A big day in GST – Division 36 and GST refunds; Full Federal Court decision on Division 165

Last Friday was a big day for GST. The Assistant Treasurer released an Exposure Draft of legislation which will dramatically change the landscape for GST refunds – my analysis of these provisions can be accessed here.

Also, the Full Federal Court handed down its long-awaited decision in Unit Trend Pty Ltd v Commissioner of Taxation [2012] FCAFC 112 dealing with the application of Division 165 of the GST Act. In a 2:1 decision, the Court allowed the taxpayer’s appeal.  I would not be surprised if the matter goes further and a special leave application is filed.

The judgment is very detailed, running to some 247 paragraphs and the decision will take some time to fully digest.  In the interim, my thoughts are set out below.

The Facts

Unit Trend is the representative member of a GST group, including Simnat (Pty Ltd), Belsford (Pty Ltd), Mooreville Investments (Pty Ltd) and Repcivic Contractors (Pty Ltd).

On 14 December 1998 Simnat entered into a contact to purchase land for $30m and the contract settled on 20 April 1999.  Simnat obtained development approval for the construction of three high-rise towers.  On 31 July 2001 Simnat appointed Rapcivic to construct Tower 1 on the site, which was completed by December 2002 and the units were sold to the public.  The margin scheme was used to calculate the GST payable.

Tower II

By contract dated 1 July 2002 Simnat engaged Rapcivic to construct Tower II.  By contract dated 14 April 2004 Tower II was sold to Blesford and the purchase price was to be determined by an independent valuer.  The sale was agreed to be the sale of a going concern and the price was determined by a valuation of $149,800,000. Under the contract of sale, Simnat assigned to Blesford all of its rights under the sale contracts it had entered into with purchasers of the units prior to the sale of the Tower.

The contract settled on 7 May 2004 and Blesford (as the new owner) continued marketing units in the tower and made off the plan sales to the public.

When the construction was completed, Blesford settled the sales contracts (including those assigned from Simnat). Blesford applied the margin scheme for the GST on the sales to the public.  In determining the margin, Blesford adopted the price it paid to Simnat for Tower II and determined the margin between that price and the value of the end sales (applying an apportionment of the acquisition price to each unit).

Tower III

This operated in a similar way to Tower II.  By contract dated 29 January 2003, Simnat engaged Rapcivic to construct Tower III.  By contract dated 15 April 2004, Simnat sold Tower III to Mooreville, with the price to be determined by an independent valuer.  The value was $10,500,000.  The sale was agreed to be a going concern and Simnat assigned the rights to existing sales contracts to Mooreville.  On completion, Mooreville settled contracts (including sales made on its own behalf and sales assigned from Simnat).  Mooreville applied the margin scheme and used the price it paid to Simnat as the consideration for the acquisition of the units.

Grounds of appeal
The taxpayer appealed against the Division 165 finding and also on the grounds that there was no valid valuation for the purposes of Division 75 because Blesford and Mooreville did not hold the land at 1 July 2000.  The Commissioner cross-appealed against a number of findings of the Tribunal about Division 75.  My discussion below if limited to the Division 165 point.
The majority (Bennett and Greenwood JJ) allowed the appeal with regard to Divion 165 by finding that the GST benefit to the taxpayer (i.e., the uplift in value for the margin scheme) was “attributable” to a choice provided for in the GST Act.  The view of the majority can be found in the following extract (at [200]-[202]):
200 The Commissioner correctly observes that the taxpayer’s election or choice to enter into agreements to Transfer Towers II and III from Simnat to Blesford and Mooreville was not itself an election or choice expressly provided for by the GST law.  It was a commercial election or choice that brought about, in effect, an uplift in the intermediate cost base in the hands of Blesford and Mooreville which would diminish the margin on end sales.  However, entry into those intra-group transactions on terms consistent with a sale of a “going concern” in a manner which conformed with s 38-325(1)(c) of the GST Act (as the Commissioner accepts), did involve an election or choice to transfer on terms expressly in conformity with s 38-325 which had the effect that GST would not become payable on settlement of the transfers from Simnat to those entities.
201 If what lies at the heart of the GST benefit obtained from the scheme is the intermediate transaction resulting in an uplift in the transactional cost base (coupled with the application of the margin scheme to end sales) the intermediate transaction within the scheme involved the taxpayer in making a choice or election to enter into a going concern transaction in conformity with s 38-325(1)(c).  But for the making of the choice or election to transfer Towers II and III as a going concern in conformity with s 38-325(1)(c), a GST liability would have arisen by reason of the settlement of each transfer.
202 However, the choice or election to engage in a going concern transaction in conformity with s 38-325(1)(c) was not the only choice.  Put simply, Unit Trend entered into a scheme comprising a number of sequential steps that ultimately gave rise to a GST benefit attributable to (or owing to or produced by) a number of choices, elections or agreements made as expressly provided for by the GST law (as it then stood) given expression in the arrangements comprising the scheme giving rise to that benefit with the result that Division 165 does not apply as s 165-5(1)(b) of Subdivision 165-A is not satisfied.  The fact that it could be said that the benefit is attributable to a “scheme” resulting from a series of such choices etc does not prevent the GST benefit also being attributable to the making of those choices.  This rises from the express use of “attributable to” rather than a narrower or more restrictive test.

And finally, at 205:

If the statutory purpose of s 165-5(1)(b) is to be served of preserving for the taxpayer the choices, elections etc expressly conferred by the GST law, the GST benefit must be answerable to, explained by or belong by those choices.

In dissent, Dowsett J took different view on the meaning of “attributable” (and appeared to adopt the approach of the Tribunal), as can be seen by the following extracts (at [46]-[48]):

46 In any event, Unit Trend’s submission seems to be that the GST benefit should be seen as the product of a number of choices expressly provided for by the GST law, and that the benefit is therefore attributable to them collectively.  I doubt whether s 165-5(1)(b) should be read as authorising such an approach.  The section rather seems to contemplate a direct link between the benefit and the relevant choice…

47 If I am correct in inferring that the inquiry posed by s 165-5(1)(b) is as to whether a GST benefit is attributable to a relevant scheme or to a relevant choice, it is most unlikely that Parliament intended that an outcome attributable to numerous choices would be excluded from the general operation of Div 165.  After all, schemes will frequently involve multiple choices.  Where one benefit is attributable to the interaction of numerous choices, it would be more accurate to attribute such benefit to that interaction, rather than to individual choices, taken discretely.  The position may be otherwise where the scheme yields discrete benefits, each of which is attributable to a different, discrete choice.

48 In any event, in the present case, the scheme which produced the benefit included the intermediate sales by Simnat to Blesford and Mooreville.  Such sales lay at the heart of the scheme, even if the various choices were also necessary integers of it.  In my view, the GST benefit was attributable to the events of which such sales were necessary party, in other words, the scheme.  In those circumstances, the benefit was attributable to the scheme, and not to any particular choice expressly provided for by the GST law.

Closing thoughts

Given the approach of the majority of the Federal Court to the concept of “attribution”, I would expect that the Commissioner will consider lodging an application for special leave to appeal to the High Court and asking that Court to adopt the approach of Dowsett J in dissent. This is an important issue for the ongoing application of Division 165, because the GST Act contains numerous choices and elections which may impact on the very things Division 165 is trying to deal with (e.g., timing differences – electing to be a cash or accruals taxpayer; whether taxable or GST free – agree to sell as a going concern; the amount of GST – agree to use the margin scheme; whether GST at all – electing to form a GST group or a GST joint venture).  Taken to the extreme, many GST benefits will likely have some element of “attribution” to a choice or election available under the GST Act.

 

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