable items was 10%. Rest homes were allowed a discount for goods or services not subject to GST and paid 8.2% on the fees they charged. Although the fee-for-service rate was fixed as a global figure without mention of GST, the liability was built into the calculation.
Almost immediately after the signing of the agreement between KKP and the department, on 1 July 1989, the general rate of GST was increased to 12.5% and the rate for rest homes to 10.25%. The unchallenged evidence before the judge of Mr Gallen, on behalf of the department, was that, at the first adjustment of the fee-for-service rate in 1990, the increase was taken into account in determining the new figure. The increased rate was then used to calculate the figures in subsequent years.
On 30 June 1993 the contract between the department and KKP came to an end. On 14 January 1999 KKP commenced proceedings in which it claimed that the sums paid to it by the department during the period from 1 July 1989 until the contract expired should have been increased by the difference between an 8.2% GST rate and a 10.25% rate. This amounted to $17,844.89.
The claim is made by virtue of section 78(2) of the Goods and Services Tax Act 1985:
"Where an alteration in the law is made and a supplier has at any time entered into any agreement or contract in respect of the supply of goods and services with a recipient, unless express provision for the exclusion of any such alteration in the law is contained in the agreement or contract, or where the alteration in the law has been taken into account, every such agreement or contract shall be deemed to be modified as follows:
(a) Where the alteration in the law renders that supply liable to be charged with tax or increases the amount of any tax charged or chargeable in relation to that supply, the supplier may add to the agreed price in the said agreement or contract the amount of that tax or the increase of that tax …
Provided … that this subsection shall not apply to require a public authority to alter any amount agreed to be paid by the authority in respect of any supply of goods and services where the consideration for that supply is in the nature of a grant or subsidy."
KKP says that it entered into an agreement with the department in respect of the supply of goods and services, namely the services to be provided to subsidised residents under Schedule A, for an agreed price, namely the fee-for-service rate or (if less) the total fee charged, less the resident's contribution. It was therefore entitled to add the difference between an 8.2% rate and a 10.25% rate.
There is very little merit in the claim. KKP agreed that increases in its costs should be adjusted each year. If it was dissatisfied with the scheme it could have withdrawn on 60 days notice: see clause 10(a) of the contract. The adjustment made in April 1990 and subsequent years reflected the increase in the rate of GST. So KKP is claiming the increase twice over. But the department has not argued, as possibly it might have done, that the alteration in the law had been "taken into account". It has taken its stand on the proviso, saying that no increase is required because its payments to KKP were "in the nature of a grant or subsidy". This of course has wider implications. It means that no increase would have been required even if the annual adjustment had not taken GST into account.
The appellant's submission, economically and attractively advanced by Mr Napier, is that the payment by the department was a subsidy to the residents but not to the rest home. KKP was simply being paid a commercial rate for the services which it provided under the contract. The words "in the nature of a grant or subsidy" in the proviso should be construed to mean a grant or subsidy to the other party to the contract.
The same point was argued before the Court of Appeal in Director-General of Social Welfare v De Morgan [1996] 3 NZLR 677 and rejected. Richardson P said (at pp. 683-684):
"It is the character or quality of what is to be paid and of the consideration which is given which is crucial, not its receipt in the hands of the payee."
In the present case, Doogue J. and the Court of Appeal followed De Morgan's case without further comment.
Their Lordships do not think that it is possible to restrict the application of the proviso to grants or subsidies of which the beneficiary is the other party to the contract. Most grants or subsidies will be made to public, charitable or private bodies in order to confer benefits upon third parties. They are made because it is considered in the public interest to enable such bodies to provide accommodation, health services, cultural events and so forth to members of the public at concessionary rates. The body in question is not itself the intended beneficiary although the subsidy may enable it to attract business. It is the conduit through which the benefits are provided. If that is not what was contemplated by the proviso, their Lordships find it difficult to imagine what was.
Mr Napier was inclined to concede that the proviso would apply to a case in which the party providing the service in return for the grant or subsidy, although not itself the beneficiary, was a...
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