Welcome to 2023. We start off the year with two decisions of the Full Federal Court.

The decision in Commissioner of Taxation v Landcom [2022] FCAFC 204 (handed down just before Christmas) appears to end the controversy about how the margin scheme in Division 75 of the GST Act applies to the sale of unimproved land by State entities. The decision also clarifies the rights “State” entities have to dispute GST issues with the Commissioner through the objection and appeal regime in Part IVC of the Taxation Administration Act.

In contrast, the decision in Commissioner of Taxation v Complete Success Solutions Pty ltd ATF Complete Success Solutions Trust [2023] FCAFC 19 appears to continue the “gold” saga and the uncertainty as to how the anti-avoidance provisions in Division 165 of the GST Act may apply to combat “missing trader fraud”. The Full Court allowed the appeals both parties and remitted the matter to be heard again by the Tribunal. The Full Court took the same action in ACN 154 520 199 Pty Ltd (in liquidation) v Commissioner of Taxation [2020] FCAFC 190, which also involved gold and missing trader fraud. My post on that decision can be accessed here. We appear to be back to square one on both matters, and without any real clarity going forward. Ultimately, the matter may need to be addressed by the High Court.

Landcom

The Facts

As I appeared for the taxpayer, I deferred posting on this matter until the matter was finalised. I understand that the Commissioner has not sought special leave to appeal to the High Court.

The dispute arose out of the sale of four lots of land by Landcom under a single Contract of Sale, where the parties agreed in writing that the margin scheme was to apply. The lots were contiguous save that one of the lots was separated by a train line. The lots had been held by the State of New South Wales since before 1 July 2000, when the GST was introduced. The lots were previously owned by the New South Wales Land and Housing Corporation (LAHC). On 1 January 2002, the lots were transferred from LAHC to Landcom pursuant to an order of the Minister made under s 17 of the Landcom Act.

A number of the lots had been used for the purpose of farming activities, although these activities had ceased a number of decades before Landcom became the owner of the lots. The lots had also been subject to other human interventions. One lot, for example, had an aero club for remote control plane enthusiasts, including a runway and a clubhouse.

Landcom applied to the Commissioner for a private ruling on whether item 4 of the table in s 75-10(3) of the GST applied to the sale of the lots on the basis that the sale of the freehold interest in each Lot was a single supply. Item 4 of the table provides for a concessional calculation of GST payable under the margin scheme for the sale of a freehold interest in land where the land has been held by the State since 1 July 2000 and the land was unimproved at 1 July 2000. It was common ground that at all times since 1 July 2000 the land and been held by “the State” for the purposes of the GST Act and the margin scheme in Division 75. It was also common ground that the land in each Certificate of Title represented a “freehold interest in land”.

As observed by the primary judge (at [15]), the question of significance for Landcom was the operation of Division 75 in circumstances where four freehold interests in land were sold in one contract. For the purposes of the application of Division 75, was there one supply of all of the lots the subject of the Contract or single supplies of each of the lots. If the sale was a single supply for Division 75 purposes, then any improvement on any one of the lots would be sufficient to take the supply of all of the land outside of the exception provided by Item 4; any improvement on one lot would ‘taint’ all of the lots – in this context, one of the lots contained a runway. If the transaction involved separate supplies of individual freehold interests in land, then some of the lots might fall within Item 4 and some might not.

The Commissioner gave a private ruling concluding that the item 4 of the table required identification of the land that is the subject of the “supply” and for item 4 purposes the supplies of the freehold interests in the Lots comprising the single Contract wa a single supply of land. Therefore item 4 applied to the land in totality. The genesis for the Commissioner’s response is found in GSTR 2006/6 ‘Goods and services tax: improvements on the land for the purposes of Subdivision 38-N and Division 75’, and what is described as the “single supply rule” at paragraphs 47A-51E of the ruling

Landcom objected to the private ruling. By an objection decision, the Commissioner disallowed Landcom’s objection. Landcom lodged an appeal to the Federal Court pursuant to s 14ZZ of the TAA, seeking to invoke the Court’s original jurisdiction to hear and determine an appeal against an objection decision.

The Jurisdiction Issue

Before the Federal Court, the Commissioner contended that the Court did not have jurisdiction to consider the appeal. At the heart of the issue was s 114 of the Constitution which prohibits the Commonwealth imposing “any tax on property of any kind belonging to a State”. To address this prohibition, when the GST was introduced the States and the Commonwealth entered into an “Intergovernmental Agreement” whereby State entities would “voluntarily” pay an amount to the Commissioner equal to the GST they would have had to pay without the prohibition. This voluntary payment is also known as “notional GST”. A detailed discussion of this regime is set out in a paper I presented in 2022 at the Taxation Institute of Australia National GST Conference – “Notional” GST – political compact or Pandora’s box.The paper also has a detailed discussion of the decision of the primary judge with respect to the Commissioner’s contentions on jurisdiction.

The primary judge rejected the Commissioner’s submission that it did not have jurisdiction to hear the appeal brought under Part IVC of the TAA. The reasons can be summarised as follows:

• Landcom voluntarily included “notional GST” in a GST return results in an assessment of a net amount which gives rise to a debt to the Commonwealth and which is enforceable by the Commissioner unless a finding of invalidity is made by a Court of competent jurisdiction. And Landcom could object to such an assessment. Landcom could object to this assessment.
• Landcom has a real interest in knowing how much notional GST to include, voluntarily, in its GST return. It is common practice to obtain the Commissioner’s views via a private ruling before engaging in a proposed course of action (“scheme”). That is one of the purposes of the private ruling system: at [139].
• The statutory scheme, being one which enables a taxpayer to obtain an advisory opinion in advance of taking a step or entering into a scheme, is underscored by s 14ZVA of the TAA 1953 which operates to limit Landcom’s right of objection against a future assessment to a right to object on grounds that neither were, nor could have been, grounds for the objection against the ruling: at [140].
• The Commissioner’s private ruling and objection decision were not “purported” or undertaken as a matter of mere courtesy. They were each authorised by, and made in accordance with, the statutory scheme. Landcom has exercised its right to appeal to this Court under Part IVC of the TAA 1953: at [141].
• Even if a self-assessment which included notional GST did not give rise to a legally enforceable debt, as there was a “matter” before the Court – there was “some immediate right, duty or liability to be established by the determination of the Court”.

The Commissioner did not appeal the finding of the primary judge that the Court had jurisdiction to consider the appeal.

The substantive issue

Landcom’s principal submission before the primary judge was that s 75-5(1)(a) of the GST Act provides separate treatment for any taxable supply of real property made by selling a freehold interest in land. Even if it was possible for a supply of multiple freehold interests to be a single supply under the basic rules, s 75-5(1)(a) (contained in the special rules) focusses upon and treats separately each supply made by selling “a freehold interest in land”. 

The Commissioner submitted that the logical and necessary starting point is identification of “the supply”. The nature of “the supply” will affect whether and how the items in the table in s 75-10(3) apply because s 75-10(3) only applies if “the circumstances specified in an item in the second column of the table in this subsection apply to the supply”: s 75-10(3)(a). Item 4 of the table in s 75-10(3) raises the question whether there were improvements on the “land or premises in question” as at 1 July 2000. Given that the circumstances in Item 4 have to apply to “the supply”, the term “land or premises in question” refers to whatever has been supplied. This is to be understood as a reference to the “tangible land that has been supplied”.

The primary judge agreed with Landcom’s approach and concluded (at [193]) that the logical starting point for the application of Div 75 of the GST Act is s 75-5(1). Relevantly for present purposes, the question was whether there has been a “taxable supply” made “by selling a freehold interest in land”. Contrary to the Commissioner’s submission, s 75-10(3)(a) does not indicate that the identification of “the supply” under s 9-5 is the necessary starting point for the purpose of determining the application of Div 75.

The primary judge concluded (at [196]) that for Item 4, the reference to “the interest” is a reference to the particular freehold interest referred to in s 75-5(1)(a). Contrary to the Commissioner’s submission, the reference to “the land … in question” is a reference to the land to which the particular freehold interest relates, not to the “tangible land that has been supplied”.

The Appeal

On appeal, the Commissioner contended that the primary judge erred in concluding that Div 75 of the GST Act applies separately to each individual freehold interest and that it is not necessary to consider whether the sale of multiple freehold interests constitutes a single supply or four separate supplies. The construction of the primary judge was incorrect because, in applying the GST Act, it is first necessary to identify the “supply” before ascertaining how to calculate the GST payable on that supply. Section 75-10 is concerned with calculating the margin for “the supply”. The term “taxable supply” is defined in s 9-5 of the GST Act and the term “supply” is defined in s 9-10(1) of the GST Act. The “supply” is to be identified pursuant to s 9-10(1). Applying the statute in this way results in there being a single supply and Div 75 is to be applied to that single supply (at [21]).

The Court, in a unanimous decision, dismissed this ground of appeal and agreed with the conclusions of the primary judge. In doing so, the Court made the following observations:

• Characterising a supply as a single supply or multiple supplies under s 9-5 does not determine the calculation of the amount of GST payable, whether that calculation is to be determined for the purposes of s 9-70 or Div 75. The amount of GST payable is to be calculated by applying the terms of Sub‑div 9-C or, if the supply is a taxable supply of real property, the terms of the special rules in Div 75 (at [26]).
• Section 75-5(1) applies to work out the amount of GST on “a taxable supply of real property” where, relevantly, the taxable supply takes the form of a sale of a freehold interest in land: s 75‑5(1)(a). The Commissioner’s contention focusses on the word “supply”, whereas the concept employed in s 75-5(1) is a “taxable supply of real property”. The gateway to Div 75 is a taxable supply of real property. Once a taxable supply of real property has been identified, there is no further need to embark on an inquiry as to whether that supply is a component of another supply by recourse to s 9-10 (at [28]).
• For the purposes of applying the special rules in Div 75, the terms of s 75-5(1)(a) define the subject-matter of the relevant supply as real property that is in the form of “a freehold interest in land”. The subject-matter of the margin scheme in Div 75 is relevantly the sale of a particular freehold interest in land (at [29]).
• The terms of s 75-10 direct attention to the individual freehold interest. Section 75-10 applies to the calculation of GST payable for the supply of the particular legal interest by reference to the “margin for the supply”: s 75-10(1). The margin for the supply is calculated by reference to “the interest, unit or lease in question”: s 75-10(2). The interest, unit or lease in s 75-10(2) is a reference back to the different forms of “real property” in s 75-5(1)(a), (b) and (c), being the juridical concept or intangible legal interest specified in each of those paragraphs: Sterling Guardian Pty Ltd v Commissioner of Taxation  [2006] FCAFC 12;  (2006) 149 FCR 255 at 260  [21] (Heerey, Dowsett and Conti JJ). The reference to “the interest, unit or lease” appears again in item 4 of the table in s 75-10(3). It, too, is a reference back to the legal interest specified in each of the paragraphs of s 75-5(1) (at [30]).
• Where there is a supply of more than one interest, s 75-10, by its terms, applies to each interest (at [31]).

Implications of the decision

The decision of the Full Court confirms that Division 75 applies to the sale of individual freehold interests in land. In the context of sales of land by State entities, I expect the Commissioner will re-visit GSTR 2006/6 ‘Goods and services tax: improvements on the land for the purposes of Subdivision 38-N and Division 75’, and what is described as the “single supply rule” at paragraphs 47A-51E. It is also now clear that State entities have the same review and objection rights as other taxpayers.

The decision may also have broader implications. The observations of the Full Court extended to the margin scheme as a whole, including each of the items in the table under s 75-10(3). Accordingly, where any taxpayer sells land comprised in a number of Certificates of Title under a single contract of sale, the requirements of the items in the table are to be applied individually to each Certificate of Title. This includes the obtaining of an “approved valuation” under s75-35. It would now appear that any such valuation needs to provide a separate valuation for each Certificate of Title.

Complete Success Solutions

“Missing trader fraud” is a problem inherent in value added tax regimes around the world. The fraud occurs here a supplier within a supply chain, upon being funded the GST (or VAT) by the acquirer through an increase in price, fails to pay the GST. The Revenue is left out of pocket where an input tax credit has been paid to the acquiring entity but the corresponding GST revenue is not received.

The decision of the Full Court is another in a line of cases involving missing trader fraud in the context of dealings in gold. A detailed discussion of those cases is beyond the scope of this post, but a deep dive into the issue generally and the previous decisions is available in the papers I presented at the Taxation Institute of Australia National GST Intensive in 2020 and 2021:

• “All that glitters is not gold”: GST and missing trader fraud (2020)

• “All that glitters is not gold”: Part II – an uncertain future (2021)

The Facts

The applicant acquired scrap gold from a single supplier through a series of transactions. The transactions involved two periods which were dealt with differently by the Tribunal. The Commissioner sought to apply Division 165 to both periods.

During the first period, the applicant acquired scrap gold and caused them to be refined into gold bullion and sold as GST-free supplies to two dealers in precious metals. The Full Court observed that the series of transactions could be summarised in the following way:

• An entity known as Manila Exchange acquired gold bullion under a GST-free supply. It defaced or adulterated the gold bullion such that it became scrap gold.
• Manila Exchange sold the scrap gold to GB Refiners. This was a taxable supply. Although the scrap gold had a lower value than the bullion, the supply of scrap gold attracted GST. Manila Exchange was able to profit from its value-lowering operations only because of its fraud, constituted by charging and not remitting GST. The Commissioner did not and does not allege that the applicant was aware of Manila Exchange’s activities in defacing or adulterating the gold.
• GB Refiners on-sold the scrap gold in a taxable supply to PM Melt Service Pty Ltd (PMMS). The scrap gold was then sold by PMMS to the applicant, albeit not coming into the applicant’s possession.
• The applicant caused the scrap gold to be refined and the applicant claimed it then sold the gold bullion to ABCRA and La Gajjar. The applicant treated its sales of gold bullion to ABCRA and La Gajjar as GST-free supplies and claimed input tax credits in relation to its acquisitions of scrap gold. The applicant’s business in the first period was only cashflow positive because: (a) its sale of the bullion did not attract GST; and (b) it was refunded the input tax credits arising in respect of its purchase of the scrap gold.

During the second period, the gold was sold as scrap gold to an offshore entity (Emirates Gold) as a GST-free export. The series of transactions could be summarised as follows:

• A bullion dealer in Singapore sold gold to QN Traders. The sale was at 100.782% of the prevailing spot price.
• QN Traders sold the gold bullion to Manila Exchange at 101.026% of the prevailing spot price. This was a supply of precious metal and therefore not a taxable supply.
• Manila Exchange adulterated the gold bullion thereby producing scrap gold.
• Manila Exchange sold the scrap gold to GB Traders at 92.327% of the prevailing spot price. The supply of scrap gold by Manila Exchange was a taxable supply in respect of which GST was payable. The price charged to GB Traders was a GST-inclusive price. GB Traders claimed an input tax credit for the GST it paid. Manila Exchange did not remit the GST it collected but retained it.
• GB Traders sold the scrap gold to PMMS at 96.518% of the prevailing spot price. This was a taxable supply in respect of which GST was payable.
• PMMS sold the scrap gold to the applicant at 99.097% of the spot price. This was a taxable supply in respect of which GST was payable.
• The applicant exported the scrap gold to Emirates Gold in Dubai at 98.996% of the spot price. The supply of scrap gold by the applicant was GST-free.
• As with the First Period, the applicant never took possession of the scrap gold it acquired from PMMS. The Tribunal described PMMS as “arranging the export of scrap gold on behalf of and in the name of” the applicant. PMMS was paid partly in advance and partly in arrears. the applicant had granted access to PMMS as a signatory to the applicant’s bank account into which the proceeds of sale of scrap gold and the GST refunds were deposited
• Both PMMS and GB Traders made substantial profit though their respective purchases and on‑sales of scrap gold. The profit in respect of the 12 January 2017 transaction was about $20,000 (PMMS) and $35,000 (GB Traders). the applicant made a comparatively small gain of a little over $4,300.
• The applicant treated its sales of scrap gold as GST-free supplies and claimed input tax credits in relation to its acquisitions of scrap gold. Similarly to the position with respect to the First Period, the applicant’s business was only cashflow positive because: (a) its export sale of scrap gold did not attract GST; and (b) it was refunded the input tax credits arising in respect of its purchase of the scrap gold.

The Tribunal’s findings

With respect to the first period, the Tribunal found that the applicant had not established that the two purchasers (ABCRA and La Gajjar) were “dealers in precious metal” as required by s 38-385. Accordingly, the supplies were not GST-free and the applicant was entitled to input tax credits on it acquisitions of the gold and was liable for GST on the supplies it made. The Tribunal did not consider the application of Division 165 because having concluded that the applicant had made taxable supplies, CSS did not obtain a GST benefit for the purposes of Div 165.

With respect to the second period the Tribunal found that the applicant had made export sales of gold and was therefore entitled to input tax credits on its acquisitions of the gold and was not liable for GST on the exports. Further, in relation to the operation of Division 165, while the series of transactions by which the applicant came to acquire and sell scrap gold to Emirates Gold constituted a scheme and the applicant  obtained a GST benefit in the form of input tax credits on its purchases of scrap gold in circumstances where it had no GST liability on its export sales, it would not be concluded that any entity had a dominant purpose of securing the applicant’s entitlement to input tax credits. Further, the principal effect of the scheme was the non-payment of GST by Manila Exchange and not the applicant obtaining input tax credits.

The Full Court observed that the Tribunal’s reasons in relation to the operation of Division 165 were heavily focussed on what it considered to be the “real mischief”, namely Manila Exchange’s failure to remit the GST which it has received in respect of its supplies of scrap gold. The Full Court referred to the following observation of the Tribunal at [113]-[114]:

The real mischief in this case is the non-payment of GST by Manila Exchange. That was the dominant if not sole purpose of the adulteration of the bullion – to allow the bullion to be sold at a GST-inclusive price. That in turn allowed Manila Exchange to retain the GST component of the price it obtained from GB Traders and profit by failing to pay its GST liability to the Commissioner

In those circumstances, accepting the Commissioner’s submission would visit punishment of that fraudulent endeavour not upon its perpetrator but instead upon [CSS], an unconnected entity that received no substantial net benefit from, and had no knowledge of, the scheme. However, I must, and do, put aside that unfortunate prospect and determine whether Division 165 applies solely by reference to the statutory criteria.

Applicant’s cross-appeal re the first period

The principal issue was whether the applicant was denied procedural fairness in respect of the finding that it had not discharged its burden of proving that each of ABCRA and La Gajjar was a dealer in precious metal within the meaning of the GST Act. The applicant contended that the Commissioner did not produce documents in his possession relevant to determining whether ABCRA and La Gajjar were each a dealer in precious metal. This failure was said to be contrary to s 37(1)(b) of the AAT Act.

Although the Commissioner did not accept that there was a denial of procedural fairness in relation to the Tribunal’s findings, having reviewed the material before him, the Commissioner accepted on appeal that a principal part of ABCRA’s enterprise was the regular supply and acquisition of precious metal and that, therefore, ABCRA was a dealer in precious metals. The Commissioner also accepted that the supplies by CSS to ABCRA were of precious metals. The Commissioner therefore conceded that the matter had to be remitted for reconsideration by the Tribunal.

The Court observed that it appeared from the Commissioner’s concession that  the Tribunal miscarried in its statutory function because it was not provided with materials which were not only relevant but were, apparently, critical to the Tribunal’s ability properly to conduct the review of the objection decision before it. The Court was satisfied that the matter ought to be remitted to the Tribunal for reconsideration of the issues concerning the First Period. 

Upon reconsideration, the issue of Division 165 will be live before the Tribunal.

Appeal re the second period

The Full Court observed that the Commissioner’s grounds of appeal largely took issue with the merits of the Tribunal’s conclusions as to dominant purpose and principal effect (questions of fact) rather than identifying a wrong approach or an error of law. At the hearing of the appeal, it appears that a further ground of appeal developed, involving the purpose of entities other than CSS in entering into or carrying out the scheme or parts of the scheme, as was the principal effect of parts of the scheme. After the hearing, the Full Court invited and received submissions on whether the the Tribunal failed properly to address the whole of what was required by s 165‑5(1)(c) in failing properly to consider whether: the sole or dominant purpose of each participant in the scheme, or part of the scheme, engaged s 165-5(1)(c)(i); and for the purposes of s 165-5(1)(c)(ii), the principal effect of the scheme, or of part of the scheme, was that CSS would get the GST benefit from the scheme directly or indirectly.

The Full Court observed that the Tribunal’s analysis of the dominant purpose of GB Traders and PMMS was limited. The Tribunal’s analysis of principal effect was limited to what it considered to be the principal effect of the scheme as a whole – it did not consider the principal effect of parts of the scheme. As a matter of substance, this was because the Tribunal considered that Manila Exchange not remitting GST was: (a) the dominant purpose of one of the parties to the scheme (Manila Exchange) which for some reason was considered to predominate the purposes of other parties to the scheme; and (b) the predominating or principal effect of the scheme as a whole.

The Full Court concluded that on a fair reading of the Tribunal’s reasons it id not complete its statutory task – the Tribunal did not address the whole of what was required by s 165-5(1)(c) because it did not:

• separately examine each entity’s purpose whether focussing on its participation in the scheme as a whole or in relation to particular parts of the scheme; or
• examine the principal effect of the various parts of the scheme.

The Full Court ordered the matter to be remitted to the Tribunal for reconsideration according to law.

Two recent decisions of the Tribunal have dealt with the perennial issue of taxpayers seeking to recover input tax credits after the expiration of the 4 year period in s 93-5 of the GST Act and the membership requirements for a GST group.

In JHKW and Commissioner of Taxation [2022] AATA 2875 the applicant, as a partner of a partnership formed with their spouse sought review of an objection decision of the Commissioner disallowing a claim for input tax credits for the quarterly tax periods between 1 July 2012 and 31 March 2017 on the basis that the business activity statements (BAS) for those tax periods were lodged outside of the four year time limit in s 93-5 of the GST Act.

The Partnership had failed to lodge GST returns for the tax periods commencing July 2012 and the Commissioner had issued a number of letters in relation to the lodgement of those GST returns. On 23 May 2016, the partnership’s ABN was cancelled. On 21 June 2021, the applicant lodged GST returns for the quarterly tax periods between July 2012 and March 2017, claiming input tax credits of $16,361. The Commissioner reversed the claims on the basis that they were claimed outside of the four-year-time-limit within which ITCs can be claimed.

At the hearing, the applicant gave evidence that they had understood that they had been given an extension of time to lodge the BAS and they were not aware of the 4 year time limit – nor were they informed of the limit by the Commissioner.

The Tribunal found that the partnership’s entitlement to input tax credits had ceased by reason of the operation of s 95-3. The Tribunal referred to the following observation of the operation of s 93-5(1) by SM Lazanas in Rosebridge Nominees Pty Ltd (In Liq) v Federal Commissioner of Taxation  [2019] AATA 426,  109 ATR 988 at [998-44]:

With respect to tax periods following 1 July 2012, s 93-5(1) of the GST Act similarly makes it abundantly clear that the entitlement to the ITCs is extinguished in certain circumstances. The use of the word “ceases” is unequivocal in describing the end of the entitlement to claim ITCs, unless certain events have occurred. This conclusion is consistent with the following decisions describing the operation of Division 93: Re Trustee for the SBM Trust and FCT [2015] AATA 174;  (2015) 101 ATR 191 and Re SE Sedgwick and YE Sedgwick and FCT [2015] AATA 690;  (2015) 97 ATR 696.

The Tribunal found that there was no evidence to suggest that the Commissioner granted an extension of time for the partnership to lodge its BAS. In the absence of an extension, the operation of s 93-5 means that after the expiry of 4 years after the day on which the BAS was required to be given to the Respondent, the entitlement to ITCs immediately ceases. Further, the provision of further time within which to give a BAS to the Commissioner cannot be provided retrospectively outside of the relevant 4 year period. There is no discretion to get around the operation of s 93-5.

The decision is a further illustration of the harsh operation of Division 93 of the GST Act.

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In Adcon Resources Vic Pty Ltd and Commissioner of Taxation [2022] AATA 2629 the Tribunal found that the applicant and a related entity did not meet the GST group membership requirements for the period 1 July 2018 to 30 June 2021 and the parties were therefore not entitled to form a GST group for that period.

The applicant was incorporated on 12 March 2018 and registered for GST on a cash basis. On 10 July 2019 the applicant gave notice to the Commissioner that it was seeking to form a GST group with Adcon Contracting Pty Ltd (Adcon Contracting) with a date of effect of 1 July 2018. Adcon Contracting was registered for GST on 25 July 2018, with effect from 1 July 2018, on an accruals basis.

The Commissioner queried the GST group on the basis that it appeared that the companies were not part of the same 90% owned group. ASIC searches disclosed that the shares in the applicant were held by DI, who was also sole director of the applicant. The shares in Adcon Contracting were held by Chale Pty Ltd which was recorded as not being the beneficial owner of the shares. The shares in Chale Pty Ltd were all held by DI.

The applicant said that Chale Pty Ltd held the shares in Adcon Contracting as trustee for a Chale Asset Trust and that it was intended that the shares in the applicant were to also be held by Chale Pty Ltd as trustee for the trust. Due to an error by the accountant, DI was made the shareholder of the applicant and a notice had been lodged with ASIC to correct the shareholding of the applicant. DI also contended that he held the shares in the applicant as trustee pending transfer of the legal title in the shares to Chale Pty Ltd.

At the hearing, the Commissioner contended that at all material times, DI was the sole shareholder of the applicant and Chale Pty Ltd was the non-beneficial shareholder of the shares in Adcon Contracting – and as such, no single company held a 90% stake in both companies. The Commissioner also contended that the GST Act does not allow a trustee for a trust to be the 90% owner – it requires a company to be the 90% owner.

The Tribunal observed that the basis of the applicant’s contentions is that an error was made during the setup of the applicant and as such, its shares were not meant to have been owned by DI. Consequently, he must have been holding them as a nominee or on trust for Chale Pty Ltd. The difficulty for the applicant was the lack of evidence to support this position. For example: there was no evidence before the Tribunal that DI acted on behalf of Chale with regards to the operations or sale of the applicant; there was no evidence that as to the actual submission of the Form 492 to ASIC or any subsequent correspondence between ASIC and the applicant; the share register was not produced; there was no evidence as to whether the applicant paid dividends or who they were paid to. Based on the lack of evidence, the Tribunal was not satisfied that the applicant had discharged its onus.

In Ian Mark Collins & Mieneke Mianno Collins ATF The Collins Retirement Fund and Commissioner of Taxation (Taxation) [2022] AATA 628 (4 April 2022) the Tribunal determined that the applicant taxpayer was liable to pay GST on the subdivision of land into 11 lots and the sale of those lots. The Tribunal found that the applicant was “required to be registered” for GST at the time the sales occurred.

The decision deals with some important issues in the context of GST and the subdivision of land. In particular, whether – as contended by the applicant – the sales were to be excluded from GST turnover pursuant to s 188-25 of the GST Act on the basis that the sales were the mere realisation of a capital asset, or alternatively that the sales were made solely as a consequence of the applicant ceasing to carry on an enterprise or substantially or permanently reducing the size or scale of an enterprise. In considering these questions, the Tribunal observed that in the income tax context, the capital vs revenue distinction was well-traversed, however s 188-25 had not been the subject of judicial consideration and raised untested issues concerning the extent to which the income tax jurisprudence is relevant for GST purposes and the proper application of s 188-25.

The applicant was registered for GST and paid GST on rental receipts from the unsubdivided land, which comprised Lots 11 and 12 and 50 acres in total. Lot 11 was acquired in 1986 and Lot 12 was acquired in 1992. The land was leased from August 2004 and in July 2015 an application was lodged to subdivide the land into 11 rural residential lots. The application was approved in February 2016 and the leases expired in August 2016. In October 2016, the applicant applied to cancel its GST registration and a plan of subdivision was registered in June 2017. 10 of the lots were sold with settlements occurring between June and November 2017. Each lot sold for a price in the order of $1m.

The question was whether the applicant was required to register for GST due to the sales. Registration was required if the applicant was carrying on an enterprise and it met the GST turnover threshold. It was common ground that the applicant, as  the trustee of a superannuation fund, is taken to have carried on an enterprise. The value of the sales exceeded the GST turnover threshold and the issue was whether the sale proceeds were to be excluded from the applicant’s GST turnover pursuant to s 188-25, which required the following supplies to be disregarded:

(a) any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset of yours; and 
(b) any supply made, or likely to be made, by you solely as a consequence of:

(i) ceasing to carry on an * enterprise; or
(ii) substantially and permanently reducing the size or scale of an enterprise.

S 188-25(a) – the sales were not of capital assets

The Commissioner submitted that the expression ‘capital asset’ does not appear elsewhere in the GST Act and that the context of the characterisation of the supply of an asset as a transfer of ownership of a capital asset in s 188-25(a) – in determining an entity’s projected turnover – is quite different to the role played by the revenue/capital distinction in determining the assessibility of receipts or deductibility of outgoings or losses. Further, in the income tax context, in determining whether the proceeds of sale of an asset are on revenue or capital account attention is focused upon whether the seller had an intention, at the time of acquisition of the asset, that the asset would be sold at a profit. In contrast, for s 188-25(a) purposes, the character of an asset must be determined at the time of the supply. This was described by the Commissioner as a ‘key point of distinction from the income tax framework’.

The Commissioner submitted that whether the taxpayer had a profit-making intention at the time of the acquisition of an asset is not determinative for s 188-25(a) purposes. The focus must be on the time a supply of the asset is made or is likely to be made. The applicant agreed with this proposition and the Tribunal adopted the proposition that for s 188-25(a) the character of an asset must be determined at the time the supply is made. The Tribunal observed that the Commissioner did not submit that income tax cases on the capital/revenue distinction should be wholly disregarded and both parties referred to the concept which has evolved in the cases of the mere realisation of an asset in an enterprising way being on capital account.

The Tribunal was of the view that the the applicant’s undertaking amounted to more than a mere realisation of the property in an enterprising way. The works required to achieve the subdivision were substantial. The applicant acknowledges that it spent in total $4,538,757.64 in developing the property in the context of land that in aggregate sold for around three times that amount. The extent of the works is reflected in the nature of the development as stated in the advertising material for the subdivided lots, which referred to fully sealed roads with rolled curb edges; security gates and front road fencing; 2 extensive lakes plus a peaceful pond; landscaping throughout the estate; picnic areas; and a pontoon. The applicant twice applied to modify the development approval; and obtained multiple, costly expert reports in relation to engineering, geotechnical, soil testing, environmental and vegetation management issues. The Tribunal considered that these activities took the character of this matter beyond mere realisation into a commercial venture entered into for the purpose of obtaining the gain on sale of the subdivided lots.

In coming to this view, the Tribunal made the following observations about the role undertaken by the applicant in the development and that the lots were sold as vacant land:

• The engagement by the applicant, who had no professional experience in land development, to provide advice and carry out engineering and construction works and real estate agents to market land is a hallmark of modern subdivision projects. While that may mean the applicant was relatively passive in respect of these activities, the Tribunal did not accept that this weighed heavily in the applicant’s favour in the context of a development of this nature which involved the undertaking of extensive skilled work.
• That the applicant chose to sell vacant land and, as the applicant expressed it, left further profits on the table by not constructing and selling houses on the lots for further profit, provides little assistance to the applicant. Every operator of a land development business that chooses to sell allotments rather than house and land packages has made such a choice.

The Tribunal was not persuaded that the supplies of the subdivided lots were or were likely to be made by way of transfer of ownership of capital assets.

S 188-25(b) – the sales were not solely as a consequence of ceasing to carry on an enterprise

The Tribunal did not accept the Commissioner’s submission that the “enterprise” referred to in s 188-25(b) must be the same enterprise that the applicant acknowledges it carried on; that is, carrying out activities as trustees of a complying superannuation fund. The Tribunal found that the section in its terms refers to ‘an’ enterprise. The Tribunal could see nothing in the context of this provision which would warrant limiting the enterprise referred to in s 188-25(b) to a particular enterprise. The Tribunal accepted the applicant’s submission that it is sufficient to demonstrate that the sales were made solely as a consequence of the applicant ceasing to carry on an enterprise of subdividing and selling the subdivided lots. However, that was not the end of the matter.

The Tribunal did not consider the applicant’s characterisation of the sales, or even the final sale, as made as a consequence of ceasing to carry on the land development was reasonably open, let alone solely as a consequence of the ceasing of that enterprise. The Tribunal considered that it would be quite artificial to say such sales occur in consequence of the business ceasing. The sale of lands was the central objective of a land development enterprise and the sales occurred as part and parcel of – as a consequence of – the ongoing conduct of the enterprise.

Observations

The main takeaway from this decision appears to be that if the applicant had simply sold the pre-subdivided land (lots 11 and 12) after the leases had expired, the sale proceeds would have been excluded under both (a) and (b) of s 188-25. Those lots being capital assets of the leasing enterprise carried on by the applicant. Also, the sale of the lots was made solely as a consequence of ceasing to carry on the leasing enterprise.

The difficulty for the applicant arose due to its decision to subdivide the lots for sale and to undertake activities the Tribunal saw as being more than merely realising the properties in an enterprising way. If the applicant had undertaken a smaller-scale subdivision, the position may well have been different. The line between realising the properties in an enterprising way and carrying on commercial activities is notoriously difficult to draw. There is no bright line test. As observed by the Tribunal, the task inevitably becomes a matter of scale and impression.

Over the last few days three decisions relating to GST have been handed down. One by the Full Federal Court on the GST treatment of gambling supplies (allowing the Commissioner’s appeal) and two by the Tribunal, one on development leases and whether excess GST has been “passed on” (partially in favour of the taxpayer and partially in favour of the Commissioner) and the other on whether the taxpayer was required to be registered for GST (in favour of the Commissioner).

In Commissioner of Taxation v Burswood Nominees Limited as Trustee for the Burswood Property Trust [2021] FCAFC 151 the question was how the special rules in Division 126 of the GST Act for “gambling supplies” applied to amounts paid between junket tour operators and the casino. Section 126-10 provides for the calculation of a “global GST amount” for gambling supplies, being calculated by taking the “total amount wagered” and subtracting the “total monetary prizes”. The resulting amount is then multiplied by 1/11. The effect of the provision is that GST on gambling supplies is to be applied to the margin of the person providing the gambling supplies.

The expression “total amount wagered” is defined as meaning the sum of the “consideration for all of [the taxpayer’s] gambling supplies” that are attributable to the relevant tax period. The word “consideration” is defined by reference to s 9-15 of the GST Act – being “in connection with” the supply. The expression “total monetary prizes” is defined as meaning the sum of (relevantly) “the monetary prizes [the taxpayer] is liable to pay, during the tax period, on the outcome of gambling events…”.

The primary judge ([2020] FCA 1295) agreed with the taxpayer that the special rules in Division 126 of the GST Act applied to the total amount payable between the parties. On appeal, the Full Court agreed with the Commissioner’s contention that the special rules did not apply to commissions and rebates, those being dealt with under the ordinary GST rules. The Full Court concluded that commissions and rebates did not form a part of “total monetary prizes” or “total amount wagered” and were not to be taken into account in calculating the taxpayer’s “global GST amount” under s 126-10.

With respect to commissions and rebates payable by the casino to the junket operator, the Full Court concluded that these amounts were not “monetary prizes” and observed as follows:

• the commission is payable for the marketing, promotion and arrangement of junkets by the junket tour operator to the casino.
• the commissions and rebates are not “prizes” within the ordinary meaning of the word – they are amounts payable by the casino to the junket operator referable to the commercial relationship between them and additional to any amount referable to winnings
• the commissions and rebates are not payable “on the outcome of gambling events” – they re payable as consideration for the provision or marketing and other services of the junket tour operator.

With respect to rebates payable by the junket tour operator to the casino, the Full Court observed that these amounts were not part of the “total amount wagered”, observing as follows:

• the rebates payable by a junket tour operator to the casino are payments to be made as part of, and in connection with, the commercial arrangements for the junket agreed between the casino and the junket tour operator
• the rebates are not payments to be made in consideration for the gambling supplies.

In WYPF and Commissioner of Taxation [2021] AATA 3050 (as I appeared in this matter I provide no comment and merely outline the essential findings) the Tribunal found that certain works constructed by the applicant (Preparatory Works) formed part of the consideration for the acquisition of development land (as non-monetary consideration) but other works (Building Works) did not form part of the consideration for the acquisition of the development land. The applicant chose to to account for GST on its sales of the apartments under the margin scheme conservatively and in calculating the GST the applicant treated the monetary consideration paid for the land as consideration for the acquisition of the land, but did not include the value of the Preparatory Works or the value of the Building Works in calculating the margin on the sales. The Tribunal found that to the extent of the Preparatory Works, the applicant had paid excess GST that it did not pass on to the recipients of its supplies so s 142-20 of the GST Act did not apply to prevent the excess GST being refunded to the applicant.

In Royal Lion Capital Pty Ltd and Commissioner of Taxation [2021] AATA 3049 the Tribunal affirmed the Commissioner’s decision to to register the applicant for GST on the basis that it had exceeded the GST registration turnover threshold of $75,000 from 1 April 2018 and that it was carrying on an enterprise of providing investment services. The Commissioner formed this view based on information obtained in relation to 22 deposits into two bank accounts, from which the Commissioner calculated the applicant’s quarterly sales and corresponding GST payable. The Commissioner did not allow input tax credits in respect of withdrawals amounts from the bank accounts. The Applicant conceded that 8 transactions $91,305.87 were commission and should be classified as GST income. Of the other transactions the Applicant submitted that they related to loans to the applicant from individuals or were interest income received from a loan between other entities for which the applicant acted as intermediary. At the hearing, the Tribunal accepted the contention of the Commissioner that the evidence provided by the applicant was properly described as lacking and unreliable – the applicant had not been able to provide a clear picture of the arrangements between it and the parties with whom it interacted. Critically, the applicant had produced no documentary evidence to support its contention that it did not meet the $75,000 threshold and that effectively the applicant was asking the Tribunal to accept its contentions, based on the word of the applicant. In the absence of corroborating evidence to the contrary, the Tribunal found that the applicant was required to be registered for GST and that the applicant had failed to discharge its onus to prove that the assessments were excessive.

In Federal Commissioner of Taxation v Travelex Limited [2021] HCA 8 the High Court has unanimously allowed the appeal brought by the Commissioner against the decision of the Full Federal Court in Commissioner of Taxation v Travelex Limited [2020] FCAFC 10. This is the second case to reach the High Court, with the first being handed down in 2010 – Travelex v Commissioner of Taxation [2010] HCA 33. The issue in the first case was whether certain supplies of foreign currency by Travelex were GST-free or input taxed. The issue in the second case was, having been successful in the first case, whether Travelex was entitled to interest on subsequent refunds paid by the Commissioner on account of an entitlement to additional input tax credits.

The appeal involved the operation of the “Running Balance Account” provisions in Part IIB of the Taxation Administration Act 1953 (TAA) and whether Travelex was entitled to interest under the Taxation (Interest on Overpayments and Early Payments) Act 1983 (TIOEP Act) on an amount which the Commissioner in fact treated as an “RBA surplus” and and in fact paid to Travelex in the aftermath of the first High Court decision (“Travelex No.1”). The High Court observed that in the course of litigation, the dispute had evolved into a dispute about whether the amount which the Commissioner in fact treated as an RBA surplus was in law an RBA surplus and, in consequence, about whether the Commissioner was obliged to pay interest at all.

It should be noted that the case arose under the “self-actuating” provisions that applied to the GST before the introduction of the self-assessment regime on 1 July 2012.

The High Court set out the facts as follows:

• Travelex No.1 was decided in September 2010. Before the decision, Travelex had on 16 December 2009 notified the Commissioner in a GST return forming part of its Business Activity Statement for its November 2009 tax period of a positive net amount for that period of $37,751. Travelex had soon afterwards paid that positive net amount to the Commissioner.
• After Travelex No. was decided, Travelex wrote to the Commissioner in June 2012 requesting the Commissioner to amend Travelex’s GST return for the November 2009 tax period to increase the amount claimed for input tax credits for creditable acquisitions by $149,020.
• Proceeding on the assumption that it was then permissible to amend a GST return, the Commissioner complied with Travelex’s request. On 28 June 2012, the Commissioner credited the RBA he had established for Travelex by an amount of $149,020 by reference to a “transaction” described in an entry made that day in the RBA as “amended self-assessed amount for the period ended 30 Nov 09”. The date assigned to the entry then made in the RBA was 16 December 2009. On 3 July 2012, the Commissioner sent Travelex a document entitled “Confirmation of revised activity statement for the period 01/11/2009 to 30/11/2009”. The document stated that “the total amount of your activity statement has been changed from $37751Dr to $111269Cr”. Three days later, the Commissioner paid an amount of $149,020 to Travelex by electronic funds transfer.
• Having treated the amount of $149,020 so paid as RBA surplus which he was obliged to pay and did pay to Travelex under the TAA, the Commissioner did not initially dispute that he was obliged to pay interest on the amount under the TIOEP Act. The scope of the dispute between the Commissioner and Travelex was initially limited to the date from which that commonly assumed obligation to pay interest arose. The Commissioner took the view that interest was payable from 17 July 2012. Travelex took the view that interest was payable from 1 January 2010.
• Travelex commenced a proceeding against the Commissioner in the original jurisdiction conferred on the Federal Court by s 39B(1) of the Judiciary Act 1903 (Cth) seeking declaratory and injunctive relief to resolve the dispute about the date from which the commonly assumed obligation to pay interest under the TIOEP Act arose. The Commissioner and Travelex agreed on a Statement of Agreed Facts (“SOAF”) in the proceeding. The SOAF stated as a “fact” that the Commissioner had on 28 June 2012 allocated the amount of $149,020 to Travelex’s RBA with an “effective date” of 16 December 2009. The SOAF also stated as a “fact” that the amount of $149,020 so allocated constituted an RBA surplus.

At first instance, Wigney J resolved the dispute in favour of Travelex. In doing so, his Honour held that neither the GST Act nor the associated provisions in the TAA (as they stood before the introduction of the self-assessment regime on 1 July 2012) gave a taxpayer or the Commissioner authority to amend a GST return. On appeal, the Commissioner’s grounds included that Travelex and the Commissioner lacked statutory authority to amend a GST return ought to have led Wigney J to reject the agreed “fact” in the SOAF that the amount of $149,020 which the Commissioner had on 28 June 2012 allocated to Travelex’s RBA constituted an RBA surplus, with the consequence that his Honour erred in concluding that the Commissioner was obliged to pay interest on that amount to Travelex under the TIOEP Act at all.

The Full Court was unanimous in accepting as correct the holding of Wigney J that neither Travelex nor the Commissioner had statutory authority to amend Travelex’s GST return for the November 2009 tax period. The High Court observed that the correctness of the holding is no longer in dispute and the Full Court divided as to the consequence of that lack of authority. Derrington J agreed with the Commissioner, finding that because the amount then allocated failed to reflect any underlying entitlement of Travelex to a refund of a net amount under the GST Act, the allocation by the Commissioner of the negative amount of $149,020 to Travelex’s RBA on 28 June 2012 was incapable of resulting in an RBA surplus. The net amount for the November 2009 tax period remained in law the positive amount of $37,751 of which Travelex had notified the Commissioner in its GST return on 16 December 2009 and which it had paid. Steward J (Kenny J agreed) took the view that the fact that the Commissioner on 28 June 2012 allocated the amount of $149,020 to Travelex’s RBA with an effective date of 16 December 2009 was enough to result in the amount having the legal status of an RBA surplus as at 16 December 2009. The foundation for that view was an understanding that Pt IIB of the TAA operated to give “the balance recorded in an RBA legal efficacy, even though the balance may be mistaken”.

The sole ground of appeal was that which divided the Full Court and the High Court found that the answer accords with that given by Derrington J. In coming to this conclusion, the High Court made the following observations (at [29]):

• The overall result is that a balance recorded in an RBA must be refunded by the Commissioner as an RBA surplus or paid to the Commissioner as an RBA deficit debt only if the balance is the product of allocations of amounts which accurately reflect obligations of the Commissioner and of the taxpayer under taxation laws.
• An allocation that the Commissioner in fact makes to an RBA of an amount the Commissioner is not legally obliged to pay to a taxpayer under a taxation law cannot result in an RBA surplus any more than an allocation in fact of an amount not legally due to the Commonwealth under a taxation law can result in an RBA deficit debt.

The High Court also dismissed the Notice of Contention filed by Travelex to the effect that the Full Court should have found that the Commissioner had, on or around 28 June 2012, made an assessment of a negative net amount for the November 2009 tax period of $111,269 (being $149,020 less $37,751). The High Court described an “assessment” as a deliberative process directed to, and culminating in, the giving of a notice of assessment, which constitutes conclusive evidence that the amounts and particulars in the assessment are correct except in so far as the assessment might be challenged on a review or appeal under Pt IVC of the TAA.

“Missing trader” fraud occurs where a supplier within a supply chain, upon being funded the GST by the acquirer through an increase in price, fails to pay the GST.

The issue of missing trader fraud in the gold industry was highlighted by two recent decisions of the Administrative Appeals Tribunal where the Tribunal upheld the Commissioner’s decisions to deny the applicants’ entitlement to input tax credits with respect to the acquisition of gold:  

• ACN 154 520 199 Pty Ltd (in liq) and Commissioner of Taxation [2019] AATA 5981
• Cash World Gold Buyers Pty Ltd and Commissioner of Taxation [2020] AATA 1546 – my post on this decision can be accessed here

The issue of “missing trader fraud” was a common theme. Both decisions:

• Disclosed the involvement of “intermediaries” in the supply chain who were able to purchase and sell very large amounts of gold while having limited financial means, and who agreed to sell gold at a price that would mean selling at a loss if the GST was remitted to the Commissioner – making the transactions uncommercial unless the GST was to be retained. 
• Raised the spectre of gold being “recycled” through the supply chain, with its taxable form being altered at some stage in the supply chain from gold bullion (non-taxable) to “scrap gold” (taxable), and one or more suppliers failing to remit GST. 

In the first case the applicant, a gold refiner, satisfied the Tribunal that the gold was acquired in taxable form, but the Tribunal affirmed the decision of the Commissioner to deny the entitlement to input tax credits on the basis that:

• The gold was not acquired for a creditable purpose because the gold was not “refined” by the applicant within the meaning of s 38-385 of the GST Act and the sales of gold bullion by the applicant were therefore not GST-free as the first supply of “precious metal” – rather the sales were input taxed under s 40-100 as a supply of “precious metal”.
• Alternatively, if the gold was acquired for a creditable purpose, the applicant’s entitlement to input tax credits should be denied pursuant to the operation of the anti-avoidance provisions in Division 165 of the GST Act – on the basis that there was a scheme where the dominant purpose or principal effect of acquiring the gold was to obtain the input tax credits.

The taxpayer appealed to the Full Federal Court. In ACN 154 520 199 Pty Ltd (in liquidation) v Commissioner of Taxation [2020] FCAFC 190 the Full Federal Court has unanimously allowed the taxpayer’s appeal and ordered the matter be remitted to a differently constituted Tribunal for determination according to law. The case is complex, with 34 grounds of appeal being relied on by the taxpayer and the judgment running to 232 paragraphs. I have sought to focus on the views of the Court which led to the appeal being allowed.

The construction issue – s 38-385 of the GST Act

Before the Tribunal, the Commissioner’s primary argument was that the applicant did not make creditable acquisitions because the supplies of bullion were not GST-free pursuant to s 38-385 – rather, they were input taxed supplies of precious metal pursuant to s 40-100. This was because the gold acquired was already at 99.99% fineness and the process applied by the applicant to put the gold into bullion form was not “refining” for the purposes of s 38-385 – the gold had already been refined to the requisite standard (ie, 99.5%) before it was acquired by the applicant. The supply of the gold bullion was therefore not “the first supply of that precious metal”. The Tribunal agreed with the Commissioner’s argument.

The Court agreed with the taxpayer that the Tribunal erred in its construction of s 38-385 of the GST Act. The Court found (at [137]) that neither the text nor the context of s 38-385 supports the construction adopted (or preferred) by the Tribunal, namely that “processes which are not directed towards increasing the metallic purity of the gold above the requisite standard of fineness (99.5% in the case of gold) should not be regarded as ‘refining’”. Rather, the ordinary meaning of the word “refining” and he statutory context suggest that the word “refining” in s 38-385 is referring to a process by which metal is brought to a finer state or form. Accordingly, a process that increases the metallic fineness, for example, from 99.5% to 99.99% would constitute “refining”, even though the gold was already at the level of fineness required for precious metal.

The Court concluded (at [142]) that once the Tribunal’s preferred construction of “refining” is rejected, it was clear on the findings of the Tribunal, and the unchallenged evidence before the Tribunal, that the processes of smelting and fluxing undertaken by the taxpayer (a refiner of precious metal) in relation to the scrap gold it received constituted refining. The Court agreed with the taxpayer that the supply of this refined gold, being a precious metal bar that was not previously in existence, was the “first supply of that precious metal”. The Court rejected the Commissioner’s argument that the relevant focus is on the gold that had been refined – which had here previously been supplied as gold bullion in investment form and then deliberately defaced. Accordingly, the supplies of gold bullion by the taxpayer were GST-free as the “first supply of that precious metal” and the taxpayer was entitled to recover input tax credits with respect to the acquisition of the scrap gold.

The Court found that the taxpayer was entitled to input tax credits totalling $122,112,065 in respect of its acquisitions of scrap gold from the suppliers.

The Division 165 issue

Before the Tribunal, the Commissioner’s alternative submission was that the anti-avoidance provisions in Division 165 were engaged to deny the taxpayer’s entitlement to input tax credits with respect to its gold acquisitions totalling approximately $73 million.

The successful grounds of appeal were described by the Court as “the procedural fairness issue”, being whether the Tribunal denied the taxpayer procedural fairness in making certain findings: in particular, whether the Tribunal had denied the taxpayer procedural fairness by relying on three documents which had not been the subject of cross-examination or submission.

The taxpayer’s submissions focused on adverse findings that were said to have been made by the Tribunal as to the credit of the director of the taxpayer, comments that the taxpayer did not put on any evidence to explain matters in the documents and the inference drawn by the Tribunal that the director and the taxpayer were aware that at least some of the scrap gold had been sourced from a related entity of the taxpayer. The documents at issue were two emails between employees of the related entity and the transcript of the director’s compulsory examination by the Commissioner. These documents had been included in the Hearing Book but the documents were not the subject of any cross-examination or submission.

The Court concluded that the Tribunal’s reliance on these documents constituted a denial of procedural fairness. While the the documents were included in the Hearing Book without objection, in the circumstances it could not have been reasonably expected that the Tribunal would rely on these documents to form an adverse view as the director’s credit or to make adverse knowledge findings against the taxpayer.

The Court also found that the Tribunal’s findings of the director’s credit and the knowledge of the taxpayer were integral to the Tribunal’s consideration of whether Division 165 operated. The Tribunal made various points in the reasons regarding the knowledge of the director and the taxpayer and it was  impossible to exclude the possibility (and, to the contrary, it seemed distinctly possible) that these findings were influenced by the adverse view the Tribunal had formed as to the director’s credit on the basis of the two emails and the compulsory examination transcript. The Court found that it was not possible to isolate and put to one side the Tribunal’s reliance on the two emails and the compulsory examination transcript on the basis of the objective nature of the test under Division 165.

The Court concluded that due to the procedural fairness issue, the the Tribunal’s conclusion relating to Division 165 must be set aside and the issue re-determined. The Court observed that while it had power under s 44(7) of the AAT Act to make findings of fact, in the circumstances of this case it would be going beyond the proper role of the Court to re-determine whether Division 165 operates. Among other things, in the process of re-determining the issue it would be necessary to consider afresh, and making findings about, whether (as the Commissioner contended) the taxpayer ought to have known certain matters.  An intensive fact-finding exercise of that nature went beyond the proper role of the Court in an appeal on a question of law under s 44 of the AAT Act. Accordingly, the Court considered it necessary to remit the matter to the Tribunal for determination according to law (that is, to re-determine whether Div 165 operates).

The Court ordered that the matter be remitted to a differently constituted Tribunal to determine the matter according to law.

Where a company becomes an “incapacitated entity” Division 58 of the GST Act seeks to shift the company’s obligation to pay GST and its entitlement to input tax credits to the “representative”, such as the administrator, receiver or liquidator. In Richard Albarran, Brent Kijurina and Cameron Shaw as Joint Administrators of Cooper & Oxley Builders Pty Ltd as trustee for the Cooper & Oxley Builders Unit Trust and Commissioner of Taxation [2020] AATA 4325 the Tribunal was required to address the difficult question of who was entitled to input tax credits where:

• the company accounted for GST on an accruals basis and made the acquisition prior to the appointment of an Administrator; and
• the Administrator accounted for GST on a cash basis and paid for the acquisition after its appointment.

The parties agreed that the company and the Administrator were not each entitled to the input tax credits. The Administrators contended that they were entitled to the credits. The Commissioner contended that the company was entitled to the credits. The Tribunal agreed with the Commissioner.

The nub of the dispute appears to have been whether Division 58, particularly s 58-10(1) which entitles the representative entity to input tax credits “to the extent that the making of the acquisition to which the…input tax credit…relates is within the scope of the representative’s responsibility or authority for managing the incapacitated entity’s affairs“, is only engaged where the acquisition is “made” during the period of appointment – with the effect that the entitlement to input tax credits for creditable acquisitions made prior to the appointment remaining with the company.

The Tribunal undertook a detailed consideration of the text of the provisions, policy considerations and the extrinsic materials and agreed with the Commissioner’s construction of s 58-10 of the GST Act, which confined the section to supplies and acquisitions made by the representative. The Tribunal considered that this reflected a more natural reading of the provision and was coherent with the scheme of the GST Act in relation to GST on taxable supplies and ITCs on creditable acquisitions and their attribution to tax periods. The Tribunal also considered that:

• Nothing in the context of the surrounding provisions, nor the EM, clearly indicates otherwise.
• The practical outcome of this construction – that representatives are only liable for GST on taxable supplies, and entitled to ITCs on creditable acquisitions, which they actually make, and not on supplies and acquisitions made before their appointment by an entity over which they had no control – was not suggestive of a manifestly absurd, unreasonable or improbable intention to attribute to Parliament.

A common, but difficult, GST issue is whether the seller of vacant lots of land is carrying on an “enterprise” and is subject to GST. There is no simple answer, and the question must always be addressed by reference to the facts. In many cases, the question arises where the land is owned by one or more individuals – for example, a holiday home on a large piece of land that has been held by a family for a long time and is to be subdivided and sold as vacant blocks. Yesterday, the Tribunal handed down its decision in San Remo Heights Pty Ltd and Commissioner of Taxation [2020] AATA 4023 where the issue arose in the context of land that had been owned by a company for a long period of time.

While the Tribunal ultimately found in favour of the Commissioner, mainly because of deficiencies in the available evidence, the decision illustrates the following matters:

• In seeking to prove that an enterprise is not carried on, a company will generally face a more difficult task than an individual. Of course, this also means that it should generally be easier for a company to establish that it is carrying on an enterprise – for example, where there is a dispute as to the entitlement to input tax credits.
• If a company is registered for GST on the basis that it carries on an enterprise, not every supply made by the company will necessarily be taxable as a supply made in the course or furtherance of an enterprise. Each case involves a question of fact.

The facts were not in dispute:

• The company acquired the land in 1962. Because of the effluxion of time, no evidence was provided as to the company’s object of acquiring the land. Over time, parts of the land were subdivided and sold.
• In April 1987, four lots were created and sold.
• In November 1987, four lots were created. One was sold in 1989, another in 1995 and the remaining two lots in 1998.
• In June 2000, four lots were created. One lot was sold in 2002 and another in June 2019. The two lots which were the subject of the dispute were sold in October and November 2018. The Commissioner assessed GST on the sales of the two lots in the company’s December 2018 quarterly tax period.
• The company was registered for GST and held three commercial rental properties, four residential rental properties and land used for grazing purposes.
• The evidence was that no income tax deductions and no input tax credits were claimed with respect to the two lots and the company had not sought previously to have the land rezoned, apply for permits or previously attempted to sell the lots. The sole purpose of the sale was said to be to facilitate the closure of the estates of deceased relatives who held shares in the company and to whom there was a debt owed by the company. There was no evidence of a business plan and the 2017 and 2018 financial accounts showed there were no employees and no wages or salary expenses.
• The Tribunal observed that the evidence was silent as to the manner in which the sales took place, therefore no findings could be made whether that was systematic, organised or businesslike, other than to note that the lands were not treated as trading stock in the company’s 2018 financial statements.

Two issues arose:

1. Whether the sales were made in the course or furtherance of the enterprise constituted by the rental and grazing activities of the company
2. If not, whether the company had established that the sales were not made in the course or furtherance of an enterprise carried on by the company.

The Tribunal observed that the concept of “business” included the well-known indicia of profit making purpose, scale, repetition and regularity, the amount of capital invested, and the organisation of activities in a business-like way with books and records. The Tribunal also observed that it had been held in previous cases that:

• where  company is incorporated for the purpose of making profits for its shareholders any gainful use to which the company puts its assets prima facie amounts to carrying on a business; and
• it is easier to draw an inference that activities of a company constitute a business than when similar activities are carried on by an individual.

In this context, I note that the definition of enterprise in s 9-20 of the GST Act excludes activities carried on by an individual without a reasonable expectation of profit or gain, but there is no exclusion for other entities such as companies. In Davsa Forty-Ninth Pty Ltd as Trustee for the Krongold Ford Business Unit Trust and Commissioner of Taxation [2014] AATA 337 the Tribunal observed that this begs the question whether other entities are subject to this qualification, the answer to which is left uncertain by the legislation.

The Tribunal found in favour of the taxpayer on the first issue, being satisfied on the evidence that the sales of the lots had no connection with the property rental or grazing enterprises carried on by the company. In coming to this conclusion, the Tribunal made some observations on the approach taken by the Commissioner in his Objection Decision which suggested that once a company is registered or required to be registered for GST, any supply it makes will be in the course or furtherance of an enterprise. The Tribunal made the following observation on this suggestion:

“That, with respect, is not correct as a matter of statutory language – s 9-5(b) of the GST Act requires determination of whether the particular supply was made in the course or furtherance of an enterprise carried on by the relevant entity, whether a company or otherwise. A company may face a particular challenge in discharging its burden of proving a supply was not made in the course or furtherance of an enterprise, but that is not say it is an impossible task – for whether any entity’s activities constitute an enterprise is ultimately a question of fact – but it requires an evidentiary foundation on which to do so.”

The Tribunal found against the taxpayer on the second issue, finding that it was not satisfied that the series of activities by the company in relation to the land did not constitute an enterprise. In coming to this view, the Tribunal noted that the taxpayer’s activities with respect to the land were carried out over an extended period of time but it could not determine that those activities were undertaken other than for commercial purposes. There was no evidence of the purpose of the controlling minds of the company in subdividing and selling blocks of land over this period. There was insufficient evidence upon which the Tribunal could determine the issue and the taxpayer had not discharged its burden of proof.

In Cash World Gold Buyers Pty Ltd and Commissioner of Taxation [2020] AATA 1546 the Tribunal affirmed the decision of the Commissioner to deny the applicant’s claim to input tax credits of $6,936,947.00 with respect to acquisitions of gold during the quarterly tax periods ending 31 December 2014 and 31 March 2015. The Tribunal’s decision is another in a line of cases where the decision of the Commissioner to deny input tax credits to with respect to the acquisition of gold has been affirmed by the Tribunal. In particular, ACN 154 520 199 Pty Ltd (in liq) and Commissioner of Taxation [2019] AATA 5981, noting that the Full Federal Court heard the taxpayer’s appeal of that decision last week with judgment being reserved.

The disputed claims for input tax credits involved the acquisition (or purported acquisition) of significant amounts of gold from three individuals (referred to as Intermediaries). The applicant satisfied the Tribunal that the acquisitions of gold were made and that the Intermediaries were not acting as agents of the applicant. The real issue before the Tribunal was the form of the gold when it was acquired by the applicant, given that director of the applicant accepted at the hearing that the gold supplied to the applicant by the Intermediaries was sourced from gold bullion dealers and those supplies were treated as input taxed supplies of “precious metal”. The Commissioner submitted that the applicant was not entitled to input tax credits because the applicant purchased “precious metal” from the Intermediaries, an input taxed supply. The applicant contended that all of the gold it acquired was “scrap gold” and was taxable.

The Commissioner also issued assessments to the Intermediaries for unpaid GST with respect to the sales of gold to the applicant. Objections to those assessments were made, but no decision had been made on the objections. However, some amounts were recovered from the assessments pursuant to garnishee orders. As discussed at the end of this post, the applicant contended that the actions of the Commissioner gave rise to a double recovery of GST.

Substantiation and documentation

The Tribunal’s decision ultimately came down to a question of substantiation and documentation. After reviewing the evidence, the Tribunal was not persuaded about the extent to which the gold acquired by the applicant from the Intermediaries was scrap gold. The Tribunal considered that there many inconsistencies and gaps in the evidence, and some of the evidence was inherently implausible – there were too many shortcomings in the evidence.

The Tribunal also made the following observations:

• That the applicant was in possession of a document entitled “tax invoice” was not sufficient to prove that a supply was a taxable supply. A tax invoice does not create a taxable supply, it records one. If a taxable supply did not take place, then a tax invoice stating that it did is meaningless
• In response to the applicant’s contention that there was no commercial reason for it to pay 105 per cent of the prevailing spot price for gold bullion unless it was required to pay GST to the Intermediaries in respect of the taxable supply of scrap gold, the Tribunal considered that the applicant would have been on notice that subtracting GST from the price paid by the applicant to the Intermediaries left them with approximately 95% of the spot price of gold. Consequently, the Intermediaries would have made a loss of at least 5% each time they supplied gold to the applicant if they were making taxable supplies and remitting GST, as they were themselves acquiring gold bullion for the spot price plus a premium. The Tribunal considered that the applicant could not provide any satisfactory explanation for this proposition.

The Tribunal also agreed with the Commissioner that the applicant was not entitled to input tax credits because it did not hold valid tax invoices.  The Tribunal found that the invoices did not comply with the requirements of s 29-70(1) of the GST Act, nor was this an appropriate case for the tax invoices to be treated as a tax invoice under s 29-70(1B). This was because many of the invoices failed to describe the quantity or weight of the gold supplied and none of the invoices identify any amount of GST payable. All the invoices issued were headed ‘TAX INVOICE*/STATEMENT* (*DELETE AS APPROPRIATE)’ but in none of them had the word ‘STATEMENT’ been crossed out to make clear the document was intended to be a tax invoice. Instead, the invoices were, in the Tribunal’s view, deliberately ambiguous.

Other matters before the Tribunal 

In the course of the decision, a number of other matters were considered by the Tribunal. These issues appear to have arisen because of the actions of the Commissioner in issuing assessments of GST to the Intermediaries with respect to the sales of gold to the applicant, while at the same time denying the applicant’s entitlement to input tax credits.

Enterprise: The Commissioner contended that the supply of gold by the Intermediaries to the applicant was not a “taxable supply” because the Intermediaries were not carrying on an enterprise as their activities were not carried on with a reasonable expectation of profit or gain – as required by s 9-20(2)(c) of the GST Act given that the Intermediaries were individuals. The Tribunal found it unnecessary to explore this submission because of the conclusion that the applicant was not entitled to input tax credits for other reasons, but the Tribunal did observe that this contention was inconsistent with the fact that the Commissioner had earlier instigated the GST registration of one of the Intermediaries and had also issued assessments to each of the Intermediaries for net amounts of GST.

Division 142: Division 142 deals with the entitlement of taxpayers to recover overpaid GST. Essentially, if a taxpayer has overpaid GST (referred to as “excess GST”), the taxpayer is not entitled to a refund of that GST if the GST has been “passed on” to the recipient and the recipient has not been reimbursed for the overpaid GST (for a detailed consideration of these provisions and the concept of “passing on”, see my paper here). If GST has been passed on, until such time that the recipient is reimbursed, the GST is deemed to have been properly payable: s 142-10.

The Tribunal observed that the Commissioner may trigger the application of Division 142 by causing an amount of “excess GST” to be included in a taxpayer’s “assessed net amount” by issuing an assessment even though the GST hasn’t actually been paid to the Commissioner. The applicant contended that by reason of the GST assessments issued to the Intermediaries, this GST was “passed on” to the applicant and even if the Intermediaries did not make taxable supplies to the applicant, the supplies were deemed to be taxable supplies pursuant to s 142-10.

The Tribunal considered that the applicant’s difficulty was that it had not demonstrated that the Intermediaries did in fact “pass on” any excess GST to it. The Tribunal found that there there was no GST passed on where the prices charged by the Intermediaries did not recover any amount on account of GST. In this regard, it was plainly uneconomic for the Intermediaries to sell gold at prices of approximately 105% of the spot price of gold having purchased the gold from bullion dealers for the spot price plus a margin, in circumstances where they were required to remit GST. Further, if there was excess GST, s 142-15(5) effectively denies the input tax credit if the applicant knew or could be expected to have known that the Intermediaries had not paid the excess GST.

Double recovery of GST: The applicant contended that the Commissioner has sought to recover GST from the applicant (by denying input tax credits) and at the same time was seeking to recover GST from the Intermediaries on the basis that they made taxable supplies to the applicant. The Commissioner had issued assessments to the Intermediaries that included the same GST. It also transpired that the Commissioner had recovered amounts owed by the Intermediaries from third parties pursuant to garnishee orders at the same time as he had sought to deny the input tax credits claimed by the applicant. The applicant submitted that the assessments were in fact cumulative assessments which were issued contrary to the Commissioner’s stated procedures regarding alternative assessments in the income tax context and impermissibly sought double recovery of GST on the same transactions. The Commissioner adopted the view that he is entitled to issue multiple assessments. Counsel for the Commissioner also submitted that the Commissioner would not seek to recover the GST twice.

While not determining the issue, the Tribunal made the following observation (at [225]):

Were the Commissioner to succeed against both Cash World and the Intermediaries, it appears that the Commissioner would be in a position to recover the GST amounts twice and, furthermore, may be required to do so without necessarily having a choice in the matter (leaving aside issues with respect to the good management rule and when it is appropriate for the Commissioner to settle tax disputes). In my view, there remains an unresolved issue as to the efficacy of the Commissioner recovering GST amounts twice. However, the double recovery of the GST is not determinative of this dispute and does not give rise to an issue for determination by the Tribunal.

The Tribunal appeared to accept that the conduct of the Commissioner could give rise to a double recovery of GST. This begs the question of what the Commissioner’s obligations now are with respect to the GST assessments issued to the Intermediaries (against which objections were lodged but no decision has been made), and the amounts recovered under those assessments pursuant to the garnishee orders.

 

As we come to the close of another year, the Federal Court and the Tribunal have handed down GST decisions. They are briefly discussed below.

In Melbourne Apartment Project Pty Ltd (as Trustee for Melbourne Apartment Project) v Commissioner of Taxation [2019] FCA 2118 the Federal Court found that the making of “supply of accommodation” in s 38-250(1)(b)(i) of the GST Act encompassed the supply of a freehold interest in an apartment. The proceeding was an appeal from a private ruling and the Court (at [1]) identified the question as whether the sale by a registered charity of an apartment to a person eligible to receive social housing on a non-commercial basis for consideration less than 75% of the GST inclusive market value of the property is exempt from the GST (as a GST-free supply).

Section 28.250(1) provides that a supply is GST-free if:

(a) the supplier is an endorsed charity…; and

(b) the supply is for consideration that:

(i) if the supply is a supply of accommodation – is less than 75% of the GST inclusive market value of the supply; or

(ii) if the supply is not of accommodation – is less than 50% of the GST inclusive market value of the supply.

The Commissioner contended that paragraph (b)(i) was not engaged because the expression “supply of accommodation” did not include the sale of a freehold interest in an apartment. This was because the word “accommodation” carried with it a temporal aspect that restricted the expression to a supply by way of lease or licence – it did not extend to a supply of a freehold interest. Therefore, paragraph (b)(ii) was the relevant paragraph and the sale would only be GST-free if the supply was for a consideration of less than 50% of the GST inclusive market value of the supply. The Applicant submitted that the expression “supply of accommodation” incorporated a spectrum of meaning, which includes the sale of an apartment.

The Court (at [68]) accepted the applicant’s submission that the ordinary and natural meaning of “accommodation” includes an apartment or any premises that are used by a person as their place of residence. The Court rejected the Commissioner’s submission that the ordinary and natural meaning of the word did not carry this meaning because of an inherent temporal limitation – the Court considered that in its ordinary sense, the word “accommodation” includes an apartment in which a person resides, whether their right of residency is conferred by licence, lease or ownership.

The Court found (at [78]) that there was nothing in the text of s 38-250 to support the Commissioner’s submission that the expression “supply of accommodation” was inapt to cover the supply of title to premises and instead contemplates only the supply of a right to occupy premises for the time being. The Court found (at [79]) that there was no contextual reasoning in the GST Act, read as a whole, that might suggest that this primary reading of the provision should not be applied.

In Jarvis-Lavery and Commissioner of Taxation [2019] AATA 5409 the Tribunal found that the applicant had not established that it was entitled to input tax credits for acquisitions from an associated entity and that the acquisitions were not of a private or domestic nature. The Tribunal observed (at [105]) that:

An applicant does not, by the mere production of a tax invoice issued by a supplier, prove an entitlement to an ITC for the acquisition of a supply. As already noted, there are other statutory requirements that must be satisfied including, relevantly here, that the acquisition was made in the course or furtherance of an enterprise and was not of a private or domestic nature.

The Tribunal observed that the applicant gave oral oral evidence that the acquisitions were for business and not private purposes but that evidence was uncorroborated by any contemporaneous records or by other witnesses. With respect to this statement, it is relevant to note the following observation of the Tribunal (at [107]):

All this is not to say that an applicant who produces a tax invoice and swears or affirms that the relevant supply was acquired for a creditable purpose may not by so doing prove their entitlement to an ITC without further corroborating evidence.

Accordingly, the Tribunal was not saying that a taxpayer can never discharge its onus of proof if it does not provide corroborating evidence. However, where, as here a taxpayer has a history of poor compliance with tax laws and has lodged returns and BASs in the past which he now says are inaccurate, the Tribunal considered that it was appropriate to approach his evidence with caution, In the particular circumstances of this case, where the applicant’s oral evidence was of a general nature, and without any business records relating to the acquisitions or more detailed explanation, the Tribunal was not persuaded that the acquisitions were creditable acquisitions.

I take this opportunity wish all my followers and readers the compliments of the season and I thankyou for your support.