Tribunal hands down the latest instalment in the GST and “gold” saga

Posted on by

Welcome to my last post of 2023. It is fitting that the year ends as it began – with another decision in the long-running saga of GST, gold, and the anti-avoidance provisions in Division 165 of the GST Act – HNMF and Commissioner of Taxation [2023] AATA 4067. In the latest instalment, after the Full Federal Court remitted the initial decision of the Tribunal (which was in favour of the Commissioner) to be heard again, the Tribunal has set aside the Commissioner’s decision to deny the input tax credit entitlement of the taxpayer, finding that Division 165 was not engaged.

Recap

The saga has been running since 2019, with no apparent end in sight – ultimately the matter may need to be determined by the High Court.

In essence, the decisions involve the entitlement of gold refiners to input tax credits where:

  • gold refiners acquired gold in a “taxable” form (ie, not in “investment form” which would be input taxed) and paid a price plus GST for the gold;
  • that gold was acquired by the suppliers (or by another entity in the supply chain) in “investment form” (ie, without GST) and was subsequently mutlilated or melted down by an entity in the supply chain so that it was in taxable form when sold to the refiner and on a plus-GST basis; and
  • the seller to the refiner (or another entity in the supply chain) fraudulently did not pay GST on the taxable supply to the refiner.

It also appears that this form of transaction may have occurred on multiple occasions, with the same gold being purchased, mutilated or melted, and sold repeatedly – with no GST being paid by the fraudulent participant. In the context of VAT generally, this is known as “missing trader” fraud. It is a problem inherent in all VAT jurisdictions.

The decisions so far are set out below:

In similar proceedings running at the same time we have:

A detailed discussion of those earlier cases is beyond the scope of this post, but a deep dive into the issue generally and the previous decisions in the context of Division 165 (other than Complete Success Solutions) is available in the papers I presented at the Taxation Institute of Australia National GST Intensive in 2020 and 2021:

A central theme of these papers is whether the GST regime should include a regime similar to that adopted in the United Kingdom to combat “missing trader” fraud – namely the denial of input tax credits where the purchaser “knew, or should have known”, that they were taking part in a transaction connection with the fraudulent evasion of VAT. Given the history of these proceedings, one can only question the suitability of the anti-avoidance provisions in Division 165 to combat this issue. The decision now handed down by the Tribunal appears to reinforce that question.

HNMF and Commissioner of Taxation

Initial observations

The first paragraph of the reasons of the Tribunal outlines the dispute in the following terms:

These reasons concern whether a refiner of precious metal who acquired Refining Materials from Division 165 Supplying Entities or Fraudulent Suppliers in transactions that were taxable supplies to the refiner should be denied a GST benefit comprising ITCs of $72,953,611 in respect of those supplies under Division 165 having regard to the artificiality of some or all of the circumstances in which the Refining Materials were supplied to it in a missing trader or carousel fraud arrangement.

Giving context to the defined terms in this description assists:

  • “Refined materials” refers to the acquisition of gold metal any fineness not in investment form – all supplies of such gold to the taxpayer were taxable supplies on which GST was payable by the suppliers;
  • “Division 165 Supplying Entities or Fraudulent Suppliers” refers to those entities that “charged and collected a GST-informed price from the applicant, and thereby thereby received or recovered from the applicant money with which their GST liabilities could be expected to have been met, they fraudulently failed to pay their GST liabilities to the ATO. In other words, the Division 165 Supplying Entities made a loss on the transactions but their failure to pay GST meant that in a cash flow sense they profited” (at [9]).

The Tribunal further observed as follows:

7. A considerable proportion of the Refining Materials acquired by the applicant was already of 99.99% fineness. An unascertained proportion of this gold had once been in investment form but had been adulterated, for example by cutting or defacing the hallmark on a bullion bar or melting it down into a different form, with the effect that supplies of this gold to the applicant were taxable supplies. An unascertained proportion of the gold refined by the applicant found its way back to the applicant as Refining Materials sold to the applicant. The extent to which that occurred is unknown.

8. Among the suppliers of Refining Materials to the applicant were the Division 165 Supplying Entities. At least to some degree, the Division 165 Supplying Entities purchased gold in investment form and adulterated the bars so they were no longer in investment form, most commonly by melting them into a different form...

9. While these Division 165 Supplying Entities charged and collected a GST-informed price from the applicant, and thereby received or recovered from the applicant money with which their GST liabilities could be expected to have been met, they fraudulently failed to pay their GST liabilities to the ATO. In other words, the Division 165 Supplying Entities made a loss on the transactions but their failure to pay GST meant that in a cash flow sense they profited.

Issue before the Tribunal

The sole issue before the Tribunal was whether Division 165 operates to deny or cancel entitlements to ITCs of $72,953,611 for the Relevant Period. The remaining issues had been dealt with by the first Tribunal decision and the Full Court decision. The Tribunal directed that the matter should be determined without further evidence being led and without further cross-examination. The parties provided a Statement of Facts that are Agreed which is reproduced at Appendix 2 to the Tribunal’s reasons.

The Tribunal identified its task as to to determine whether the applicant has discharged the burden of proving that, taking into account the matters described in s 165-15, it is not reasonable to conclude that:

(a) an entity that entered into or carried out a scheme or part of the scheme did so with the sole or dominant purpose of the applicant getting a GST benefit – the Contested ITCs – from the scheme; or

(b) the principal effect of the scheme, or of part of the scheme, was that the applicant got a GST benefit, being the Contested ITCs, from the scheme directly or indirectly.

The Tribunal concluded that the applicant had discharged this burden.

The applicant’s submissions

The applicant submitted that the steps it undertook are wholly consistent with its day-to-day operations as a refiner and obtaining the ITCs was a normal and intended (by the GST law) incident of such a business. When all relevant circumstances are taken into account as required, it would not be reasonable to conclude the dominant purpose of any entity entering into the scheme or a part of the scheme, or the principal effect of the scheme or any part of the scheme, was for the applicant to obtain the Contested ITCs.

Rather, it would be concluded that the dominant purpose of the Division 165 Supplying Entities was to obtain and dishonestly retain for themselves the benefit of the GST payable on the prices paid to them by the applicant through collecting the GST-informed prices from the applicant but not paying their GST liabilities to the Commissioner. It was only on this basis that the participation of these entities in the transactions made commercial sense. Further, the only rational conclusion is that its own purpose was to acquire Refining Materials for its business. Similarly, creating a taxable supply and the enhanced price paid for it and failing to remit it to the ATO was the principal effect of the scheme and that ‘… availability of an input tax credit was nothing more than an incidental consequence and far from the “principal effect” of the scheme’..

The Commissioner’s submissions

The Commissioner submitted that the objective purpose of the Division 165 Supplying Entities participating in the arrangements could not be explained as evading a liability that would not exist but for the scheme. Rather, the scheme was directed at the applicant obtaining the Contested ITCs. Without the benefit of those ITCs, the applicant would not have paid a GST-informed price for its acquisitions. Unless that occurred, the transactions would make no commercial sense for the Division 165 Supplying Entities – that is, they would have been operating at a loss. Thus, it would be concluded that the applicant obtaining the ITCs was both the dominant purpose of the Division 165 Supplying Entities and the principal effect of the scheme or a part of the scheme.

Further, the applicant’s acquisitions occurred as part of co-ordinated transactions in which bullion was acquired, deliberately and uncommercially adulterated destroying value and on-sold to the applicant for the production and sale of bullion. That was not, the Commissioner says, ordinary commercial trading. the evidence establishes the transactions were co-ordinated and cohesive and the result of sophisticated planning and interaction between the participants, including the applicant. The Tribunal should conclude that the applicant knew of, or at the very least, turned a blind eye to, the activities of the Division 165 Supplying Entities, including the adulteration of the bullion before its on-supply to the applicant.

With respect to the Commissioner’s submissions, the Tribunal made the following observations:

  • It is not surprising, possibly even to be expected, that non-ordinary steps are to be found in a sequence of events executing a fraud. Accordingly, identifying transactions as uncommercial does not assist greatly to determine the present matter.
  • The Commissioner’s proposition that the arrangements could not be explained as evading a liability that would not exist but for the scheme ignores another critical element of what would not have occurred but for the scheme: the Fraudulent Suppliers would not have received the cash referrable to the evaded liability but for the scheme.

Further, after considering the evidence before it (which was extensive), the Tribunal concluded (at [96]) that it was not prepared to make a positive finding of fact that the applicant:

  • was an informed participant that knew of, or ought to have known of and turned a blind eye to, the activities of the Division 165 Supplying Entities; or
  • was not such an informed participant in the arrangements.

Ultimately, the Tribunal did not consider it necessary to make a positive finding either way.

Division 165

The Tribunal considered the factors in s 165-15 and concluded that it was not reasonable to conclude that to conclude that any of the persons who entered into or carried out the scheme or any part of the scheme did so for the sole or dominant purpose of enabling the relevant taxpayer to obtain the GST benefit or that was the principal effect of the scheme. In doing so, a critical issue before the Tribunal appears to have been whether the purposes of a supplier creating a taxable supply – and therefore creating (or creating and not paying) a GST liability – and receipt of the supply of a corresponding ITC entitlement are effectively “different sides of the one coin”, such that they could be regarded as a single composite purpose. The Tribunal (at [158]) observed that it was necessary to address this issue after the Full Court decisions in ACN and Complete Success Solutions. In ACN the Full Court expressed the principle in the following terms:

Insofar as ACN 154 submits that the dominant purpose of the scheme was for the Division 165 Supplying Entities to obtain the GST (which they would fail to remit to the Commissioner), rather than for ACN 154 to obtain input tax credits, this submission seems to go to the merits of the Tribunal’s conclusion. In any event, we consider that it was open to the Tribunal to view the obtaining (by ACN 154) of the input tax credits and the obtaining (by the supplying entities) of the GST as comprising one purpose, in circumstances where the two were inextricably linked…

The Tribunal observed that in Complete Success Solutions the Full Court took the matter a little further, stating:

Indeed, it would be open to conclude that the purpose of obtaining (and not remitting) GST and the purpose of obtaining input tax credits for CSS were one purpose if the facts showed them to be inextricably linked: ACN FC at 513 [224]. Such a conclusion might be open, for example, if it were concluded that it was important to Manila Exchange that the scheme end with a GST-free supply by an entity that would be refunded input tax credits, so that the scheme as a whole would work by being sufficiently funded. (emphasis added by the Tribunal)

The Tribunal observed (at [162]) that the Full Court contemplated the possibility of the obtaining and not remitting amounts referable to GST and the obtaining of ITCs being collectively a single purpose. However, the Court did not mandate that there was such a purpose. In coming to its decision, the Tribunal appears to have concluded that the purposes of the Fraudulent Suppliers and the applicant were separate. This is discussed further below.

The Tribunal considered the factors in s 165-15 – summarised as follows:

  • Manner of execution (para (a): Absent adulteration of gold bullion, in many respects the relevant transactions were carried out in the way of ordinary transactions. The steps taken were largely as would be expected in arm’s length sales of Refining Materials and gold bullion. Aside from the extraordinary fact that: the Fraudulent suppliers adulterated bullion; destroyed some of its value; and then, ignoring GST effects, sold what had become Refining Materials at prices that were less than their acquisition costs, but for the non-payment of GST by the suppliers the transactions would likely have been regarded as unremarkable from a fiscal perspective. The applicant paying dollar for dollar amounts as components of GST-informed purchase prices, in a setting where for the applicant, only refining profits were generated, suggests the manner of execution test does not point to a dominant purpose of the applicant or any other participant in entering into or carrying out the scheme that the applicant obtain ITC entitlements. The pricing is linked to the adulteration of bullion and that part of the scheme is s explicable by the Fraudulent Suppliers’ purpose of securing a GST-informed amount of money and non-payment of GST. It does not suggest a separate dominant purpose of the applicant obtaining ITCs.
  • Form and substance (para (b)) – the form and substance of the scheme support a conclusion that any entity entered into or carried out the scheme or a part of the scheme with the dominant purpose of the applicant obtaining ITCs.
  • Purpose or object of the GST Act (para (c)) – So far as the applicant obtained the Contested ITCs on the acquisition of taxable supplies in the course of its enterprise, that is an unremarkable outcome under the GST Act. It is well-known that, with limited exceptions, GST on acquisitions is intended to have a neutral impact on a GSTregistered taxpayer’s costs. The purpose or object of the GST Act includes, fundamentally, to create a liability for GST on taxable supplies. That is what occurred. It is the failure to pay the GST that departs from the object of the GST Act, not the allowance of ITCs on business-to-business acquisitions which is the standard and intended object of value-added taxation.
  • Timing of the scheme (para (d) and (e)) – To the extent it happened, the round robin nature of the movement of the same gold from the applicant to and through the Fraudulent Suppliers and back to the applicant and the timing of those steps suggest that the scheme was structured to be, to the extent of this circularity, self-contained and possibly self-perpetuating. The timing of the circular steps suggests, if anything, pursuit of the fraudulent purpose.
  • The effect of the Act on the scheme apart from Division 165 (para (f)) – The GST Act intends to allow an ITC to an entity carrying on an enterprise that has paid for an acquisition, and paid dollar for dollar for it, in a business-to-business transaction under a practical business tax system that places great reliance on the use and acceptance of tax invoices. On that footing, absent the operation of Division 165, the outcome in the present circumstances is entirely consistent with an intended outcome of the GST Act. This factor, analysed this way, suggests that the dominant purpose of participants in the scheme was not to secure a GST benefit. This is not a case where, by some artifice on the part of the taxpayer, a GST benefit ensues without the full cost of securing it having been paid. Either little weight ought to be given to this factor, or it should suggest a non-GST benefit purpose.
  • Change in the avoider’s financial position (para (g)) – There is no question that the Fraudulent Suppliers were financially disadvantaged by the scheme if the non-payment of GST, which does not form part of either of the Commissioner’s articulated schemes, is ignored. That is because their sales prices for the Refining Materials were less than they paid for bullion in investment form. However, it would be artificial to ignore the non-payment of GST. It is objectively clear that without that non-payment their participation in the scheme would have made no sense and would not have happened. The Fraudulent Suppliers were, if outstanding liabilities are not taken into account, enriched in a cash sense by not paying the GST they were liable to pay. That enrichment swamped the spot price differential between what they paid for bullion and what they sold the Refining Materials for. That suggests those entities had a dominant purpose of enriching themselves by collecting but not paying GST – that was the sole source of their enrichment. There are no identifiable financial changes for any other entity that could conceivably be regarded as supporting a conclusion that an entity had a dominant purpose of the applicant obtaining the Contested ITCs. This factor does not support a conclusion that the availability of the ITCs was the principal effect of the scheme or a part of the scheme. A financial effect of ITCs would be illusory when, as here, matched by a liability to pay a price that includes a corresponding amount of GST.
  • Nature of the connection between entities (para (j)) – There is no suggestion that the dealings between the Division 165 Supplying Entities and the applicant and/or ABC NSW were other than at arm’s length in both the relationship sense and in the sense that commercial prices were paid for the relevant supplies. The latter is not surprising since there is no common ownership between the Division 165 Supplying Entities and the applicant or ABC NSW.
  • Circumstances surrounding the scheme (para (k)) and other relevant circumstances (para (l)) – One such circumstance, excluded by the Commissioner from his articulated schemes, is the fraudulent non-payment of the Fraudulent Suppliers’ GST liabilities. That circumstance points in favour of a conclusion that the dominant purpose of the Division 165 Supplying Entities participating in the scheme or a part of the scheme was those suppliers enriching themselves by defrauding the Commonwealth. It does not support a conclusion that any entity entered into the scheme or a part of the scheme with the dominant purpose of, or that the principal effect of the scheme or any part of the scheme was, the applicant obtaining the Contested ITCs.

Concluding observations of the Tribunal

The Tribunal concluded my making a number of observations which assist in giving context to its ultimate decision. These observations also raise questions as to the suitability of Division 165 as a vehicle to combat missing trader fraud.

A single composite purpose? ([208]-[211]) The Tribunal observed that in the present case, what was essential for the scheme to operate was the creation of a product that the marketplace traded at a GST-informed price, and the Fraudulent Suppliers receiving that price and not paying the GST to the Commissioner, or more fundamentally, for the Fraudulent Suppliers not to pay their GST liability having received a market driven price that assumed they would. The availability of the ITCs was an ordinary incident of a purchase of a taxable commodity on commercial terms by a GST-registered entity in the course of its enterprise. In those circumstances, the non-payment of amounts referrable to GST stands aside from the creation of the GST liability and the entitlement to corresponding ITCs. The Tribunal sees the Fraudulent Suppliers’ non-payment of GST as a separate and ulterior and ultimate purpose to any purpose of making taxable supplies and the applicant obtaining ITCs.

Collection failures: ([212]-[214]) The Commissioner seeks to uphold an assessment disallowing ITCs of nearly $73m, and a penalty of over $30m, in circumstances where; it is the Fraudulent Suppliers, not the applicant, that profited from the scheme by fraudulently retaining the cashflow profit produced by the GST-informed prices paid to them by the applicant, and not paying their GST liabilities; and disallowing the Contested ITCs does not reverse the huge financial gain enjoyed by the Fraudulent Suppliers that failed to pay GST but drastically effects the applicant which did not enjoy the financial benefit of the fraud. The Commissioner would not be seeking to deny the Contested ITCs if he had been able to recover the unpaid GST from the suppliers. There is nothing in the text of Division 165, or extraneous materials, or in the jurisprudence relating to Division 165 or Part IVA of the 1936 Assessment Act upon which it was plainly modelled, to indicate Division 165 was intended to be invoked, where it would not otherwise be applied, as an alternative to recovery of liabilities owed by other entities. The result of applying Division 165 strikes the Tribunal as both surprising, in terms of visiting extraordinarily severe consequences on the applicant, who did not participate in the fraud, rather than the Fraudulent Suppliers who were the perpetrators that benefited directly from their fraud, and out of all proportion to any benefit that, on any view, could have been enjoyed by the applicant from participation in the scheme.

Knowledge or blind eye: ([215]-[219]) In summary, in the Tribunal’s view, the proper conclusion is that the dominant purpose of the Fraudulent Suppliers was to execute their fraud by first obtaining and then retaining the GST-informed prices they charged the applicant. Their participation in the transactions made no sense unless they committed that fraud. Even if the creation of the taxable supplies to the applicant and the applicant’s entitlement to ITCs are viewed as a single purpose, that would, in itself, achieve no benefit for either the applicant or the Fraudulent Suppliers. It is reasonable to conclude that defrauding of the Commonwealth was the Fraudulent Suppliers’ dominant purpose. Taking into account the required factors, it is not reasonable to conclude that the dominant purpose of any entity was for the applicant to obtain the Contested ITCs. The conclusion would not change even if the applicant was, as the Commissioner asserts, an informed participant in co-ordinated arrangements. Little if anything concerning purpose conclusions changes by assuming the applicant had relevant knowledge. In the Tribunal’s view, it would still not be reasonable to conclude that the dominant purpose of the Fraudulent Suppliers was for the applicant to obtain ITCs. Even if there was informed participation and co-ordination by the applicant, the requisite conclusion would still be that the dominant purpose of those suppliers was to receive but not pay amounts referable to their GST liabilities. The taxable supplies and connected ITCs were merely steps in an ultimate plan that would remain the same. The applicant paid dollar for dollar for the ITCs it became entitled to. That remains the same. The dominant purpose of the applicant remains securing its refining profit. Informed coordination could not change the principal effect of the scheme or a part of the scheme.

Concluding observations

I do not expect the saga to end here, with an appeal back to the Full Federal Court to be expected. We also have the remitted decision of the Tribunal in Complete Success Solutions to come.

I wish all my readers and subscribers a safe and happy holiday period and all the best for the new year. 2023 has been another fascinating year for GST and 2024 promises more of the same.

Leave a comment