Welcome to 2023. We start off the year with two decisions of the Full Federal Court.
The decision in Commissioner of Taxation v Landcom  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  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  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.
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 ), 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 .
- 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 .
- 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 .
- 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 ) 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 ) 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”.
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 ).
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 ).
- 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 ).
- 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 ).
- 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  FCAFC 12; (2006) 149 FCR 255 at 260  (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 ).
- Where there is a supply of more than one interest, s 75-10, by its terms, applies to each interest (at ).
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)
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 -:
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.