Full Federal Court allows taxpayer’s appeal in “missing trader” gold case

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“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:  

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.

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