Damages From Late Payment for Credit Cards
Damages from late payment for credit cards
That financial supplies such as the supply of credit under a credit card contract should be exempt from GST is usual under a value-added tax regime. Australia is no different in this regard. Under such a regime, difficulty may arise when a taxable supply makes its way into the midst of exempt financial supplies. This is exactly what happened in the recent case of American Express International Inc v Commissioner of Taxation [2009] FCA 683 where the Federal Court of Australia found that damages from late payment of a credit card debt were taxable!
The issue was whether payments made by holders of credit cards and charge cards to the issuers of such cards for late payment were subject to GST. In finding that the payments attracted GST, the Federal Court rejected the argument that these payments were consideration for a financial supply and therefore exempt, namely, the supply of an interest on a debt, a credit arrangement or a right to credit.
The Federal Court's inquiry begins with consideration of the immediate circumstances of the late payment in determining whether there was a financial supply in connection with the payments. The Court found no such connection. There was, from the outset, an agreement between the card issuer and the card holder as to the time for payment. The card issuer did not exercise any forbearance. The contract between the card issuer and the card holder was not one under which the obligation of the card holder to pay an amount to the card issuer was deferred. Accordingly, there was no "credit arrangement" arising out of the late payment to which the payments could be connected.
The Court then looked more widely to see if such a connection could be found elsewhere. The key question was whether, if there was a credit arrangement or right to credit between the card holder and the card issuer the payments could be said to be in connection with the supply of such a credit arrangement or right to credit. The Court said that while the obligation to make the relevant payments to a card issuer would not arise unless there was the credit card facility or charge card facility in place between the card holder and the card issuer, the liability for making the payments arose because the card holder had failed to perform that card holder's obligations. They were not therefore consideration in connection with opening, keeping, operating, maintaining or closing the relevant facility. A card holder became liable for making the payment only because that card holder had failed to discharge, that is, had breached, the card holder's contractual obligations under the relevant facility. The "liquidated damages" that become payable as a consequence of failure to pay when due, the debt created upon a charge being debited to the card holder's account, was not consideration in connection with the provision, acquisition or disposal of that debt. The primary obligation of the cardholder was to pay the debt when due. The agreement to compensate the card issuer for the card holder's failure to perform the contractual obligation was the result of a novus actus interveniens, being the breach by the card holder of the card holder's contractual obligation.