CANTERBURY JOCKEY CLUB INCORPORATED v COMMISSIONER OF INLAND REVENUE [2018] NZHC 2569

CANTERBURY JOCKEY CLUB INCORPORATED v COMMISSIONER OF INLAND REVENUE [2018]NZHC 2569 [1 October 2018]IN THE HIGH COURT OF NEW ZEALANDWELLINGTON REGISTRYI TE KŌTI MATUA O AOTEAROATE WHANGANUI-Ā-TARA ROHECIV-2016-485-383[2018] NZHC 2569BETWEEN CANTERBURY JOCKEY CLUBINCORPORATEDPlaintiffAND COMMISSIONER OF INLANDREVENUEDefendantHearing: 2 October 2017 and 20 July 2018Appearances: M G Colson and A Y Ronald for the PlaintiffP H Courtney and D M Consedine for the DefendantJudgment: 1 October 2018JUDGMENT OF CULL JTABLE OF CONTENTSFactual background 5Racing governance 8Races 14Clubs 15Canterbury Jockey Club and the current dispute 22Relevant law 28What is "supply"? 37The Rules of Racing 41Question 1: Do trainers and riders supply services to the Club? 46(a) What is the legal arrangement among the Canterbury Club, trainers andriders? 47Parties' positions 47Legal principles on contract for supply 51Discussion 57Conclusion 71(b) What services do trainers and riders provide on race day and to whom? 73Parties' positions 73Discussion 76The Club's business 79The Rules on stakes payments 80GST on stake money is not neutral 86Conclusion 94(c) Is the contribution of trainers and riders to the Club on race day a"benefit" rather than a "supply"? 93Conclusion 106Question 2: Are stakes payments to trainers and riders consideration for theservices provided? 107(a) Is there the necessary nexus or reciprocity in the payment of stakes toqualify as consideration? 108Parties' positions 108Legal principles on consideration and nexus 112Discussion 123Conclusion 132(b) Are stakes payments "prize money"? 133Legal principles 135Discussion 140Conclusion 156Summary of conclusions 157Result 159[1] This is a Goods and Services Tax (GST) test case involving stakes payments1in the racing industry. The issue to determine is whether Canterbury Jockey ClubInc (the Club) is entitled to GST input tax deductions, for stakes payments paid toGST registered trainers and jockeys in horse races conducted by the Club. Thestakes payments made to horse owners and riding fees paid to riders are not indispute.[2] Whether the Club is entitled to GST input tax deductions for stakespayments depends on two key factual issues:(a) whether horse riders and trainers "supply" any services to the Club;and(b) whether the stakes payments paid by the Club to horse riders andtrainers are "consideration" for any services provided.1 Stakes payments are prize money derived as a result of a horse finishing a race in a stake-bearingposition at a race meeting.[3] The Club's position is that trainers and riders provide services to it on racedays for consideration, in the form of stakes payments. Therefore, it says, it isentitled to GST input deductions, for stakes payments made to trainers and riderswho win.[4] The Commissioner of Inland Revenue (the Commissioner) denies the Clubis entitled to an input tax deduction, because there is no supply of services for stakespayments by trainers and riders to the Club for the purposes of the Goods andServices Tax Act 1985 (the GST Act). The Commissioner says trainers and riderssupply services only to the horse owners.Factual background[5] The evidence at the hearing was adduced by an agreed statement of facts,together with the evidence of a court-appointed industry expert, Mr Fenwick.2[6] Following the initial hearing, the parties filed further submissions and theClub filed an affidavit from New Zealand Thoroughbred Racing's (NZTR) financialofficer, with examples of NZTR's invoicing in relation to payments made to trainers,riders, owners and clubs following a race meeting.[7] The following are the agreed facts on the racing industry's structure.Racing governance[8] The New Zealand Racing Board (NZRB) oversees the racing industry andconducts betting on races for all three racing codes, the relevant one here being thethoroughbred horse racing code.3 Betting may occur only at race meetingsconducted by registered racing clubs. As a result of the conduct of betting by NZRB,profits are distributed to the three racing codes.2 Under r 9.57 of the High Court Rules 2016.3 The other two codes are harness and greyhounds.[9] NZTR is the governing body overseeing the thoroughbred racing codethroughout New Zealand. Importantly, it distributes, among its registered racingclubs, NZTR's share of NZRB's surpluses.[10] NZTR establishes, enforces and amends the Rules of Racing 2013 (theRules),4 which govern the various relationships and interactions between parties whochoose to be subject to the rules. These include:(a) registered thoroughbred racing clubs (clubs), including Canterbury;(b) owners or lessees of horses (owners);(c) horse trainers (trainers); and(d) jockeys, including apprentices (riders).[11] Those four groups must consent to being subject to the Rules, if they wishto participate in thoroughbred racing.[12] The Racing Act 2003 gives NZTR the sole authority to make and administerthe Rules and to provide for "prize money and other stakes".5 NZTR has broadpowers to regulate what stakes are paid for, to whom and in how many pools. Stakemoney is payable under the rules, regardless of the arrangements that may have beenreached between owners, trainers and riders for the provision of services and theirpayment. From 1 June 2013, the Rules came into effect, by which NZTR (on behalfof clubs) must pay to the owners, trainers and riders their share of their stake money.[13] When a horse finishes a race in a stake-bearing place, the Rules requireNZTR, on behalf of a club, to pay stakes payments to the owners, trainers and ridersin the following proportions:4 These rules have subsequently been amended, effective from 9 July 2018. The previousamendment applies and is what was argued before me for the purposes of this case.5 Racing Act 2003, s 29(2)(e).(a) 80 to 85 per cent of the gross stakes payments to the owner;6(b) 10 per cent of the gross stakes payments to the trainer;7 and(c) 5 to 10 per cent of the gross stakes to the rider.8Races[14] NZRB has a dates committee, which allocates race dates to clubs. Theallocation of a date entitles a club to a betting licence, although in practical terms,NZRB conducts race betting.Clubs[15] Clubs organise and manage race meetings, including the advertising andpromotion to the industry and the wider public. Horses compete in races for prizemoney, which is known as stakes or stake money. On behalf of clubs, NZTR collectsthe entry fees payable when a horse is nominated and accepted for a race, anddisburses the prize or stake money.[16] Clubs receive revenue or funds for race day activities, from one or more ofthe following sources:(a) nomination and acceptance fees;(b) spectator/gate entry fees;(c) food and beverage sales;(d) hospitality packages;(e) commission on bets placed on the races at that meeting;(f) sponsorship; and(g) membership fees.6 Rules of Racing 2013, r 505(2).7 Rule 326(4).8 Rule 332(1).[17] Clubs compete to attract horses, trainers and riders to participate in theirrace meetings. Stakes payments are paid to attract owners and trainers to enter thehorses into the club races, to attract riders to attend race meetings and to reward theconnections of a horse that finishes in a stake-bearing place. The size of the stakesoffered is a relevant factor. Higher stakes at a race meeting generally attract higherquality horses and more people engaging with the race meeting, whether attendingthe course or through off-course betting.[18] Registration for GST varies within the industry. Owners may be registeredfor GST, if they operate a business involving race horses, but many will not be, ifhorse racing is a hobby or recreational pursuit. Trainers, who are usually paid amonthly fee by owners to cover the services they provide, are in the business ofproviding the services of training horses, so will usually be GST registered. TheRules require that a trainer notifies NZTR whether they are GST registered. Ridersare required to be licensed by NZTR in order to participate in race meetings.[19] Riders are paid a set fee by owners to ride horses at races, regardless of theoutcome of the race. These are rider fees and are separate arrangements to whichclubs are not a party. A trainer normally engages a rider for a race, although ownersmay also be involved. The majority of riders are GST registered and, again, theRules require that a rider notifies NZTR whether they are GST registered.[20] The Rules provide that an owner or trainer may enter a horse for a race.However, Mr Fenwick, the industry expert, told the Court that it is almost always thetrainer who makes the decision about which horse is suitable for a specific race. Hesaid:Normally it would be the trainer that would firstly determine the race orraces that the horse would compete in and it would normally be the trainerwho would give the instructions to the rider. They may do that inconsultation with the owner but I think most owners would really leave it tothe trainer.[21] Although it is the owner's horse that is entered into a race, the trainer isdescribed as "the agent for the owner" and Mr Fenwick added that it would be veryrare for an owner to ring and nominate their horse. It is normally done by the trainer.The trainer also oversees the weight restrictions and selects the rider for the race.Canterbury Jockey Club and the current dispute[22] Canterbury is a racing club located in Canterbury. It is an incorporatedsociety,9 and a "racing club" as defined in s 5 of the Racing Act, which is registeredfor GST with a taxable activity of horse racing.[23] The Club is also registered with NZTR and, like other clubs, is subject tothe Rules, which are enforced by NZTR.10[24] The Club filed its GST return for the return period ended 30 September2013, which excluded a claim for input tax credits for $102,428.82 worth of stakespayments made by the Club to GST registered trainers and riders. This followed anagreement between the parties that the Club would adopt "a conservative approach inself-assessing its tax position", with the intention of proposing an adjustmentincreasing the Club's total purchases and expenses (including GST) by the amount ofthe relevant stakes. The Club would then dispute and challenge the adjustmentclaimed, by way of this test case, as a representative club for the racing industry.[25] On 18 December 2013, the Club issued a Notice of Proposed Adjustment tothe Commissioner under s 89DA of the Tax Administration Act 1994. It proposed toadjust its return by increasing the total purchases and expenses (including GST) by$102,428.82, to reflect the GST component on stakes payments made to trainers andriders that year. This proposed adjustment would increase the GST refund due to theClub by $13,360.28 for the relevant period.[26] On 13 February 2014, the Commissioner rejected the Club's Notice ofProposed Adjustment and issued a Notice of Response the next day. In the Notice ofResponse, the Commissioner stated its position that trainers and riders do not supplyservices to the Club but supply services to owners. Thus, the Club was not entitledto GST input tax deductions.9 Under the Incorporated Societies Act 1908.10 Rules of Racing 2013, r 101(1).[27] As the Rules prescribe, those that receive stake payments and who are GSTregistered, must pay GST on the stakes payments. NZTR, on behalf of the clubs,pays the stakes to trainers and riders directly, deducts GST from the stakes paymentsto trainers and riders, and issues the necessary tax invoice on the club's behalf.11The clubs collect the GST on the payments for payment to the IRD. The clubs filetheir own GST returns and make any required GST payments to Inland Revenuedirectly. The Rules are discussed further under the first issue.Relevant law[28] The relevant legal principles to be applied to this case have their foundationin the statutory provisions of the GST Act, the Rules of Racing and the applicablecase law and authorities.[29] In this section, the relevant provisions of the GST Act and the principlesapplicable to the statutory requirements are canvassed in broad overview. The Rulesand the authorities relevant to the two principal issues in this case are discussedfurther under the respective issues.[30] "Goods" and "services" are defined widely under s 2(1) of the GST Act:goods means all kinds of personal or real property; but does not includechoses in action, money or a product that is transmitted by means of a wire,cable, radio, optical or other electromagnetic system or by means of a similartechnical system.services means anything which is not goods or money.[31] Section 8(1) of the GST Act is the core provision imposing GST:8 Imposition of goods and services tax on supply(1) Subject to this Act, a tax, to be known as goods and services tax,shall be charged in accordance with the provisions of this Act at therate of 15% on the supply (but not including an exempt supply) inNew Zealand of goods and services, on or after 1 October 1986, by aregistered person in the course or furtherance of a taxable activitycarried on by that person, by reference to the value of that supply.11 Rules of Racing 2013, rr 326(4) and (6), 331(3) and 332(1).[32] Taxable activity under the GST Act includes any activity that involves thesupply of goods and services to any other person for consideration.12 Considerationmust be provided in relation to the supply of any goods and services.[33] The GST Act distinguishes between output tax and input tax.[34] Output tax under s 2(1) means tax charged under s 8(1) for the supply ofgoods and services made by a registered person. Thus, a GST registered person mustcharge GST on goods and services they supply to others.[35] Input tax under s 3A means tax charged under s 8(1) on a supply of goods orservices acquired by a registered person. Thus, GST must be charged on a supply ofgoods and services acquired by a registered person.[36] So in completing a GST return, the registered person must deduct from theoutput tax charged in the taxable period, the amount of the input tax in relation to thesupply of goods and services acquired by the registered person. The differencebetween the two results in either a payment by the registered person to theCommissioner or a payment by the Commissioner to the registered person.What is "supply"?[37] Under s 8(1) of the GST Act, GST is imposed on the supply of goods orservices. "Supply" is defined in s 5(1) as including "all forms of supply".[38] In Databank Systems Ltd v Commissioner of Inland Revenue, Davison CJinterpreted "supply" as follows:13In its ordinary every day usage the word "supply" is given the followingmeaning in the Shorter Oxford English Dictionary:1. To help, aid, assist; to succour, relieve; to support, maintain;2. To furnish with:3. To add:12 Goods and Services Tax Act 1985, s 6(1)(a).13 Databank Systems Ltd v Commissioner of Inland Revenue [1987] 2 NZLR 312 (HC) at 323.4. To make up for:5. To fulfil, satisfy:6. To furnish, provide:7. To furnish with what is necessary:8. To furnish or provide with something.In the context of s 5(1) "supply" simply means "to furnish with or provide".[39] A supply must involve the transfer of something to someone else, asemphasised by Tipping J in Chatham Islands Enterprises Trust v Commissioner ofInland Revenue:14[28] While it is clear that the services do not have to be supplied to theperson providing the consideration (as defined) for them; it is still necessaryfor there to be a supply of services within the proper meaning of that phrase.Although services are defined as meaning anything which is not goods, it isstill necessary for there to have been a supply of something[40] There must also be a nexus or connection between the payment and thesupply of services, with reciprocity in the legal relationship between the supplier andthe person providing the consideration.15The Rules of Racing[41] The Rules changed the way in which stake money is paid. Previously,owners were responsible for paying the share of stake money due to trainers orriders. As a matter of practice, as the Commissioner submits, NZTR deducted thepayments due to trainers and riders, before paying the net amount to owners. Thiswas confirmed by Mr Fenwick. In the mid-1990s, NZTR centralised the drawing-upof the fields for race days, the taking of nominations and acceptances, and a paymentsystem, where NZTR paid the trainers and riders directly "and the owners got paiddirect less any deductions." NZTR, in practice was making those payments onbehalf of clubs.14 Chatham Islands Enterprises Trust v Commissioner of Inland Revenue [1999] 2 NZLR 388(CA).15 At [17] and [31]; and Commissioner of Inland Revenue v New Zealand Refining Co Ltd (1997)18 NZTC 13,187 (CA) at 13,193.[42] Following amendments in 2013, rr 326(4), 332(1) and 505(2) of the Rulesnow provide that NZTR, on behalf of a club, shall pay to each of the owner, trainerand rider, a specified percentage sum of the gross stakes as prescribed under r503(2). These are set out at [13] above.[43] As illustrated by r 327(4), NZTR, on behalf of a club, shall pay to a horse'strainer a fixed percentage of the "gross stakes credited to a horse for a particularrace ", and subject to rule 506, NZTR:16on behalf of a club, shall pay to a trainer such a sum of money, being 10percent of the gross stakes less any amount which NZTR, on behalf of aclub, is legally obliged to deduct therefrom for tax [44] Similarly, in respect of riders, rule 332(1) provides that NZTR, on behalf ofa club, shall (in addition to the riding fees earned by that rider) pay them 5 or 10 percent of the "gross stakes credited to a horse for a particular Race " the rider hasridden.[45] The Rules also prescribe that NZTR, on behalf of, and in the name of aclub, shall issue any tax invoice required under the Act.17Question 1: Do trainers and riders supply services to the Club?[46] I will deal with this issue by considering the following three questions.They are:(a) What is the legal arrangement among the Club, trainers andriders?(b) What services do trainers and riders provide on race day and towhom?(c) Is the contribution of trainers and riders to the Club on race daya "benefit" rather than a "supply"?16 Emphasis added.17 Rules of Racing 2013, r 326(6).(a) What is the legal arrangement among the Canterbury Club, trainers andriders?Parties' positions[47] The Club argues there is a "supply of services" by trainers and riders to theClub, because the core of the relationship among clubs, owners, trainers and riders isa contractual relationship. The Club relies on the Commissioner's 2010interpretation statement about the supply rule under s 9(1) of the GST Act, whichstates:18 the legal arrangements between the parties must be considered indetermining whether a supply exists. Where a binding contract exists and apayment is made pursuant to that contract, there is an automatic assumptionthat a supply exists.[48] The Club submits that all clubs, owners, trainers and riders, who wish toparticipate in thoroughbred racing, must consent to be subject to the Rules andundertake certain obligations under them. The Club says that a contract consists of aseries of mandatory rules governing the relationship between its parties, who arebound by such rules, and this relationship is contractual. In the alternative, the Clubcontends that if the Rules are not contractual, they are still in express legal form andare enforceable, giving rise to a supply for GST purposes.[49] On the other hand, the Commissioner contends that trainers and riders donot supply services to the Club, and nor is there a relationship of "supply" to theClub under the GST Act. The legal relationship between clubs like the CanterburyClub and trainers and riders is governed by the Rules, which provide anadministrative framework for the thoroughbred racing industry. It is mandatory forparticipants in the industry to comply with those Rules. However, the Commissionersubmits that compliance with the Rules does not create a relationship by way ofcontract, agreement or understanding that could amount to a "supply" of serviceswithin the scope of the GST Act.18 Commissioner of Inland Revenue "IS 10/03: GST: Time of Supply – Payments of Deposits,including to a stakeholder" (2010) 22(6) Tax Information Bulletin 7 at [65].[50] Further, the Commissioner disputes that any change to the Rules in 2013,regarding payment of stake money to the trainers and riders directly, establishes thattrainers and riders provide services to clubs such as the Canterbury Club.Legal principles on contract for supply[51] In Turakina Maori Girls College Board of Trustees v Commissioner ofInland Revenue, the Court of Appeal determined that it was not necessary for there tobe a contract between the supplier and the person providing consideration, in orderfor there to be services provided, which attracted GST.19[52] The issue before the Court was whether payments made by parents for"attendance dues" to the proprietors of integrated schools ought to attract GST. Thedues related to the proprietors' obligations for payment of debt, capital works andimprovements and other charges associated with land and buildings. The operationof the schools, including teacher's salaries and educational materials, was funded bythe State and was free of charge to students. The proprietors' obligations were notconditional upon the payment or non-payment of attendance dues. TheCommissioner argued GST was payable on the attendance dues.[53] The Court held that the proprietors were liable to pay GST on dues, as thepayments were made to secure the enrolment of a student in a school, for which theproprietors provided the buildings and ensured its special character. The supply ofthese things was a taxable service.[54] The Court also held the GST Act did not require that the "supply" must beto the person who pays the consideration. It was clear from the statutory definitionthat the supply of any service for consideration was part of a taxable activity underthe Act, even though it was to a person other than the person who provided theconsideration. The Court noted it is not necessary that there should be a contractbetween the supplier and the person providing the consideration, so long as theconsideration is "in respect of, in response to, or for the inducement of, the19 Turakina Maori Girls College Board of Trustees v Commissioner of Inland Revenue (1993) 15NZTC 10,032 (CA) at 10,036.supply".20 There must be a connection between the consideration and the supply ofservices. Although the proprietors did not provide the education, they supplied thebuildings, ensured the maintenance of the special character and were able to requireattendance dues to be paid as a condition of enrolment. Parents agreed to pay duesin respect of, in response to, or for the inducement of enrolment in the school, whichwas itself the supply of a service.[55] In Chatham Islands, the Court of Appeal considered the relevance of thelegal arrangements between parties in establishing the nexus:21Although the linkage or nexus between a payment and the activity to whichit gives rise may be very broad, it is still necessary to have regard to the legalform which is being employed:". . . in taxation disputes the Court is concerned with the legalarrangements actually entered into . . . not with the economic orother consequences of the arrangements."(Commissioner of Inland Revenue v New Zealand Refining Co Ltd (1997) 18NZTC 13,187 at p 13,192 citing Marac Life Assurance Ltd v Commissionerof Inland Revenue [1986] 1 NZLR 694 at p 706.) The tax being one ontransactions, it is necessary to pay close attention to the legal nature of whathas been done.[56] In Wilson & Horton Ltd v Commissioner of Inland Revenue, the Court ofAppeal considered whether advertisements placed by overseas clients in the NewZealand Herald should be charged GST or be zero rated.22 The focus of the Court ofAppeal differed from that of the High Court. Their focus was on the nature of thecontractual arrangements between Wilson & Horton and their overseas clients, forwhom they published advertisements in the New Zealand Herald, not on whobenefitted from the advertisements. The Court of Appeal found in favour of Wilson& Horton, holding that the publication of advertisements attracted GST at the rate ofzero per cent. Even where the supply was to an overseas person, zero-rating was notexcluded, merely because another person in New Zealand may derive a benefit.Richardson J said:2320 Goods and Services Tax Act 1985, s 2(1) definition of "consideration".21 Chatham Islands, above n 14, at [17].22 Wilson & Horton Ltd v Commissioner of Inland Revenue [1996] 1 NZLR 26 (CA).23 At 33. the obvious commercial inference is that the contracting party paying thebill expects to benefit from the services supplied.The statutory focus under s 11(2)(e) [of the GST Act] is on the contractualsupply of services, not on non-contractual benefits Discussion[57] In this part of the judgment, I will deal with "supply" in the context of thelegal relationship of the parties. It is considered further in the context of reciprocityat paragraph [108] to [132] below.[58] It is accepted by the parties that owners pay trainers monthly and there is aseparate contractual arrangement between owners and trainers in relation to the day-to-day training of race horses. Clubs, such as the Canterbury Club, are not a party tothese separate arrangements. It is also accepted that riders are paid a set fee byowners to ride horses at races, regardless of the outcome of the race. These areknown as rider fees and do not form part of the stake money share.[59] The Club argues, however, that there is a contractual relationship betweenthe Club and the trainer/rider participants, because of the series of mandatory racingrules governing the relationship, which is enforceable and reciprocal as a result.[60] The Club points to the obligations placed on trainers and riders, as well asthe percentage of gross stakes payments credited to each person under the Rules,which ensure NZTR retains oversight of their activities. It says the Rules are legallyenforceable and can be enforced through a range of mechanisms, including:(a) the Judicial Control Authority (a racing judicial body) andJudicial Committees appointed by that Authority for each raceday;(b) the arrears list kept by NZTR, which lists money payable by anyperson or body to NZTR or a racing club under the Rules and isused to enforce debts; and(c) the Rules contain a right of set-off for NZTR and clubs againsttrainers and riders.[61] In making these submissions, the Club relies on Tucker v Auckland RacingClub to support the proposition that the Rules are capable of giving rise to acontractual relationship.24 In Tucker, Shorland J considered whether the Court hadjurisdiction to examine a decision of a domestic tribunal created by the New ZealandRules of Racing, in force at the time, by which the parties had agreed to be bound.Shorland J held the Court did have the necessary jurisdiction; the rules wereprocedural and could not oust the Court's jurisdiction. The case concerned apotential breach of the rules by a trainer and lessee of a horse that had been enteredfor a race, because the horse had drugs administered to it. No GST or other taxissues arose in Tucker.[62] At the outset of the judgment, Shorland J observed that the plaintiff, as alicensed trainer, was bound by contract with the New Zealand Racing Conference byvirtue of his registration with that body and his entry into the particular race. TheJudge then treated both parties as bound by the New Zealand Rules of Racing.[63] I accept the Commissioner's submission that Tucker was concerned withissues in administrative law and the Court was not required to and did not addressthe key issues in the present case. However, the question of whether the currentRules create a contractual relationship among the parties is not critical to adetermination of the issues in this case, in light of the Court of Appeal's approach inTurakina and Wilson & Horton.25[64] A contractual relationship between the Club and each of the riders andtrainers is not a pre-requisite for the provision of services. The Club is part of astatutory framework, in which it has obligations to all the participants in the industry.The legal relationship among the Club, trainers and riders is one that is regulated bythe Rules, which are enforceable and reciprocal. Those Rules apply to and arebinding on NZTR, the clubs, owners, trainers and riders.24 Tucker v Auckland Racing Club [1956] NZLR 1 (SC).25 Turakina, above n 19; and Wilson & Horton, above n 22.[65] In Turakina, the Court held that a contract between the supplier and theperson providing the consideration is not necessary, so long as the consideration is inrespect of, in response to, or for the inducement of the supply.26[66] Under r 326(6), NZTR, on behalf of a club, is "deemed to agree" that atrainer shall not issue a tax invoice under the Act in circumstances prescribed underthe rule. Such language may suggest an obligation in the nature of a contractualrelationship. However, this is not the case to determine whether the Rules imposecontractual obligations on the industry participants, in circumstances wider than thefocus of this GST test case.[67] It is clear the Rules are enforceable and are capable of giving rise to asupply for GST purposes, as the wording of the Rules indicates. This is supportedby the Commissioner's interpretation statement, in which the Commissionerconsidered the GST implications of a payment that is made when no contractexists.27 In confirming that legal arrangements between parties must be consideredto determine whether a supply exists, the Commissioner said:However, a supply need not necessarily be made under a contract. Thecrucial question is not whether there is a contract, but whether there is asupply.[68] The Commissioner has also had occasion to consider the regulatory force offormal rules. In a 2013 issues paper, the Commissioner considered the rulesgoverning GST registration of bodies corporate and summarised the principles fromrelevant cases including:28When an entity has a set of formal rules that regulate the conduct of theentity, it is most likely that the entity will be found to be making supplies toits members even where the members formally employ staff [69] The Commissioner made a further reference in the issues paper to thefulfilment of statutory functions and whether that can give rise to a supply. The26 Turakina, above n 19.27 Commissioner "GST: Time of Supply", above n 18, at [65].28 Commissioner of Inland Revenue Bodies Corporate – GST Registration (Issues Paper 7, May2013) at [3.149].Commissioner considered that a body corporate makes supplies to its owners when itfulfils its statutory functions under the Unit Titles Act 1972, by stating:29The statutory nature of the mutual obligations of the body corporate and theowners does not mean that they are not making supplies for a consideration.That the duties are statutorily imposed does not alter the fact that the bodycorporate actually furnishes or supplies certain goods or services to theowners, it only affects why the supplies are being made.[70] I accept the Club's submission that the Commissioner's statements supportthe proposition that rules or duties statutorily imposed are capable of giving rise to asupply for GST purposes, even in the absence of a contract. By entering a race,trainers and riders have agreed to be bound by the Rules, which impose obligationson them and gives them entitlements to certain rights, such as stakes.Conclusion[71] The legal arrangement among the Club, trainers and riders is governed bythe Rules, which impose enforceable and reciprocal obligations on each of the Club,trainers and riders. Those obligations are capable of giving rise to a supply for GSTpurposes, even in the absence of a contract.[72] I make no determination on whether the Rules of Racing create acontractual relationship among the Club, trainers and riders, because a contractualrelationship is not critical to determining the issues in this case.(b) What services do trainers and riders provide on race day and to whom?Parties' positions[73] The Club contends that trainers and riders provide services to it on race day.The Club maintains that the relevant services provided by trainers and ridersincludes entering a Club race, participating in accordance with the Rules andproviding a stake-winning performance. Trainers and riders must provide a horsethat has every chance of being competitive on race day. Their skills are important tohow a horse performs. The method by which trainers and riders are remunerated issaid to incentivise the required performance or service, in other words only winning29 Bodies Corporate, above n 28, at [1.13].performances are paid stakes payments. The Club says that another way of phrasingthis is that the stakes payments are an inducement to trainers and riders to supplyservices to the Club.[74] The Commissioner submits that trainers and riders do not provide servicesto the Club on race day. They provide services to the owner. While on a race day ahorse needs to be ridden and the training it has received will contribute to how itperforms, the Commissioner says those factors are in the nature of a benefit to theClub, rather than a service provided to the Club.30 The Commissioner relies on thefollowing features about trainers in support:(a) trainers do not contract with the Club to provide trainingservices;(b) trainers do not train race horses on behalf of the Club;(c) trainers provide training services to the owner, for which thetrainer is paid by the owner;(d) the trainer may enter the horse to race on behalf of the owner;31and(e) even if a horse is nominated and accepted for a race, whether itraces is not a decision made by the Club. There is no redress ifthe horse is scratched for any reason.[75] The Commissioner submits the following supports her position that ridersdo not directly supply services to the Club:(a) riders ride the horses after being declared to the NZTR bytrainers or owners;3230 This submission on "benefit" is addressed at [93]–[106].31 Rules of Racing 2013, rr 518 and 519.32 Rule 537.(b) riders do not enter themselves to race, but are declared bywhoever enters the horse;(c) a rider's involvement is linked to the actions of the owner andtrainer; and(d) riders do not contract to provide riding services to the Club.33Discussion[76] It is correct, as the Commissioner submits, that trainers and riders do notcontract with the Club to provide services and that they provide training and ridingservices to the owners, for which they are paid. It is also correct that the trainer mayenter the horse to race on behalf of the owner and may also select the appropriaterider.[77] However, a contract between the parties is not necessary, for the supply ofservices.34 I accept the Club's submission that the trainers and riders provideservices to the Club on race day by entering a Club race, participating in accordancewith the Rules and providing a stake-winning performance.[78] There are three reasons why I consider the trainers and riders' services areprovided to the Club on race day, not just to the owners alone. Those reasons are:(a) the Club's business of conducting competitive racing;(b) the Rules require NZTR to pay stakes money, plus GST, on behalfof the Club, and to render tax invoices for the Club to pay GST;and(c) GST on stake money is not neutral.33 Unlike the rodeo rider in the case of McCarthy v Australian Rough Riders Assoc Inc [1987] FCA391, (1988) ATPR 49,017.34 Turakina, above n 19, at 10,036.The Club's business[79] The Club carries on a business aimed at promoting competitive horse racingand competitive betting. The Club provides stakes paid from the betting profit, toinduce trainers and riders to provide their services to the Club on race day.Competitive horse racing provides a more competitive betting pool, by attractingspectators and encouraging betting, which in turn enables stakes to be paid from thebetting profit. It is the Clubs which manage or organise racing meetings, promotingthem to the industry and the wider public. Clubs compete to attract horses, trainersand riders to participate in their race meetings. The Clubs' income is largely frombetting profit.The Rules on stakes payments[80] The Rules changed the way in which stake money was paid. Under theprevious rules, owners were responsible for paying the share of stake money due totrainers and riders, although, as a matter of practice, NZTR had deducted theproportion due to trainers and riders before paying the net amount to owners.[81] The position was formalised under the Rules, to the extent that after 1 June2013, NZTR, as the Club's agent, pays to trainers and riders the proportion of thestake money due to them directly, as was the prior practice.35[82] As the Rules exemplify, NZTR, on behalf of clubs, is statutorily obliged todeduct any tax liability from the sums of money paid to owners, trainers andemployers/riders (where registered). Mr Fenwick gave evidence that the GSTcomponent is advanced to the trainers and riders for them to make the necessarypayments. The Rules prescribed that clubs (through NZTR) must ensure GST ischarged and deducted from the stake money paid.[83] I consider it problematic for the Commissioner to deny input tax deductions,when a club (through NZTR) must ensure the GST component is paid for thetrainers' and riders' services on race day.35 Rules of Racing 2013, rr 326(4), 332(1) and 505(2).[84] Although the Commissioner is correct that the new aspects of the Rulesregarding stake money by themselves are not solely determinative of the issue ofsupply of services, the Rules expressly provide that NZTR pays stakes to atrainer/rider or owner, "on behalf of a Club".36 NZTR issues tax invoices under theAct in the name of the Club.37[85] Thus, the Club is providing stakes money plus GST to the trainers andriders, not paying the owners on their behalf, as happened formerly. NZTR makesthe payment in the name of the Club and issues the tax invoices, on behalf of theClub. Importantly, the Club retains responsibility for paying the GST components ofthe stakes money.GST on stake money is not neutral[86] The third reason to support my finding that services are provided to theClub is that, without the input deductions being claimed by the Club, the GSTpayment on stake money is not neutral. GST was intended to be broad-based andneutral. This was confirmed by the Supreme Court in Glenharrow Holdings Ltd vCommissioner of Inland Revenue where the Court described GST as a type of value-added or turnover tax.38 The Court said:39[41] Broadly speaking, GST is a type of value-added tax. It isfundamentally an indirect tax levied on transactions with consumers. Thelegislation envisages that, for a business, over time the net impact will be animpost of GST on the value which the business adds to the goods andservices it supplies. GST has been likened to a turnover tax (the outputs arethe turnover) but with provision for offsetting deductions (or credits) for theGST content of input costs (the expenses incurred in producing the outputs).[87] Importantly, in the context of this proceeding, the Supreme Court confirmedthat GST was introduced to be a neutral tax:40[42] GST was intended to be broad-based, efficient and neutral.Nevertheless, as the review done in 1999 highlighted, compliance andadministration costs preclude perfect neutrality ever being achieved. 36 For example, r 326(4).37 Rule 326(6).38 Glenharrow Holdings Ltd v Commissioner of Inland Revenue [2008] NZSC 116, [2009] 2 NZLR359.39 Footnote omitted.40 Footnotes omitted.[44] From a reading of the Act as a whole it is clear that the legislatureanticipated that, for a trader in goods and services, there will over timeusually be some balancing out or netting off of the GST components of salesand purchases [88] The Club provides the stake money, which is paid to participants subject tothe GST liability, and the trainers/riders pay the GST for which they are liable. TheClub, however cannot claim any input deduction.[89] The current and proposed positions were furnished by Mr Colson on behalfof the Club:(a) The current GST position, with an owner not GST registered andthe payment of stakes of $1,000 exclusive of GST isdemonstrated as follows:(i) Stakes $1,000 (excluding GST);(ii) Owner pays trainer $115 (10 per cent plus GST);(iii) Owner pays rider $57.50 (five per cent plusGST);(iv) Owner retains $827.50; and(v) Owner cannot claim back GST paid to trainer andrider.(b) The proposed GST position where the owner is not GSTregistered on a stakes payment of $1,000 exclusive of GST, thefollowing would occur:(i) Stakes $1,000 (excluding GST);(ii) Club pays trainer $115 (10 per cent plus GST);(iii) Club pays rider $57.50 (five per cent plus GST);(iv) Club claims back GST of $22.50; and(v) Club pays owner $850.[90] Under the current position, owners who are not GST registered are not ableto claim back the GST on the payments to the trainer and jockey. Because theowners are not GST registered, they do not need to account for GST and cannotclaim as input tax the GST on the payments made.41 Effectively, in this example, theowner pays the GST on the trainers' and jockeys' payments.[91] The current GST position in the example above under (a) illustrates that thecurrent position is not GST neutral. NZTR makes the payments to the participantson behalf of the Club. The Club cannot claim any input deduction and nor can thenon-GST registered owner, who bears the cost of GST on the payments.[92] Under the proposed GST position, the Club (through NZTR) pays thetrainer and rider GST on their payments and claims back the GST. There, the ownerreceives 85 per cent of the stakes money, whereas under the current position, theowner is credited with a payment, less the GST paid by the Club, for the trainer andrider. If the proposed position is upheld, it is GST neutral. Trainers and riders areproviding services to the Club and being paid stakes plus GST in return by the Club(through NZTR). Those GST payments to the trainers and riders can then beclaimed by the Club as GST input tax. If this occurs, owners who are not GSTregistered receive more than those who are, because the GST on stakes payments tothe trainer and the rider is not credited against or paid by them.[93] There is an inconsistency in the Commissioner's position on stake money.Stake money is treated by the Commissioner as GST liable in the hands of aregistered trainer or rider. But the Commissioner denies that the Club, on whosebehalf the stake money is paid together with GST, can claim the input taxdeductions. As the example on the current position shows, in the case of the non-GST owner, the GST position is not neutral, contrary to the authorities and thescheme of the Act.Conclusion[94] Trainers and riders supply services to the Club on race day. The Club paysstakes in exchange for those services, together with GST.42 Consistent with that41 Goods and Services Tax Act 1985, s 20(3)(a).42 GST is payable if the trainers and riders are GST registered.supply, trainers and riders (where GST registered) have GST deducted on their stakespayment, if their horse finishes a race in a stake-bearing place.(c) Is the contribution of trainers and riders to the Club on race day a"benefit" rather than a "supply"?[93] I have found that trainers and riders supply services to the Club on race day,but for completeness, I now address the Commissioner's further submission thattrainers and riders do contribute to the success of the Club's races, but that suchcontribution is a benefit rather than a supply to the Club.[94] Both parties relied on Wilson & Horton for each of their differentpositions.43 The Commissioner submits that the relationship between the Club andtrainers/riders is similar to the facts of Wilson & Horton, which held that a benefitmay be conferred without any supply to, or any consideration being provided by, therecipient of the benefit. The benefits to the Club in this case, in the Commissioner'sview, do not establish any supplies to the Club by the trainers and/or riders.[95] Conversely, the Club relies on Wilson & Horton to show that the recipientfor GST purposes should be the contractual recipient of the relevant services ratherthan some other party that might derive incidental benefits. Because the Club isrequired to pay owners, trainers and riders their percentage of the stakes under theRules to recognise their services, the obvious commercial inference is that the partypaying a bill expects to receive a benefit from it. The Club argues it benefits fromthe services provided by trainers and riders and pays them for it.[96] In Wilson & Horton, the Court of Appeal focussed on the contractualarrangements of the parties, finding that the legal nature of the particular transactionconcerned will establish whether there is supply with a sufficient nexus to theconsideration:44Those provisions [ss 2, 6, 8, 9 and 10 of the GST Act] are directed to thecontractual arrangements between the supplier and the recipient of thesupply. In keeping with the general statutory scheme in that respect s 11,providing for zero-rating of supply transactions where the stated overseas43 Wilson & Horton, above n 22.44 At 30 (emphasis added).element is present, follows that same pattern. It follows that where, as inthe presently material s 11(2)(e), the provision refers to "services . . .supplied . . . to a person" the statutory dictionary applies and the phraserefers to the contractual position and so to the person who has providedthe consideration.[97] I deal with the issue of stakes payments as consideration under Question2.45 I have found that while there is no contract with the Club, there is a legallyenforceable obligation on the Club under the Rules, to make stakes payments tosuccessful trainers and riders on race day.[98] The contest between the parties on this issue is whether race day services bytrainers and riders are in the nature of a benefit to the Club, or whether they aresupplied to the Club for consideration.[99] In contending that the Club receives a benefit, not a supply of services, theCommissioner points to two facts in support of that proposition:(a) compliance with the Rules of Racing does not create a supply tothe Club; and(b) the fact that NZTR (on behalf of the Club) pays stake moneydirectly to the trainers and riders does not establish there has beenany supply by those trainers and riders to the Club. Proof ofpayment, the Commissioner says, does not amount to proof ataxable supply was made in return for that payment.[100] Compliance with the Rules is a pre-requisite before a horse may be enteredinto a race and potentially win stakes money. That is an agreed fact. In entering ahorse for the race, the owner, trainer and rider must comply also with the Rules, "inorder to ply their trades" as the Commissioner submits. I consider "plying theirtrades" is in effect a supply of their respective services, for which both the trainersand riders (who are GST registered) are obliged to pay GST.45 At [107]–[132] of this judgment.[101] It is difficult to accept that while trainers and riders contribute to the successof the Club's races, as the Commissioner concedes, this contribution should beviewed as a benefit only, rather than a supply. I accept the Commissioner'ssubmission that the Club provides various taxable supplies to the race-going publicwho attend race meetings, including the use of race course facilities, paying forrefreshments and placing bets.[102] Although there may be an additional benefit conferred on a third party, theCourt in Wilson & Horton found that the obvious commercial inference is that acontracting party paying a bill expects to receive a benefit from it. As McKay Jsaid:46The tax is based on the value of the consideration for the supply: s 10. It isnot concerned with the value of the supply to persons who are not parties tothe contract, nor with any benefits which may result to such persons.[103] Although McKay J referred to parties to a contract, as the Court in Turakinafound, it is not necessary that there be a contract between the parties, provided thepayment or consideration is "in response to or for the inducement of the supplier."47[104] In light of the parties' legal arrangements here, I consider that Wilson &Horton supports the Club's position, in that the Club is providing the stakes money;expects to receive a benefit from it; and that benefit derives from the servicessupplied by trainers and riders to the Club on race day. Consistent with this, trainersand riders must pay GST on the stakes money received for their supply of services.The owner, trainer and rider are all paid directly by NZTR on behalf of the Club,with GST being levied for registered persons.48[105] The fact that the Club receives a benefit does not exclude there being asupply of services. I am unable to accept the proposition that the participation bytrainers, riders and horses in the Club's races benefits the Club by attracting the race-going public but their participation does not establish a supply to the Club by thetrainers and riders. The betting profit received by the Club provides the means to46 Wilson & Horton, above n 22, at 36.47 Turakina, above n 19, at 10,036.48 Rules of Racing 2013, rr 326; 332 and 505.pay stake money to the trainers and riders. Indeed, the definition of supply under s5(1) of the GST Act includes "all forms of supply".Conclusion[106] Participation by the trainers and riders in Club races on race day is a supplyof services, for which the Club pays stakes money to the successful trainers andriders and from which the Club derives a benefit. This benefit does not affect thefact that there is a supply of services.Question 2: Are stakes payments to trainers and riders consideration for theservices provided?[107] To determine this question, I will focus on two questions:(a) Is there the necessary nexus or reciprocity in the payment ofstakes to qualify as consideration?(b) Are stakes payments rewards by way of "prize money", notfees for services?(a) Is there the necessary nexus or reciprocity in the payment of stakes toqualify as consideration?Parties' positions[108] The Club argues that stakes payments are consideration for the servicesprovided and that there is a linkage or reciprocity in the relationship between it andthe trainers and riders, as required for a taxable supply. Clubs organise, manage andpromote race meetings as well as compete to attract horses, trainers and riders toparticipate in their races (including through the stakes payments offered). A clubdepends on owners, trainers and riders participating in race meetings and races runon race day. There is reciprocity between the services provided by trainers and riderson the one hand, and the payment of stakes by clubs, such as Canterbury, on theother. If a trainer or rider performs in accordance with the Rules and becomesentitled to stakes payments, then each would have legal recourse against the relevantclub for the payments.[109] The Commissioner argues that the payments are not consideration and thereis a lack of the necessary reciprocal nexus in the relationship between the Club andthe trainers and riders required for a taxable supply. The Commissioner says there isno clear connection between mandatory compliance with the Rules by trainers orriders and receiving stakes payments (the alleged consideration), because anintervening event must take place before stakes payments are made; a rider or trainermust finish a race in a stakes-bearing place. Not all of those who enter andparticipate are awarded such payments.[110] The Commissioner submits that entry and participation in races run by theClub, with payments of stake money, are not sufficiently strongly linked to be able toconclude the stakes payments are made "in respect of, in response to, or for theinducement of the supply" of entry and participation in the races.[111] The Commissioner submits further that stake money is in the nature of aprize and the Rules reflect the difference between prize money and fees. TheCommissioner says that proof of payment does not amount to proof that a taxablesupply was made in return for that payment and nor does it show the necessaryreciprocity for a taxable supply.Legal principles on consideration and nexus[112] Consideration is defined under s 2(1) of the GST Act:consideration, in relation to the supply of goods and services to any person,includes any payment made or any act or forbearance, whether or notvoluntary, in respect of, in response to, or for the inducement of, the supplyof any goods and services, whether by that person or by any other person;but does not include any payment made by any person as an unconditionalgift to any non-profit body[113] In analysing the definition of "consideration" in s 2(1) of the GST Act, theCourt of Appeal in Turakina held:49Likewise, the value of the supply is to be measured by the consideration,whether or not the consideration is provided by the person to whom theservice is supplied. It is not necessary that there should be a contractbetween the supplier and the person providing the consideration, so long as49 Turakina, above n 19, at 10,036.the consideration is "in respect of, in response to or for the inducement of thesupply".[114] Subsequently, the Court of Appeal in Wilson & Horton, observed that thelegal nature of the transaction, which was governed by a contract, will establishwhether there is supply with a sufficient nexus to the consideration.50 The Courtnoted that while there may be a benefit to a third party, namely the publication ofadvertisements for overseas clients in the New Zealand Herald, the imposition ofGST will depend upon the contractual relationship formed.[115] The Court of Appeal in Commissioner of Inland Revenue v New ZealandRefining Co Ltd described the relationship between the preliminary sections of theGST Act and the need for a supply of services, with a connection between paymentand supply, to impose GST.51 The Court stated:52It is fundamental to the GST Act that the tax is levied on or in respect ofsupplies. It is not a tax on receipts or on turnover; it is a tax on transactions:Commissioner of Inland Revenue v Databank Systems Ltd. It is thereforenecessary to distinguish between supplies and the taxable activity (asdefined in s 6) in the course of which they are made. The definition in s 6itself requires a nexus between a supply and consideration, as does s 10.The tax itself is levied by s 8 on a supply in the course or furtherance of ataxable activity and is "by reference to the value of that supply." Section 10provides that the value of a supply is "to the extent of the consideration forthe supply" the amount of the money involved or the non-monetary openmarket value of the consideration. Already, before turning to the definition of"consideration", it can be seen that, again, a linkage between supply andconsideration is requisite to the imposition of the tax.The definition of "consideration", though broad, cannot and does notdispense with that requirement. To constitute consideration for supply apayment must be made for that supply, though it need not be made to thesupplier nor does the supply have to be made to the payer.There is a practical necessity for a sufficient connection between thepayment and the supply. The mechanics of the legislation will otherwisemake it impossible to collect the GST.[116] Thus, the taxpayer must be able to show that the payment has a sufficientlystrong connection or nexus to the supply of goods or services.50 Wilson & Horton, above n 22, at [32] and [36].51 New Zealand Refining, above n 15.52 At 13,193.[117] In Chatham Islands, the Court of Appeal identified the need for a linkage orconnection and the need for reciprocity in establishing this.53 Tipping J noted:[30] When coupled with the definitions of taxable activity and consideration,to which I shall come, and in spite of the width of those definitions, theconcept of supplying services has a reciprocal connotation[118] Although there need not be a contract between the parties, there must beconsideration paid in respect of, in response to, or for the inducement of the supplyof services.54 There must be a linkage or connection between supply andconsideration.[119] In New Zealand Refining, the New Zealand Refining Co operated an oilrefinery and processed products for five oil companies in return for fees.55 TheGovernment encouraged New Zealand Refining to borrow substantial sums to carryout a large expansion of the refinery. Ten years later, the Government changed itspolicy to one of deregulation, which meant oil companies were free to import refinedproducts. This meant New Zealand Refining faced overseas competition. Anagreement was reached between the Crown and New Zealand Refining, where theCrown agreed to repay the company's loans and pay them $85 million over threeyears, which was conditional on the refinery remaining in operation.[120] The Commissioner sought GST on the Crown's payments to New ZealandRefining, contending that the payments were made in relation to the supply ofservices by New Zealand Refining to its customers. The Court of Appeal foundagainst the Commissioner, holding that a linkage or connection between supply andconsideration is required to impose GST. In terms of the agreement between theCrown and New Zealand Refining, there was little or no linkage between theCrown's payments and the supply of goods or services by New Zealand Refining toits customers. The Court held that while the payments were received in the course ofthe taxable activity of the taxpayer, they were not in consideration for any supplymade by it. The payments were intended as an inducement to the taxpayer to keepthe refinery open.53 Chatham Islands, above n 14.54 Definition of "consideration" in s 2(1) and definition of "taxable activity" in s 6(1) of the Goodsand Services Tax Act 1985.55 New Zealand Refining, above n 15.[121] In Chatham Islands, a trust was set up by the Crown to acquire certainCrown assets and undertakings that were integral to the infrastructure andcommercial activities of the Chatham Islands.56 The Crown wanted to remove itselffrom the role of providing infrastructure and commercial activities. To do so, theMinister of Internal Affairs, acting as settlor on behalf of the Crown, endowed thetrust with $8 million. The trust was then required to provide these services. TheCommissioner sought GST in respect of these endowment payments.[122] The Court of Appeal held against the Commissioner and found there was notaxable activity for the purposes of the GST Act. The Crown had vested money in atrust for the Chatham Islands' people and the trustees accepted an obligation to holdthe fund and apply it in a specified way. There was no reciprocity in therelationship: the trust did not make a supply of anything to the Crown in exchangefor, or induced by, the payment. Rather, the trust was the recipient of an endowmentto be held upon the terms of the trust deed.Discussion[123] The authorities establish that payments made to induce particular behaviourby the payee cannot be taxable for GST, unless there is a sufficient connectionbetween the two. Turning then to stakes payments, there must be a sufficientconnection between the Club and the trainer/rider, to induce them to provide theirservices on race day. The phrase "inducement of" in the s 2(1) definition ofconsideration in the GST Act supports the conclusion that clubs are entitled to GSTinput tax deductions. The payments are paid to riders and trainers to ride and trainthe horses to participate in the races put on by the particular club. I consider thatstakes payments to riders and trainers by the Club are in response to, or for, theinducement of supplying their services to the Club by participating. Stakespayments are paid to riders and trainers as consideration for the services theyprovide.[124] While a contract between the parties to a supply may not always benecessary, the supply for GST purposes does require some reciprocity or nexus56 Chatham Islands, above n 14.between the supply made and the consideration passing between supplier andrecipient. There needs to be a focus on the legal relationship between the parties andthere is a commercial inference that the party paying for the services, expects tobenefit from them, even if others do too.57[125] Here, there is a nexus between the club paying the stakes and the trainersand riders providing their services on race day. When successful, the trainer/riderreceives stakes payment as consideration for their services. The stakes areinducements for the supply of their services on race day.[126] I accept the Club's submission therefore, that despite my finding that thereis not a contractual relationship between it and the participants, consideration canstill be given and is given here. There is no need for a contract under this definitionof consideration.58[127] However, stakes cannot be made for the sole purpose of inducement. Theremust be a linkage or connection between riders and trainers participating in clubraces, (their services) and the payments made to induce their participation.[128] The Court in Chatham Islands focused on the need for a linkage orconnection using the language of "reciprocity". The Court specifically addressed theissue of payment being made in exchange for, or for the inducement of, the supply ofservices. In Chatham Islands, the Crown endowed the trust with funding to executeits objectives. There was no two-way relationship of reciprocity where the Crownreceived services from the trust in return.[129] I consider Chatham Islands is distinguishable from the present case, in thatthat there is a reciprocity in the relationship between clubs and riders/trainers. TheClub pays riders and trainers as an inducement to participate in their races, and thereis a reciprocal relationship because riders/trainers participate and provide theseservices to the Club. In turn, this means that more horses run in the race and more57 Wilson & Horton, above n 22, at 33.58 Turakina, above n 19.spectators attend races and place bets. This appears to me to be a relationship ofreciprocity.[130] In so finding, I do not accept the Commissioner's submission that becauseevery trainer and rider in a race does not receive stakes money, there can be noreciprocity between entry/participation and stake money. For those that enter,participate and win, stakes payments must be paid. If the payment were not made inaccordance with the Rules, the trainer/rider would have legal recourse against theClub. While it is correct that the Club cannot force a trainer/rider to participate, sucha requirement is not necessary. The Rules govern those that wish to participate andthe Club provides an inducement to race at their club race days. The reciprocalrelationship then occurs.[131] It is important to clarify that the Club is not just a collection agency. Itprovides the services for race day, paying GST on expenses (as it is GST registered)and pays each participant for their service. Stakes are paid with the GST deductionby NZTR on their behalf.Conclusion[132] Stakes are paid to riders and trainers as consideration for the services theyprovide in participating and succeeding in obtaining a stake-bearing place in races onrace day. There is a connection between the supply of race day services and stakespayments made by the Club. The Club pays riders and trainers as an inducement toparticipate in their races. There is a reciprocal relationship because riders/trainersparticipate and provide their services on race day for which they receive stakespayments, if they are successful.(b) Are stakes payments "prize money"?[133] The Commissioner also says it is significant that the Rules describe allamounts payable as a result of a horse having finished in a stakes-bearing place inthe same way, no matter whether they are payable to an owner, trainer or rider. TheRules describe the stakes payments as a proportion of the gross stake credited to thehorse. The Commissioner argues this makes the payments "prizes", given as areward to a winner, rather than "fees", contingent on success.59[134] The Commissioner also notes that in the United Kingdom, tax tribunalshave held that prize money resulting from horse racing is not consideration for anysupply, either of goods or services.60Legal principles[135] Under s 5(11CB) of the Act, prize money is treated as consideration for aservice by an owner to the racing club in the course of the taxable activity. Section5(11CB) provides:(11CB) For the purposes of this Act, if a registered person in the course of ataxable activity receives a prize from a racing club or racing code forthe performance in a race of a horse or greyhound owned by theregistered person, the prize is treated as being consideration for aservice provided by the registered person to the racing club or racingcode in the course of the taxable activity.[136] Although this section applies to owners, not trainers or riders, it isinstructive that prize money is treated as consideration for a service provided by theowner.[137] In Canada, the issue of prize money was considered by the Federal Court ofAppeal in J Hudon Enterprises Ltd v Canada.61 The issue in Hudon was whether"purse money" paid to trainers and drivers of horses was intended to remuneratethem for services rendered to owners, or whether they were "prizes", which areexempt from GST under Canadian law.[138] The Court held that these payments amounted to fees, contingent onsuccess, for services rendered to owners and were not prizes. A prize was describedunder the relevant legislation as "an honour, an award or winnings that are won bythose who demonstrate superiority or achievement over and beyond the rest of the59 This is particularly so considering "riding fees" are separately identified in r 332(1) of the Rulesof Racing 2013.60 Brian Gubby Ltd (1985) 2 BVC 205,360 (VAT Tribunal) at 205,366, adopted in Michael JacksonBloodstock Ltd [1992] BVC 945 (VAT Tribunal).61 J Hudon Enterprises Ltd v Canada [2010] FCA 37.field of competitors in a competition or contest."62 A fee, however, was described bythe Court as "remuneration, emolument, recompense or compensation that is earnedby a particular person for performing particular services under a contract ofemployment or other direct retainer."63[139] Based on the regulatory framework and the agreements under which driversand trainers received their payments, the Court determined the amounts were fees,not prizes. The Court noted that Standardbred horse racing is a heavily regulatedactivity. Under the regulations, purse money is payable to owners alone and the feesof drivers and trainers is deducted from this purse money. Further, the agreementsbetween recognised harness participants' associations and racing associationsdistinguished between purse money, won by horses and paid to the owners, from thefees that are paid to the drivers and trainers. Drivers and trainers were therefore notawarded purse money directly. As the payments made to drivers and trainers are feesand not prizes, the Court concluded that GST must be paid on these payments.Discussion[140] In New Zealand, in the normal course of business, trainers and ridersprovide their services to owners of race horses, and in consideration for this are paidfixed fees or wages by owners, independently of whether the horses win a stake-bearing place on race day. It was accepted by the parties that trainers are usuallypaid a monthly fee by owners, under a separate contractual arrangement, to cover thetraining services they provide and clubs are not a party to these arrangements.[141] On race day, the participants must comply with the Rules. Theowner/trainer must register the horse but the trainer and the rider must also providetheir services. If they succeed in obtaining a stakes placement, they are paidindividually on behalf of the Club. The GST component is also paid, where theparticipants are GST registered. NZTR deducts the GST component on behalf of theClub and the Club makes any required GST payments to Inland Revenue directly.62 At [19], citing Excise Tax Act RSC 1985 c E-15, s 188(2).63 J Hudon, above n 61, at [19].[142] In Hudon, the Court held that the equivalent stakes money (purse money)were fees, contingent on success, that were intended to remunerate drivers andtrainers for services rendered to owners.64 This is the distinguishing feature betweenthe New Zealand regulatory framework and the regulations prevailing in Canada.The equivalent stakes money was payable to owners alone and the fees of driversand trainers were deducted from the purse or stakes money. The Court in Hudonalso considered the agreements in place, which made a distinction between stakesmoney won by horses and paid to the owners and the fees that were paid to thedrivers and trainers.[143] In New Zealand, however, the stakes money is payable directly to thetrainers, riders and owners respectively in the proportions predicated by the Rules.GST must be paid on these payments, where participants are registered for GST.The Hudon decision is not helpful or relevant here.[144] The Commissioner submits there is nothing in the Rules that states thepayments should be treated as fees, contingent upon success, and therefore stakespayments are prizes gained due to a horse's performance, paid to owners, trainersand riders in the same way. However, as canvassed above, the Commissioner'sposition is problematic.[145] The Commissioner refers to the Concise Oxford Dictionary definition of aprize as:65A thing given as a reward to a winner or in recognition of an outstandingachievement. Something won in a game of chance.[146] Prizes were exempt from GST under Canadian law, as the Court held inHudon. Similarly, the United Kingdom Tax Tribunals have held that prize moneyresulting from horse racing is not consideration for any supply, either of goods orservices, as the Commissioner submits.6664 J Hudon, above n 61.65 The precise edition of the Concise Oxford Dictionary referred to by the Commissioner could notbe located, and is not known.66 Brian Gubby, above n 60.[147] The Commissioner's position that stake money must be treated as prizemoney does not accord with the current practice in New Zealand, where GST and taxare payable on stakes payments. The fact that GST is deducted on behalf of the Clubby NZTR is inconsistent with the Commissioner's argument that stake money shouldbe treated as prize money. Not only is GST payable on stake money, but so too isincome tax.[148] By way of comparison, Mr Colson on behalf of the Club, referred to theAustralian Taxation Office's (ATO) statement, in which it has provided guidance toits industry on the characterisation of stake money.67 Although it is a prize inAustralia, it is not considered a classic prize, like a lottery. It is money acquired inthe course of a taxable activity, for which income tax and GST must be deducted.[149] The ATO, in a Goods and Services Tax Ruling, said in support of itsposition:68[29] All participants make a supply to the event holder by participating inthe event, although the event holder may give a prize only to the winner ofthe event. Other participants may receive nothing despite having alsosupplied their participation.[150] Further, the ATO said:69[37] An event holder offers prizes in an event as an inducement andreward for a winning performance in the event. As these prizes are in thenature of rewards for services rendered, we consider that there is a sufficientnexus between a prize given to the winner and the supply of the winnersparticipation.[151] I record that the Commissioner disputes that the ATO ruling is of assistanceto this case, because the ruling does not deal with the issue of mere compliance withthe Australian Rules, as a supply of services, and does not address the treatment ofowners, trainers and/or riders in respect of prize money, among other reasons.7067 Australia Taxation Office GST for the Racing Industry (July 2007).68 Commissioner of Taxation Goods and Services Tax: Prizes (Australian Taxation Office, Goodsand Services Tax Ruling GSTR 2002/3, October 2002).69 Commissioner of Taxation, above n 66 (footnote omitted).70 The Commissioner submits (i) there is no suggestion in the Ruling that mere compliance withthe Australian Racing Rules is a supply to or by anyone; (ii) the Ruling does not suggesttrainers'/riders' contributions to the success of races in Australia are supplies; (iii) the Rulingstill requires a nexus between the prize and supply; (iv) the Ruling addresses the owner of a raceDespite the Commissioner's misgivings about the absence of detail in the Ruling, theATO's Ruling accords with my view of the characterisation of stakes money and itstreatment in New Zealand.[152] Both counsel referred to the characterisation of the "services" provided byrodeo riders and prize money in McCarthy v Australian Rough Riders Assoc Inc.71There, Spender J observed that the "local organising rodeo acquires the 'services' ofthe rough rider", which include his participation in the particular event and therebythe provision of entertainment to the spectators at the rodeo.72 He notedspecifically:73These services are provided by the rodeo rider in exchange for the prizemoney he earns.[153] The Commissioner submits, in a rodeo event, riders simply enter themselvesand the animal that is ridden is drawn randomly from a pool and allocated to therider. The legal position is different, the Commissioner submits, and McCarthy isdistinguishable.[154] I accept that there are differences in the legal arrangements in relation torodeo riders, and that the statutory definition of services under the Australian TradePractices Act 1974 differs from the GST Act definition. McCarthy was notconcerned with issues of GST or income tax but the unlawful restraint of trade ofone of the rules of the Australian Rough Riders Assoc excluding participation inunaffiliated rodeos. However, it is notable for the comments made by Spender J,where he describes riders as providing services to event holders by participating intheir races and, in exchange, event holders paying those who are successful.[155] This view gains support from s 5(11CB), where prize money is treated as aconsideration for a service provided to the Club by an owner and is GST liable.Stakes payments in New Zealand are treated as consideration for the supply ofservices, being GST liable where participants are registered for GST. The argumenthorse, not the trainer or rider – indicating it is the owner who supplies the horse; and (v) theRuling does not address prize money for trainers and/or riders.71 McCarthy, above n 33.72 At [56].73 At [56].that stakes payments are prizes is redundant because the label of "prize money" doesnot alter the way in which the stakes payments are treated for GST.Conclusion[156] Stakes payments to trainers and riders are consideration for the servicesprovided and are treated as such both under the Rules and in practice, because in thehands of GST registered participants, the stakes payments are GST liable.Summary of conclusions[157] Question 1 – Do trainers and riders supply services to the Club?(a) The legal arrangement among the Club, trainers and riders isgoverned by the Rules of Racing, which impose enforceable andreciprocal obligations on each of the Club, trainers and riders.(b) Trainers and riders supply services to the Club on race day. TheClub pays stakes in exchange for those services, together withGST. Consistent with that supply, trainers and riders (where GSTregistered) have GST deducted on their stakes payment, if theirhorse is placed in a stake-bearing place.(c) Participation by the trainers and riders in Club races on race day isa supply of services, for which the Club pays stakes money to thesuccessful trainers and riders and from which the Club alsoderives a benefit. This benefit does not alter the position thatthere is a supply of services.[158] Question 2 – Are stakes payments to trainers and riders consideration for theservices provided?(a) Stakes are paid to riders and trainers as consideration for theservices they provide in participating and succeeding in obtaininga stake-bearing place at race meetings and in races on race day.(b) The Club pays riders and trainers as an inducement to participatein their races. There is a reciprocal relationship becauseriders/trainers participate and provide their services to the Club onrace day for which they receive stakes payments, if they aresuccessful.(c) Stakes payments to trainers and riders are not treated as "prizemoney" but treated as "consideration" under the Act, the RacingRules and in practice, because in the hands of GST registeredparticipants, the stakes payments are GST liable.Result[159] Canterbury Jockey Club is entitled to GST input tax deductions for stakespayments made to GST registered trainers and riders in horse races conducted by theClub.[160] In the absence of agreement between counsel on costs, counsel are to filememoranda within 20 working days of this decision.Cull JSolicitors:Bell Gully, Wellington for PlaintiffCrown Law, Wellington for Defendant