Presented at the TIA National GST Intensive, December 2021

1 Introduction and recap

1.1 Missing trader fraud in VAT/GST

At last year’s conference, I presented Part I of this paper titled “All that glitters is not gold: GST and missing trader fraud”. The focus of that paper was on the concept of “missing trader” fraud generally in the context of Value Added Tax regimes. “Missing trader” fraud occurs where a supplier within a supply chain, upon being funded the GST^[1] (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.

I also identified the scope of missing trader fraud. Whether it is mobile phones, gold, or other activities, the statutory regime can be taken advantage of by parties engaging in missing trader fraud. As an example, in 2002 a UK newspaper reported that Customs officially estimated the size of fraud through the international trade of mobile phones at 2.6 billion pounds in the 2001 financial year.^[2] I also observed that Australia was not immune. On 31 March 2017, “The Australian” reported that an elaborate GST scam involving gold had so far cost taxpayers more than $700 million in lost tax revenues.^[3] Since that time, there have been a number of decisions by the Tribunal in cases involving gold, GST and input tax credits.

1.2 Combatting missing trader fraud in the United Kingdom – a settled path

In the United Kingdom, the Courts developed an approach whereby the entitlement of an acquiring entity in a supply to claim a credit (referred to as a deduction) with respect to the VAT paid to a supplier will be lost where it is established that the entity “knew or should have known” that, by their purchase, they were taking part in a transaction connected with the fraudulent evasion of VAT. Under this approach, the entitlement to a credit may be denied even if the claimant did not profit from the transaction.

1.3 Combatting missing trader fraud in Australia – a developing landscape

To date, the United Kingdom approach has not been considered in Australia. Rather, the Commissioner is seeking to deny the applicant taxpayer’s entitlement to input tax credits by applying the anti-avoidance provisions in Division 165 of the GST Act. This approach was first considered by the Tribunal in ACN 154 520 199 Pty Ltd (in liq) and Commissioner of Taxation [2019] AATA 5981. The Commissioner was initially successful before the Tribunal. However, the applicant was successful on appeal to the Full Federal Court on procedural fairness grounds and the High Court denied the Commissioner’s application for special leave. The result is that the decision is to be heard again by a differently constituted Tribunal. How the matter will ultimately be resolved remains unclear.

In September of this year, the Tribunal considered the application of Division 165 to a “gold scheme” in a second case – STNK and Commissioner of Taxation [2021] AATA 3399. The taxpayer was successful in that case, with the Tribunal finding that Division 165 was not engaged. The Commissioner has filed an appeal to the Federal Court.

These decisions, and the subsequent appeals, show that the role of Division 165 in combatting missing trader fraud in GST will continue to develop. It may take some time before the principles are settled by the appellate Courts. In the interim, we can only speculate and spectate. We can also enquire whether there is a better way.

1.4 ACN 154 520 199 Pty Ltd (in liq) and Commissioner of Taxation [2019] AATA 5981

The applicant was a gold refiner. The applicant: purchased gold from suppliers as taxable supplies; purported to “refine” that gold into gold bullion in “investment form” (and a “precious metal” as defined); and, sell that gold bullion as a GST-free supply under s 38-385 as the first supply of that precious metal after its refining. The gold acquired by the applicant was at a fineness of 99.9% but it was common ground that the gold was not in “investment form” – and was therefore a taxable supply to the applicant which claimed input tax credits with respect to the acquisition of the gold. The applicant claimed to be entitled to input tax credits for the acquisitions on the basis that it was acquired to make GST-free supplies under s 38-385.

The Tribunal affirmed the decision of the Commissioner to deny the entitlement to input tax credits on two grounds:

The first ground (the Construction Issue) was 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”. The amount of input tax credits denied under this ground was approximately $122 million.
Alternatively, the second ground (the Division 165 Issue) was that 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 – 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 amount of input tax credits denied under this ground was approximately $73 million.

1.5 ACN 154 520 199 Pty Ltd (in liq) and Commissioner of Taxation [2020] FCAFC 190

The taxpayer appealed to the Full Federal Court on both matters. The Court unanimously allowed the appeal and remitted the matter to the Tribunal to be heard again by a differently constituted Tribunal.

On the Construction Issue, the Court agreed with the taxpayer that the Tribunal erred in its construction of s 38-385 and the meaning to be given to “refining”.
On the Division 165 Issue, the taxpayer appealed on a number of grounds. 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 been included in the hearing book, but had not been the subject of cross-examination or submission. Due to this issue, the Court concluded that the matter should be remitted to the Tribunal (differently constituted) to be heard again.

The Commissioner accepted the decision of the Full Court on the Construction Issue but applied to the High Court for special leave to appeal on the findings of the Full Court with regards to the Division 165 Issue. The High Court dismissed the application on the papers without an oral hearing.

1.6 STNK and Commissioner of Taxation [2021] AATA 3399

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 Tribunal found that the applicant had not established that the two purchasers were “dealers in precious metal” as required by s 38-385. The Tribunal therefore did not consider the application of Division 165.

During the second period, the gold was sold as scrap gold to an offshore entity as a GST-free export. Each transaction began with the purchase of gold bullion and involved the defacing of that bullion to make the gold taxable, the taxable supply of that gold and the non-payment of GST by the entity that defaced the gold. These transactions were earlier in the supply chain and there was no evidence that the applicant had any knowledge of, or connection with, those earlier entities or transactions. Nor was there any evidence of there being the “round robin” circulation of gold.

The Commissioner sought to apply Division 165 to deny the applicant its entitlement to input tax credits for the acquisitions of scrap gold on the basis that there was a scheme where the dominant purpose or principal effect of the scheme was for the applicant to be entitled to input tax credits. The Tribunal found in favour of the applicant. In doing so, the Tribunal considered that the decision of the Full Court in ACN was of little assistance, being based on substantially different facts – that case involving input tax credits arising from, as described by the Full Court, “a ‘surging’ turnover of sales amounting to some hundreds of millions of dollars, apparently arising out of the circular and repeated nature of the transactions”.

In determining that Division 165 did not apply, the Tribunal appeared to characterise the transactions, whereby the applicant: acquired scrap gold from an entity, sold the gold as GST-free exports to another entity, and claimed input tax credits to recover the cost of the GST on the acquisitions, as “an entirely orthodox and common application of the GST law”.

This paper deals only with the Division 165 aspects of the decision.

As outlined above, the Commissioner has appealed the decision to the Federal Court.

2 Some general observations

Before I consider the decisions in detail, set out below are some general observations. These observations were included in my earlier paper, but they assist in providing the broader context in which to consider the decisions.

2.1 The failure of the supplier to pay GST

Under the basic rules in Chapter 2 of the GST Act, the failure of the supplier to pay its GST liability has no impact on the entitlement of the acquiring entity to claim an input tax credit. The amount of the input tax credit equals the GST “payable” by the supplier – whether or not the GST is actually paid is irrelevant. It is also irrelevant whether the purchaser knew, or should have known, that the supplier has not paid, or was not intending to pay the GST. An acquiring entity is under no obligation to enquire as to whether the supplier has paid, or will pay, the GST.

This is an intended outcome of the legislative regime, as the statutory rights and obligations of the supplier and the acquirer under the GST Act operate independently of each other. The respective BASs lodged by the supplier and the acquirer are deemed to be an assessment of that entity’s net amount. They are separate and independent assessments. If the supplier fails to report its GST liabilities to the Commissioner or fails to pay the net amount reported in its BAS, that is a matter between the Commissioner and the supplier. Any unpaid amounts will be a debt due by the supplier to the Commissioner.

2.2 “Missing trader” schemes

A “missing trader” scheme is where one of the parties to a supply chain engages in fraud or tax evasion – it fails to pay its GST liabilities and goes into liquidation or disappears. That party will effectively “pocket” the GST component of the price paid to it by a purchasing entity. If the purchasing entity claims an input tax credit and the Commissioner is ultimately unable to recover the GST from the supplier entity, there will be a loss to the revenue. The Commissioner will have paid the input tax credit to the various acquirers in the supply chain but cannot recover the GST liability from the fraudulent supplier.

2.3 The knowledge of the purchaser

2.3.1 The United Kingdom

The legal basis for the approach was established in Kittel v Belgium, Belgium Recolta Recycling [2006] ECR 1-6161. The Court observed as follows:

55. Where the tax authorities find that the right to deduct has been exercised fraudulently, they are permitted to claim repayment of the deducted sums retroactively…It is a matter for the national court to refuse to allow the right to deduct where it is established, on the basis of objective evidence, that the right is being relied on for fraudulent ends…

56. In the same way, a taxable person who knew or should have known that, by his purchase, he was taking part in a transaction connected with fraudulent evasion of VAT must, for the purposes of the Sixth Directive, be regarded as a participant in that fraud, irrespective of whether or not he profited by the resale of the goods.

57. That is because in such a situation the taxable person aids the perpetrators of the fraud and becomes their accomplice.

58. In addition, such an interpretation, by making it more difficult to carry out fraudulent transactions, is apt to prevent them…

61….where it is ascertained, having regard to objective factors, that the supply is to a taxable person who knew or should have known that, by his purchase, he was participating in a transaction connected with fraudulent evasion of VAT, it is for the national court to refuse that taxable person entitlement to the right to deduct.

The test was further clarified by Moses LJ in Mobilx Ltd v Revenue and Customs [2010] EWCA Civ 157. His Lordship observed (at [24]) that the scope of VAT, the transactions to which it applies, and the persons liable to the tax are defined according to objective criteria of uniform application and that:

…the objective of the common system of VAT of ensuring legal certainty and facilitating the measures necessary for the application of VAT by having regard, save in exceptional circumstances, to the objective character of the transactions concerned.

His Lordship then observed (at [30]):

…the Court made it clear that the reason why fraud vitiates a transaction is not because it makes the transaction unlawful but rather because where a person commits fraud he will not be able to establish that the objective criteria which determine the scope of VAT and the right to deduct have been met.

On the question of knowledge, his Lordship provided the following guidance:

52. If a taxpayer has the means at his disposal of knowing that by his purchase he is participating in a transaction connected with fraudulent evasion of VAT he loses his right to deduct, not as a penalty for negligence, but because the objective criteria for the scope of that right are not met. It profits nothing to contend that, in domestic law, complicity in fraud denotes a more culpable state of mind than carelessness, in the light of the principle in Kittel. A trader who fails to deploy means of knowledge available to him does not satisfy the objective criteria which must be met before his right to deduct arises.

The approach in the UK operates as an exception to the basic VAT rules and it gives the Revenue an effective tool with which to combat VAT and fraud and “missing trader” schemes.

2.3.2 Australia

To date, the United Kingdom approach has not been considered in Australia. My research has not identified any decision of a Tribunal or a Court where the decisions in Kittel or Mobilx have been considered. If such an approach was adopted, it would likely operate as an exception to s 11-5 of the GST Act, with the effect that an entity would not have made a creditable acquisition (and would thereby not be entitled to input tax credits) if the entity knew, or should have known, that, by their purchase, they were taking part in a transaction connected with the fraudulent evasion of GST.

As outlined in the Introduction, the first real opportunity for a Court or Tribunal in Australia to consider the issue of GST fraud and “missing trader” schemes was the Tribunal decision in ACN. The Commissioner did not rely on the United Kingdom approach and no reference is made to Kittel or Mobilx in the decision. Rather, the Commissioner sought to rely on the anti-avoidance provisions in Division 165.

2.4 An outline of Division 165

In Commissioner of Taxation v Unit Trend Services Pty Ltd [2013] HCA 16; 250 CLR 523 the High Court observed that Division 165 contains anti-avoidance provisions that operate to nullify schemes which have the purpose or effect of reducing GST, increasing refunds, or altering the timing of payment of GST or refunds – with such effects being described as “GST benefits”.^[4] The Court observed that, in broad summary, Division 165 applies where:

There is a scheme, from which an entity gets a GST benefit;
The entity or some other entity entered into or carried out the scheme for the sole or dominant purpose of getting the GST benefit;
Alternatively, the principal effect of the scheme was that the entity or some other entity gets the GST benefit; and
The GST benefit is not attributable to the making by the entity of a choice expressly provided for by the Act.

Where those requirements are satisfied, the Commissioner is empowered to make a declaration negating the GST benefit.

“Scheme” is defined broadly to mean:^[5]

any arrangement, agreement, understanding, promise or undertaking;

(i) whether it is express or implied; and

(ii) whether or not it is, or is intended to be, enforceable by legal proceedings; or

any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise.

An entity will get a “GST benefit” from a scheme if, inter alia:^[6]

an amount that is payable by the entity under this Act, apart from this Division is, or could reasonably be expected to be, smaller than it would be apart from the scheme or a part of the scheme; or
an amount that is payable to the entity under this Act, apart from this Division is, or could reasonably be expected to be, larger than it would be apart from the scheme or a part of the scheme…

In Unit Trend, the High Court (at [59]) observed that in the context of a liability to pay GST the GST benefit the entity gets from a scheme is the difference, as to quantification, between: (a) an amount that would be payable by the entity under the GST Act absent Division 165 with the scheme in existence; and (b) such amount as would have been payable by the entity under the GST Act without the scheme in existence. Applying this reasoning to the receipt of an input tax credit, the GST benefit is the difference, as to quantification between: (a) an amount that would be payable to the entity under the GST Act absent Division 165 with the scheme in existence; and (b) such amount as would have been payable to the entity under the GST Act without the scheme in existence.

In determining whether an entity (whether alone or with others) entered into or carried out the scheme with the sole or dominant purpose of that entity or another entity getting a GST benefit from the scheme, or the principal effect of the scheme was that the avoider gets the GST benefit from the scheme, the matters set out in s 165-15(1) must be taken into account. These matters include:

the manner in which the scheme was entered into or carried out;
the form and substance of the scheme;
the timing of the scheme;
any change in the avoider’s financial position that has resulted, or may reasonably be expected to result, from the scheme; and
the circumstances surrounding the scheme.

3 ACN – the Tribunal Decision

The Tribunal affirmed the decision of the Commissioner to deny the applicant’s entitlement to input tax credits with respect to the acquisition of scrap gold where other entities in the supply chain had fraudulently failed to pay GST.

3.1 The Facts

The background facts were set out in the judgment of the Full Court at [37]-[87]. For the purposes of this paper, I have summarised the facts as follows:

Establishment of the applicant and its business

The applicant was formed as a joint venture between two entities to acquire an existing assaying, refining and precious metals manufacturing business. The plan was that the applicant would exclusively produce “ABC” hallmarked bullion bars and would focus on refining scrap of at least a fineness of 75%. All scrap with a lesser fineness would be sent to different refiners.
There is a distinction between primary reﬁning material and secondary reﬁning material. “Primary reﬁning material” refers to gold that is sourced directly from mines; “secondary reﬁning material” refers to existing material such as jewellery and recycled gold from various users. The joint venturers expected it would be easier to enter and disrupt, if not dominate, the secondary reﬁning sector of the gold market given their business model, existing relationships with third parties who would become key suppliers of the reﬁnery, and experience in the precious metal industry.
In about November 2011, the joint venturers entered into a Shareholders’ Agreement. An email from a lawyer to one of the joint venturers included the following paragraphs regarding the proposed joint venture (emphasis of the Tribunal):

You [ABC NSW] and Palloys (in partnership, on a 50/50 basis) wish to acquire the Business and have already established “Newco” to conduct the Business. A signiﬁcant motivation is to obtain the beneﬁt of the current GST-free “ﬁrst supply from a reﬁnery” exemption.

In other words, you will be able to have gold reﬁned and barred by Newco with the “ABC Reﬁning” mark. Those bars (I assume) will then be marketed by you and/or your network of distributors under your standard distribution agreement.

On 1 February 2012, the applicant acquired the business and commenced refining operations. The Commissioner did not dispute that the applicant was a “refiner of precious metal” as defined in s 195-1 of the GST Act.
As a general reﬁner (as distinct from a toll reﬁner), the applicant acquired scrap gold on its own account; the scrap gold was converted or reﬁned into precious metal, that is, gold bullion in investment form, that the applicant planned to sell GST-free to dealers in precious metal, including ABC NSW, one of the joint venturers.
The majority of the scrap gold supplied to the applicant during the relevant period was already of at least 99.99% ﬁneness. It followed that some of the reﬁnery processes were not engaged, or were not engaged to the same extent as they would have been if the applicant had been reﬁning scrap gold that was less than 99.99% ﬁneness. Put simply, it is quicker, easier and cheaper for the reﬁnery to work with material that has already been reﬁned to the point of ﬁneness expected of investment-grade bullion.
The Tribunal found that the applicant’s gross margin in respect of its reﬁning business was primarily derived from the difference between the price at which it bought the ﬁne metal content in scrap from its suppliers and the price at which it sold the ﬁnished product as precious metal, namely, investment-grade bullion, to dealers. The applicant also earned some fees from reﬁning, assaying and barring.

The applicant’s funding arrangements

The Applicant’s funding arrangements were an integral feature of its business model. The applicant was in the business of acquiring scrap gold and then selling the ﬁnished product. Quite apart from any capital required to effect process improvements by hiring staff and acquiring and upgrading plant and equipment, it needed working capital to fund its trading. To that end, the joint venturers agreed in the Shareholders’ Agreement to provide metal and general ﬁnance loans to assist the applicant to make acquisitions of scrap. The applicant also obtained an overdraft facility from a bank that initially provided $3 million in credit, which was extended to $10 million by June 2013.
The payment arrangement offered by the applicant to suppliers was described by its director as “a system of fast payment” based upon preliminary testing of the material by the applicant or sometimes by the supplier itself. The director’s evidence was that he was aware that this system was a common international industry practice but prior to the advent of the applicant it was not widely practiced by Australian refiners.
The evidence was that the strategy was essential to the applicant’s success because it gave clients “a significant cashflow advantage” and a point of difference compared to doing business with the applicant’s Australian competitors. Further, the was important because many suppliers (or clients) would not ship the scrap to the applicant until they were paid. The ongoing relationships between the appilcant and various suppliers meant it was easier to adjust a supplier’s account if there was variation between the results of the preliminary analysis and the results returned from the more detailed assay and laboratory testing.

Increase in the applicant’s turnover

The applicant’s turnover increased dramatically during the relevant period. In the last ﬁve months of the 2012 ﬁnancial year, when the applicant took over the business, the turnover was $63,278,865. In the 2013 ﬁnancial year, the turnover surged to $594,838,536. In the 2014 ﬁnancial year, the turnover increased to $745,785,032, although the growth was affected by attention from the authorities during that period. Turnover decreased to $654,159,601 in the 2015 ﬁnancial year.

The supply of refining material to the applicant

The director of the applicant confirmed in evidence that the applicant was supplied with a larger number of damaged or defaced precious metal bars. These bars bore a hallmark, but they were cut, melted or otherwise damaged in a way that made them untradeable as “precious metal”. Some of the bars had been previously produced and hallmarked by the applicant, but many of them were hallmarked by somebody else.
The evidence was that these bars were sold to the applicant by third party suppliers as taxable supplies on the basis they were not in investment form. That meant the applicant paid GST-inclusive prices for these acquisitions of scrap gold. The applicant claimed input tax credits in the usual way, just as it did for other acquisitions of things acquired for carrying on its enterprise. The applicant took the same approach to claiming input tax credits when it acquired other scrap gold including: metal blobs or slugs; metal granules; jewellery, jewellery scrap and jewellery by-products; and metal industrial by-products.
According to the applicant’s laboratory analyses, around 22% of the material supplied during the period was less than 99.99% ﬁneness gold. This meant that, on the applicant’s calculations, around 78% of the scrap it acquired or received was already reﬁned to the level of 99.99%. Some of that material perhaps a great deal of it – was contaminated with non-metallic impurities like silicon. In some cases, those contaminants were introduced, perhaps unintentionally, by the suppliers. The evidence of the applicant’s director was that some of the suppliers might have melted down gold bars or other material that was 99.99% ﬁneness using primitive equipment in uncontrolled conditions; that process could introduce non-metallic contaminants (like silicates and borates) into the melted product; and those non-metallic contaminants had to be eliminated by the applicant as part of its processes, even if the product already had a high level of metallic purity.

The applicant’s refining process

The evidence before the Tribunal was that every piece of scrap gold received was melted down and subjected to the smelting and ﬂuxing processes. The invariable practice, even where the scrap gold in question was defaced or damaged precious metal bars that bore a recognised hallmark conﬁrming the bar was of 99.99% ﬁneness. The Tribunal stated that the motivation behind that practice was clear from the evidence. No reﬁnery, and certainly not the applicant, was prepared to accept anybody else’s word for the purity of the product it acquired. Every reﬁnery was worried about fraud. The material received always had to be melted and analysed for quality control purposes.
Fraud was not the only risk. A number of the suppliers melted down material they had on hand into blobs in an effort to conceal the source of that material.
The Tribunal found at [84] that the primary objective of the initial smelting and ﬂuxing process was to provide quality assurance. This finding was the subject of challenge on appeal.
The evidence was that, while the metal was in a molten state, a dip sample was collected and four assays were made of the sample. The assay result was recorded in the laboratory and the dip samples were kept for three months. The assay result was also recorded on the job sheet, which could then be used to determine the ﬁnal ﬁnancial settlement with the supplier. This settlement was also known as the ‘out-turn’.
At the time of out-turn, the applicant was taken to purchase the total number of grams of ﬁne metal content of the material supplied (that is, the number of grams of 99.99% ﬁneness gold or other investment-grade metal that existed within the batch of molten material). The purchase price was determined by the terms agreed with each supplier but was generally calculated with reference to the prevailing spot price for the metal, less a discount and less any fees payable to the applicant by the supplier under the terms. The usual practice was that the price was recorded in a tax invoice created by the supplier in question or in a recipient-created tax invoice prepared by the applicant. In some cases, the grams of gold were simply credited to the supplier’s ﬁne metal account with the applicant. In either event, the molten gold sitting in the reﬁnery became the property of the applicant at that point.

Supplies of precious metals to dealers

During the relevant period, the applicant supplied most of its precious metal to two companies, ABC NSW and Ainslie Bullion Company (Ainslie) (together, the Dealers), each being a “dealer in precious metal”, as deﬁned in s 195-1 of the GST Act.
In respect of the 2013 calendar year, approximately 63% of the applicant’s customer receipts were from ABC NSW, with approximately 30% of customer receipts from Ainslie. ABC NSW was associated with the applicant. Ainslie was not related to the applicant. All of the bullion sold by the applicant to the Dealers was on the basis it was GST-free. That means the applicant did not charge GST to the Dealers and it claimed to be entitled to its input tax credits for the GST charged to it by suppliers with respect to its acquisitions of scrap gold.

Summary of the Tribunal’s findings

The Full Court observed that the Tribunal’s findings included the following:
- The applicant was a reﬁner of precious metal and it acquired a large volume of scrap gold from a relatively small pool of suppliers as part of a business strategy that targeted suppliers of secondary reﬁning material.
- The applicant and its joint venturers were familiar with many of the main suppliers; indeed, some of the main suppliers were directed to the applicant by one of its founding investors, ABC NSW, in order to increase turnover at the reﬁnery.
- The applicant did not always know where the suppliers sourced their material because suppliers tended to be secretive for reasons of their own. Having said that, the Tribunal found that the applicant knew that a few of its main suppliers were sourcing material from ABC NSW in particular, and that a proportion of the material delivered to the applicant was in the form of damaged bars or in other forms which were likely to have been comprised of gold that had been in investment form but which had been melted to disguise its provenance.
- At least 78% of the material acquired by the applicant from the suppliers was 99.99% ﬁneness at the time of acquisition. The Tribunal also found that some of that material might have been supplied in a form that included non-metallic contaminants that had to be removed before the material was transformed into investment-grade bars that were hallmarked and ready for sale by the applicant to the Dealers.

Warrants, audits and assessments

On 29 October 2013, the Australian Federal Police executed search warrants at the applicant’s premises as well as the premises of ABC NSW. Some of the applicant’s suppliers of scrap gold had their bank accounts frozen by the Commissioner and it became impossible to continue dealing with those entities. The evidence was that the applicant voluntarily ceased dealing with some suppliers that were unwilling or unable to supply declarations to the applicant conﬁrming their compliance with the GST laws.
The Commissioner began to conduct more GST compliance activity in relation to the applicant’s business, which impacted on its operations and relationships. The Commissioner retained refunds claimed in the applicant’s business activity statements for October and November 2013 for veriﬁcation. The questions over the claims for input tax credits and the delay in paying the GST refund caused the applicant to become more cautious in its payment strategies. That new-found caution appears to have caused some of the suppliers to move their business away from the applicant. While the evidence was that the Commissioner completed the audit of those particular business activity statements and paid a GST refund to the applicant on 13 December 2013, further GST audits followed. In particular, a more detailed and extensive audit was launched by the Commissioner on 8 July 2014. The evidence was that the applicant’s business did not change in any substantive way during the periods covered by the GST audits, and it continued to claim input tax credits of over $40 million during the 2015 ﬁnancial year.
On 8 April 2016, the Commissioner issued notices of assessment and notices of amended assessment of net amount disallowing certain input tax credits claimed by the applicant in its business activity statements in the relevant period totalling $122,112,065. The Commissioner also issued declarations and issued alternative notices of assessment negating input tax credits claimed by the applicant in its business activity statements in the relevant period totalling $72,953,611. On the same day, the Commissioner also issued notices of assessment of administrative penalties totalling $58,059,829.75 in relation to the GST shortfall for the relevant period.

3.2 The Division 165 Issue before the Tribunal

The Full Court (at [7]) observed as follows:

It transpired that a number of the suppliers of scrap gold to ACN 154 were pocketing the GST they should have been remitting to the Commissioner in respect of the supplies of scrap gold to ACN 154. It also transpired that a number of the suppliers of scrap gold to ACN 154 were: purchasing gold in precious metal form (directly or indirectly) from the dealers to which ACN 154 sold gold in precious metal form; defacing or damaging the gold so that it was no longer in investment form; and selling the gold (now, scrap gold, but still of 99.99% ﬁneness) to ACN 154.

The Court then observed (at [9]) that the Commissioner made determinations under Division 165, reversing input tax credits totalling approximately $73 million arising out of transactions involving a sub-set of suppliers. The Court said:

In brief terms, the Commissioner considered that Div 165 operated on the basis that: (a) ACN 154 had obtained a “GST beneﬁt” (in the form of the input tax credits) from a “scheme” within the meaning of the relevant provisions; and (b) one or more of the entities (including the relevant suppliers) entered into or carried out the scheme for the dominant purpose of giving ACN 154 the GST beneﬁt, or the principal effect of the scheme was that ACN 154 obtained the GST beneﬁt.

3.2.1 The alleged schemes and the Commissioner’s case

The Full Court observed that in relation to Division 165, the Commissioner relied upon a wider scheme or, in the alternative, a narrower scheme or schemes.

The alleged wider scheme was alleged to be comprised of the following matters:

the supply by the applicant to the Dealers of gold of 99.99% in investment form for an amount roughly equivalent to the prevailing spot price for gold;
the purchase by the missing traders (the Intermediaries) of gold of 99.99% in investment form;
the scratching, melting or altering of the gold such that, while still of 99.99% fineness, the gold was no longer in investment form for the purposes of the definition of “precious metal”;
the supply of the gold by the Intermediaries to the applicant for an amount that was less than the prevailing spot price for gold, before the addition of GST; and
the refining by the applicant of the gold to produce “precious metal”.

The narrower scheme did not include the first and last elements.

The Full Court observed that the Commissioner’s broad case was summarised by the Tribunal (at [239]):

239. Broadly, the Commissioner explained that the scheme required the participation of a refiner, here the applicant, that would acquire the scrap gold to make supplies of precious metals…The Commissioner further submitted that the purpose of defacing the precious metal that was acquired from the Dealers into non-investment form precious metal, which was an integral step in both the wider and narrower schemes, was fundamental to the scheme as it enabled the [missing traders] to make taxable supplies to the applicant such that it would pay the higher GST-inclusive prices to the [missing traders]. In this way, the making of taxable supplies to the applicant enlivened the entitlement to claim input tax credits. The Commissioner says it was the GST net amounts paid by the Commonwealth to the applicant that funded the arrangement and that made it attractive to the [missing traders].

The Full Court also observed that there was no dispute that the Intermediaries were guilty of tax avoidance by failing to remit to the Commissioner the GST on their taxable supplies of gold to the applicant. Also, the applicant accepted, based on the evidence, that certain rogue suppliers altered gold to make taxable supplies to the applicant, collect GST-inclusive prices from the applicant, and fraudulently retain the GST (Tribunal at [266]). However, the applicant’s position was that it was not aware of the tax evasion (ie, the non-remittance of GST).

The Commissioner’s position before the Tribunal was not that he was not alleging the applicant was a party to the fraud being perpetuated by the Intermediaries, but he was alleging that the applicant was a willing and informed beneﬁciary of the scheme, because it received the beneﬁt of input tax credits in connection with its acquisitions of this suspiciously rich and surging taxable supply of scrap gold.

The Tribunal found that both schemes were established. The Tribunal also found that the applicant obtained a “GST benefit”, namely input tax credits in the amount of $72,953,611. The Tribunal then considered the issues of dominant purpose and principal effect.

3.2.2 The Tribunal’s factual findings

The Court stated (at [117]) that the Tribunal’s factual findings could be summarised as follows:

A very large proportion of the scrap gold supplied by the Intermediaries to the Applicant during the relevant period was already of at least 99.99% ﬁneness.
A substantial proportion of the scrap gold supplied by the Intermediaries to the applicant was acquired by those entities (directly or indirectly) from the Dealers and was acquired in precious metal form.
The Intermediaries defaced, damaged or altered that precious metal so that it was no longer in precious metal form (that is, it became scrap gold).
The Intermediaries engaged in tax evasion by way of non-remittance to the Commissioner of the GST on the supplies of scrap gold to the applicant.

The Court also observed (at [118]) that the Tribunal examined whether the applicant had knowledge of (or was on notice of) all or any of the above matters. Ultimately, the Tribunal concluded as follows:

The further ﬁndings we make in relation to the Division 165 Supplying Entities are, as follows. We ﬁnd the applicant was aware these suppliers were acquiring investment-grade bullion from the Dealers (especially in the case of its related entity, ABC NSW). We also ﬁnd the applicant more than likely knew the Division 165 Supplying Entities were altering the bullion so it no longer satisﬁed the investment form requirement of precious metal to make taxable supplies to the applicant. We also ﬁnd the applicant was on notice these suppliers were not remitting the GST because it would have been uneconomic for them to do so. We reach that conclusion, in particular, based on the prices at which they bought the precious metal from the Dealers or other intermediaries, namely, ‘spot price plus a premium’, and the prices at which the Division 165 Supplying Entities later sold the scrap gold (whether or not it was the same gold) to the applicant for reﬁning. The price paid by the applicant was a GST-inclusive price, namely, ‘spot price less a discount plus GST’ with the GST liability owed to the Commissioner. However, it was only economically feasible for the suppliers to undertake the transactions if they recovered the GST in the price of the scrap gold from the applicant but did not remit the GST to the Commissioner.

3.2.3 Dominant purpose and principal effect

The Commissioner’s contention was that that one or more of the applicant and the Intermediaries entered into or carried out the scheme or a part of the scheme with sole or dominant purpose of the applicant getting a GST beneﬁt from the scheme (namely, the input tax credits for its acquisitions, for which the applicant paid GST inclusive prices to the Intermediaries).^[7]

The Court observed that the Tribunal’s reasoning is usefully captured at [266]-[268] of the decision, where the paragraphs set out a summary of the applicant’s arguments and the Tribunal’s response. The Tribunal’s response contained the following elements:

The applicant’s entitlement to the input tax credits was more important to the operation of the scheme than the GST liabilities evaded by the Intermediaries.
The input tax credits paid by the Commonwealth to the applicant funded the round-robin arrangements because, in simple terms, it was only economically feasible for the applicant to pay those GST-inclusive prices to the Intermediaries in the knowledge that the applicant would receive the input tax credits.
Without the entitlement to the input tax credits, the applicant would not have paid those prices to the Intermediaries and, consequently, there would have been no acquisition of precious metal by the third-party suppliers (including the Intermediaries) from the Dealers. There would have been no defacing of that precious metal, no taxable supplies in altered form to the applicant, no processing of the metal by the applicant, and no sale of an equivalent amount of precious metal back into the market by the applicant to the Dealers, and so on.
The round robin arrangements would have fallen over if the applicant had not been able to claim the input tax credits. It was the GST beneﬁt in the form of the larger input tax credits payable by the Commonwealth to the applicant, because of the Intermediaries making taxable supplies to the applicant, that underpinned the scheme.

The Tribunal concluded that it was satisfied that either the applicant or the Intermediaries entered into the scheme (in either of its formulations) with the dominant purpose of the applicant getting a GST beneﬁt from the scheme. In the context of the manner in which the scheme was entered into or carried out (s 165-15(1)(a)), the Court noted that the Tribunal stated as follows (at [271]): (emphasis of the Court)

As we have explained above, Mr Cochineas and Ms Simpson – but especially Mr Cochineas – were on notice (and in some cases had actual knowledge) of the fraudulent activities of the Division 165 Supplying Entities. That state of knowledge must be attributed to the applicant. Further, the Division 165 Supplying Entities created a liability to GST when making taxable supplies of scrap gold and the Division 165 Supplying Entities passed on the GST to the applicant as part of the price for the scrap gold. There was no commercial reason for the round robin arrangement except for the GST consequences arising from the different treatments of gold. Accordingly, the manner in which the scheme was carried out strongly suggests the dominant purpose of the entities listed at [264] above (including the applicant), was to secure the GST beneﬁt.

The emphasis placed by the Court illustrates the importance of the Tribunal’s findings of knowledge in the resolution of the appeal.

4 The appeal to the Full Federal Court

The applicant relied on 34 grounds in the Notice of Appeal. In the context of the Division 165 Issue, the Court (at [14]) considered that the principle issues in the appeal could be summarised as follows:

Whether the Tribunal denied the applicant procedural fairness in making certain ﬁndings; in particular, whether the Tribunal denied the applicant procedural fairness in the Tribunal’s reliance on three documents, which had not been the subject of cross examination or submissions (the procedural fairness issue).
Whether the Tribunal erred in law in its reliance on the failure of ACN 154 to call certain witnesses (the witness issue).
Whether there was ‘no evidence’ for certain ﬁndings made by the Tribunal (the no evidence issue).
Whether the Tribunal otherwise erred in law in its application of Div 165.

The Court concluded that the Tribunal denied the applicant procedural fairness in its reliance on the three documents as a basis for adverse ﬁndings of knowledge of certain matters on the part of the applicant. Those ﬁndings were integral to the Tribunal’s consideration of whether Div 165 operates. It followed that the Tribunal’s decision must be set aside and the issue re-determined.

While the Court found in favour of the applicant on the procedural fairness issue, each of the issues were addressed by the Court in the judgment.

4.1 The procedural fairness issue

The central issue was whether the Tribunal denied the applicant procedural fairness by making certain findings, in particular by relying on three documents which were included in the Hearing Book but which had not been the subject of cross-examination or submissions.

The first two documents were emails between employees of ABC NSW, one of the Dealers and one of the joint venture participants in the applicant’s business. In submissions to the Court, the Tribunal contended that: the director of the applicant was not a party to the emails, was not cross examined about them, and the Commissioner made no submissions about them. Moreover, the Commissioner expressly disavowed making any submission or drawing any inference that the director or the applicant knowingly participated in a fraud. The applicant submitted that it was a fundamental denial of procedural fairness for the Tribunal to make adverse findings about the director and the applicant.

The applicant also complained about the Tribunal’s reliance on a transcript of a compulsory examination of the director of the applicant in circumstances where, as with the emails, although included in the Hearing Book, the document was not the subject of any cross-examination or submissions.

The Court (at [88]) described the process by which the Hearing Book was prepared and finalised and dealt with by the Tribunal. The Court noted (at [173]) that the Tribunal stated that it should not be assumed that the Tribunal had read every document in the Hearing Book and the Tribunal expected to be taken to the documents relied on by the parties. The agreed process regarding the Hearing Book included the opportunity to object to the inclusion of a document, with the documents ultimately remaining in the Hearing Book considered to be “in evidence”. The Court also noted that at one point, the Tribunal indicated that, if the Commissioner wished to rely on a document, beyond a particular statement that had been put to a witness, the witness should be asked about the other aspects sought to be relied on. Finally, the Court noted that there was no dispute between the parties that the two emails and the transcript of the compulsory examination were included in the Hearing Book without objection and there was no dispute that the documents were not the subject of any cross-examination or any submissions.

The Court summarised the submissions of the parties at [175] and [176]. The applicant submitted that in the context of the above process, there was an expectation that the Tribunal would not have regard to material that was not referred to – yet the Tribunal used the emails, which were not put to Mr Cochineas and he was not a recipient of the emails or copied in on them, to find that Mr Cochineas and the applicant had knowledge (or at lease were on notice) that the Intermediaries were exploiting “GST loopholes” (the expression used in the second email). The Commissioner submitted that it was not a denial of procedural fairness for the Tribunal to refer to material that was before it, whether or not it was referred to in the parties’ submissions. The two emails and the transcript form a part of the record on which the Tribunal was to rely. The Court was also taken in detail to the transcript of the cross-examination of Mr Cochineas to make good the proposition that the Commissioner squarely put to Mr Cochineas that he understood “what was going on”. The Commissioner also submitted that the impugned ﬁndings went to Mr Cochineas’ subjective state of mind, which was a matter put in issue by Mr Cochineas in his afﬁdavit, but was not a relevant matter for the purposes of the Div 165 issues. Those were to be determined, it was submitted, having regard to objective facts.

The Court concluded that the Tribunal’s reliance on the emails and the transcript, in circumstances where Mr Cochineas was not a party to the emails, was not cross-examined on the documents and the documents were not the subject of any submissions by the parties, constituted a denial of procedural fairness. While 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 to Mr Cochineas’ credit or to make adverse knowledge ﬁndings against the applicant. The Court concluded (at [192]) that in relying on the documents, the Tribunal formed the view that Mr Cochineas appeared to have given “incomplete or inaccurate” evidence under oath in the compulsory examination, that his answers in the compulsory examination were “inconsistent” with his afﬁdavit evidence, that he was “disingenuous” in denying in his afﬁdavit evidence the existence of suspicions about the fraudulent activities of the Intermediaries and that the emails “contradict[ed]” his claims that he was entirely ignorant of any GST-related mischief by the Intermediaries.

The Court considered that the findings of the Tribunal were integral to the Tribunal’s subsequent consideration of whether Division 165 operated and it was distinctly possible that these findings were influenced by the adverse view the Tribunal had formed as to Mr Cochineas’ credit. The Court referred to a number of findings and observations made by the Tribunal, including:

The Applicant “knew it was uneconomic for the Division 165 Supplying Entities to sell scrap gold to it at a price that was effectively less (on a GST-exclusive basis) than that for which the Division 165 Supplying Entities were buying essentially the same gold, in the form of precious metal from the Dealers, unless they were not remitting the GST on those taxable supplies”
Dealing with dominant purpose and principal effect, the Tribunal against stated that the Applicant was “at least, wilfully blind”.

Finally, the Court acknowledged that the question of dominant purpose was to be objectively assessed, the Tribunal’s adverse assessment of Mr Cochineas’ credit may have inﬂuenced its ﬁndings on objective facts, including whether (as the Commissioner had contended) the Applicant ought to have known relevant matters.

Given its finding on the procedural fairness issue, the Court observed that it was strictly unnecessary to deal with the remaining grounds but did so, briefly, for the sake of completeness.

4.2 The witness issue

The central ground was whether the failure of the applicant to call witnesses to corroborate the evidence of the director of the applicant “prevented” the Tribunal from accepting the evidence adduced by the applicant.

The Court (at 192) reproduced the following paragraph from the Tribunal’s decision (emphasis of the Court):

We do not infer the uncalled witnesses would necessarily have given adverse evidence in this case, but the surprising failure to call those witnesses without an adequate explanation has consequences for the applicant even so. The applicant bears an evidentiary burden. It relies in particular on the evidence of Mr Cochineas. In doing so, it has placed all of its evidentiary eggs in the one basket – a risky strategy in a case where some of the evidence is contentious and credit is an issue. As it happens, for reasons we have explained, we have concerns about the evidence of Mr Cochineas. It has been found wanting. The applicant’s failure to call the identiﬁed witnesses to corroborate his evidence and ﬁll any gaps underlines those shortcomings, and prevents us from being satisﬁed the applicant has discharged its onus on this issue.

The applicant submitted that the Tribunal’s approach was contrary to law for two reasons. First, there was no requirement in either law or logic for a taxpayer to adduce corroborative evidence or to call all witnesses who might give relevant evidence to discharge their onus under s 14ZZK of the TAA.^[8] Second, the absence of a witness does not in any way diminish the cogency of the proof otherwise offered by a party.^[9]

The Court did not consider that the applicant had established an error of law in the Tribunal’s approach. The Court considered that the Tribunal made it clear that it was not inferring that the uncalled persons would have given evidence adverse to the applicant’s case. In substance, the Tribunal was merely observing that, in the absence of further evidence, for example from the uncalled persons, the applicant had not discharged its onus.

4.3 The no evidence issue

The applicant contended that there was no evidence for certain findings made by the Tribunal. The Court observed that whether a fact is supported by any evidence is a question of law, likewise whether a particular inference can be drawn from facts found is a question of law. However, there is no error of law by simply making a wrong finding of fact. Nor is there an error of law if there is some basis for an inference (the inference is reasonably open), even if that inference appears to have been drawn as a result of illogical reasoning.

The Court rejected the following grounds:

The finding that applicant “directly benefited” from the GST not being paid by the Intermediaries to the Commissioner. The Court rejected this ground, concluding that the substance of the Tribunal’s finding (insofar as it concerned the applicant) was that the applicant would not have entered into the relevant transactions (acquisitions of scrap gold) at the prices it did unless the transactions were taxable supplies in respect of which the applicant could claim an input tax credit for the GST it paid. This inference was reasonably open on the basis of the primary facts found by the Tribunal.
The finding that the applicant “directly benefited” from the Intermediaries’ fraudulent conduct by claiming input tax credits from on its acquisitions of scrap gold. The Court also rejected this ground, concluding that the substance of the Tribunal’s finding was that the ability of the applicant to claim input tax credits in respect of the relevant acquisitions was critical to the whole arrangement; but for those input tax credits, the relevant acquisitions would not have taken place, at least at the prices that they did. Understood in this way, the inference was reasonably open on the basis of the primary facts found by the Tribunal.
The finding that there was a “sophisticated planning and interaction between the parties [which included ACN 154] that were involved in each of the supply chains”. The Court concluded that this finding was reasonably open on the basis of the primary facts found, noting that the ﬁnding does not appear to depend on the adverse knowledge ﬁndings that are the subject of the procedural fairness issue.
The finding that the applicant’s pricing was a characteristic that set the applicant apart from what other refiners would do. The Court considered the substance of the Tribunal’s ﬁnding to be that no reﬁner would pay those prices unless they were entitled to claim the input tax credit. There was a proper basis for that ﬁnding as a matter of logic, having regard to the evidence generally.

The Court accepted the following ground:

The applicant “made a proﬁt because of the input tax credits”. The applicant submitted that, contrary to the Tribunal’s ﬁnding, the input tax credits merely reﬂected amounts of GST that had been paid by the applicant to its suppliers; the input tax credits were therefore neutral in relation to the applicant’s proﬁt. The Court agreed that the Tribunal’s finding that the applicant made a “profit” from the input tax credits was not supported by any evidence. The input tax credits merely reﬂected the GST that had been paid by the applicant to its suppliers; in that sense they were neutral.

4.4 The Tribunal otherwise erred in law in its application of Div 165

The applicant relied on a number of grounds of appeal relating to the application of Division 165. The grounds fell under three questions of law, which were addressed by the Court as follows.

The first question of law was whether “a series of independent and uncoordinated events constitute a ‘scheme’ within the meaning of s.165-10(2).” The Court concluded that the answer was yes, referring to authority.^[10] The Court also observed that the Tribunal did not make this finding, rather the finding was that there was “sophisticated planning and interaction between the parties that were involved in each of the supply chains”, a ﬁnding that the Court found was reasonably open. The Court also observed that the applicant took issue with the Tribunal’s description of the arrangement as a ‘round robin’ arrangement, The Court considered that that finding was reasonably open on the basis of the primary facts found.

The second question of law was whether any entity entered into the scheme, or part of the scheme, for the dominant purpose of the applicant getting a GST Beneﬁt. The third was whether the principal effect of the scheme, or part of the scheme, was for the applicant to get the GST Beneﬁt from the scheme. Under cover of these questions of law, the applicant’s submissions were summarised by the Court as follows:

Having regard to the factors in s 165-5(1), there was no rational basis for the Tribunal to conclude that any entity entered into or carried out the scheme or part of the scheme for the dominant purpose (ie the “ruling, prevailing, or most inﬂuential purpose” of the applicant getting a GST beneﬁt, which was the input tax credit for its acquisition of a taxable supply and for which the applicant paid the whole of the GST-inclusive consideration to the supplier.
Unknown to the applicant, the Intermediaries altered the form of the gold such that the supply of gold to the applicant would be a taxable supply, enabling those entities to charge a GST-inclusive price to the applicant. Those entities failed properly to account for that GST liability to the Commissioner, such that the entities were enriched by the GST which they had collected from the applicant. The conclusion to be drawn from this was that the dominant purpose of the Intermediaries in taking the steps they took in the “scheme” was to obtain the beneﬁt for themselves of the GST component of the price paid by the applicant.
The dominant purpose of the applicant was not to secure an input tax credit but to acquire the reﬁning material it needed to produce its end-product, which included the production of precious metal. It defied logic to conclude that the dominant purpose of a taxpayer acquiring a taxable supply of goods that are critical to its business is not to obtain the goods themselves but simply to obtain the input tax credit applicable to them, the entitlement to which arose because the applicant had already paid that amount to the suppliers in the price of the material which it purchased.
The applicant’s profit was independent of the rate of GST. In contrast the benefit to the Intermediaries was directly referable to the GST.
The Tribunal’s conclusion that the applicant’s entitlement to input tax credits was more important to the scheme than the GST liabilities evaded by the Intermediaries cannot stand. The availability of an input tax credit was an expected and natural incident of the payment of GST-inclusive prices in the conduct of an enterprise. It was central to its business and the very object of s 38-385 that it would be entitled to input tax credits for GST paid on its inputs.
The Tribunal has impermissibly substituted a ‘but for’ test in place of the statutory test of dominant purpose. The mere fact that, on the Tribunal’s ﬁnding, the scheme would have “fallen over if the applicant had not been able to claim the input tax credits” (at [268]) does not inform the conclusion as to the dominant purpose of the scheme.
The principal effect of the scheme was to enable the Intermediaries to sell material to third party purchasers as a taxable supply, thereby enabling those suppliers to recover a higher GST-inclusive price and fail to remit that GST to the Commissioner.

In oral submissions, the applicant submitted that two matters were at the heart of the Tribunal’s conclusion as to dominant purpose. The ﬁrst was the Tribunal’s ﬁnding that the applicant’s proﬁt was obtaining from the input tax credits. The second was the proposition that the applicant was not an innocent party. It was submitted that the scheme was explicable only by the desire of the rogues to pocket the cash from the GST.It was also submitted that the Tribunal asked itself the wrong question; that is, that the Tribunal asked what made the scheme work, rather than what the scheme was working to achieve.

The Court concluded that the applicant had not established that the Tribunal adopted a wrong approach, or made an error of law, in its consideration of dominant purpose and principal effect for the purposes of s 165-5. The Court took the view that, to a large extent, the applicant’s submissions took issue with the merits of the Tribunal’s conclusions as to dominant purpose and principal effect rather than identifying a wrong approach or an error of law. Critically, the Court observed as follows:

The finding of the Tribunal that the applicant’s entitlement to input tax credits needs to be read in the context of the whole of the Tribunal’s findings, which were that – without the entitlement to the input tax credits, the applicant would not have paid the prices that it did to the Intermediaries and, consequently, there would have been no acquisition of precious metal by the Intermediaries from the Dealers.
The Court was not satisfied that the Tribunal misdirected itself by adopting a “but for” causation approach.
It was open to the Tribunal to view the obtaining (by the applicant) of the input tax credits and the obtaining (by the Intermediaries) of the GST as comprising one purpose, in circumstances where the two were inextricably linked.
The fact that the Intermediaries were pursuing their own (dishonest) gain is not necessarily inconsistent with a conclusion that it would be reasonable to conclude that an entity that entered into or carried out the scheme did so with the dominant purpose of the applicant obtaining the input tax credits.

4.5 Conclusion on the appeal

The Court found that it followed from its from its conclusion in relation to the procedural fairness issue that the Tribunal’s conclusion relating to Division 165 must be set aside and the issue re-determined. The Court observed that it had power under s 44(7) of the AAT Act to make ﬁndings of fact, but 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 will be necessary to consider afresh, and making ﬁndings about, whether (as the Commissioner contended) the applicant ought to have known certain matters. While this was an unpalatable result given the length of the Tribunal hearing, it was considered necessary to remit the matter to a differently constituted Tribunal to re-determine whether Division 165 operated.

5 STNK and Commissioner of Taxation [2021] AATA 3399

5.1 The relevant “gold scheme”

The Tribunal (at [1]) observed that the Commissioner described this case as a “GST gold scheme case” – being a case involving a scheme to avoid payment of GST or increase input tax credit entitlement.

The Tribunal (at [2]) made the following observation as to its role in the proceeding:

Implicitly, that statement might also be viewed as an invitation to consider this matter through the lens of the history of GST scheme cases in Australia. It is appropriate, therefore, to make clear at the outset that is not my approach. I consider the correct approach to be to make relevant findings of fact based on the evidence before the Tribunal and apply the law to those facts, free of any predisposition that this is a ‘scheme case’.

Having regard to this statement, it appears clear that the Tribunal did not approach the matter with any pre-conceptions given the nature of the case, but applied the ordinary approach of the Tribunal in tax cases, which was to make findings of fact based on the evidence, and apply the law to those facts. In doing so, the Tribunal concluded that Division 165 was not engaged.^[11]

The Tribunal described the Commissioner’s characterisation of “gold schemes” in the following terms:

3. …this case follows the patters of GST gold schemes in which:

Gold bars that satisfy the definition of ‘precious metal’ in the A New Tax System (Act) 1999 (‘GST Act’) – as detailed below – are acquired by an entity and adulterated, such that they no longer satisfy that definition.
That entity – sometimes called a ‘missing trader’ – makes taxable supplies of the scrap gold but does not pay the GST on those supplies.
The scrap gold is then passed through a number of intermediaries, each claiming input tax credits on their acquisitions of the scrap gold and remitting GST on their subsequent taxable supplies of scrap gold.
The scrap gold finally reaches an entity, in this case the applicant, which would purport to refine the scrap gold, or cause it to be refined on its behalf, and make GST-free supplies of the resulting gold bullion.
This last step is said to create the circumstance in which the entity (here, the applicant) would claim to be entitled to input tax credits on its acquisitions of scrap gold but without any liability for GST on its subsequent supplies.

4. The underlying mischief in such schemes starts with a fraud on the Commonwealth: the missing trader’s failure to pay GST. It may be because the missing trader is ‘missing’ – such that the Commissioner cannot recover the GST it failed to pay – that the Commissioner’s gaze turned to the applicant.

The Tribunal observed that the applicant was effectively saying that if there was a scheme to evade or avoid paying GST or increase input tax credit entitlements, the applicant was not a part of it.

The Tribunal (at [113]-[114]) made the following observations on “the real mischief” of the scheme:

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 the applicant, 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.

5.2 The facts/scheme

The applicant acquired scrap gold from entity called PMMS, with the gold being exported to Emirates Gold in Dubai. PMMS undertook most of the logistical arrangements for the export of the gold, taking care of customs and freight arrangements in the name of the applicant.

The Commissioner submitted that the applicant had not obtained title to the scrap gold when it was exported and therefore could not be the entity that exported the gold. The Tribunal found, on the balance of probabilities that the applicant did make the export sales and was therefore entitled to have its sales treated as GST-free and be entitled to input tax credits on its purchases from PMMS, unless that entitlement was negated by Division 165.

The series of transactions operated under the following basic form:

Baird & Co sold bullion to QN Traders.
QN Traders on-sold the bullion to Manilla exchange.
Manilla Exchange adulterated the bullion so it was no longer precious metal, and sold it to GB Traders as a taxable supply – but Manilla Exchange failed to remit GST.
GB Traders claimed input tax credits on the acquisition of scrap gold from Manilla Exchange and paid GST on the taxable supply of that scrap gold to PMMS.
PMMS claimed input tax credits on its acquisition of scrap gold and paid GST on its taxable supply to the applicant.
The applicant sold the scrap gold to Emirates Gold as a GST-free export sale. PMMS undertook most of the logistical arrangements for the export of the gold, taking care of customs and freight arrangements, in the name of the applicant.

5.3 The Tribunal’s consideration of the factors in s 165-15

The Tribunal readily accepted that the series of back-to-back transactions constituted a “scheme” for the purposes of Division 165.

The Tribunal also observed that it was clear that the applicant obtained a “GST benefit”. The applicant became to input tax credits on the purchases of scrap gold. But for its participation in the purchase and the export sale of scrap gold, the applicant would not have received the input tax credits.

The Tribunal considered the controversy to be whether s 165-5(1)(c) was engaged – that is whether, taking into account the matters set out in s 165-15, it was reasonable to conclude that either:

an entity that (whether alone or with others) entered into or carried out the scheme, or part of the scheme, did so with the sole or dominant purpose of that entity or another entity getting a *GST benefit from the scheme; or
the principal effect of the scheme, or a part of the scheme, is that [the applicant] gets the GST benefit from the scheme directly or indirectly.

The Tribunal addressed this issue by reference to an objective consideration of each of the factors in s 165-15. Each factor (using the headings in the decision), and the Tribunal’s conclusions are set out below. The Tribunal’s reasoning on each factor was shortly, but clearly, stated.

(a) the manner in which the scheme was carried out

Other than the unchallenged evidence regarding the series of transactions comprising the scheme, the Tribunal observed that there was not a great deal of evidence regarding the manner in which those parts of the scheme that involve entities other than the applicant, PMMS and Emirates Gold were carried out.

In respect of the dealings between these entities, the heavy involvement of PMMS in the applicant’s transactions was viewed by the Tribunal as unusual, and it weighed in favour of a conclusion that PMMS had a purpose of ensuring the applicant carried out the transactions which would generate an entitlement to input tax credits on the applicant’s acquisitions of scrap gold. However, the Tribunal did not see how this could support a conclusion that the principal effect of the scheme was to secure a GST refund for the applicant.

(b) the form and substance of the scheme, including (i) the legal rights and obligations involved in the scheme; and (ii) the economic and commercial substance of the scheme

The form of the scheme is that scrap gold was sold by Manila Exchange to GB Traders. GB Traders and PMMS each on-sold the gold at a profit, with the applicant exporting the scrap gold. The Tribunal did not see any real difference between the form and substance of the transactions, other than in respect of the export sales by the applicant.

The Tribunal saw “the telling element of substance” to be that Manila Exchange acquired bullion, adulterated it and sold the adulterated scrap gold at a lower price before GST than it paid for the bullion. And did not pay GST on those sales. This suggested that Manila Exchange was intent upon perpetrating a fraud on the Commonwealth rather than securing the applicant’s entitlement to input tax credits. Further, the actions of Manilla Exchange, and those of any other entities that joined in the fraud, did not point to a principal effect of the scheme being the securing of the applicant’s input tax credits.

(c) the purpose or object of [the GST Act]…and any relevant provision of this Act…(whether the purpose or object is stated expressly or not)

The Tribunal observed that the purpose or object of the GST Act includes to generally relieve GST-registered businesses of GST costs on their inputs, through the input tax credit mechanism, other than those related to making input taxed supplies. Manila Exchange sought to abuse that system by taking steps to incur but not pay a GST liability on sales of adulterated gold bars. It may be that other entities in the chain of transactions were parties to that fraudulent endeavour, but there was no evidence, and the Commissioner does not allege, that would include the applicant or the Director of the applicant.

The course of conduct of Manila Exchange, and other parties to the fraud, considered against the objects of the GST Act, may point to a purpose of perpetrating a fraud on the Commonwealth. But the Tribunal could not see how it favoured a conclusion that the dominant purpose or principal effect of the scheme was to secure the applicant’s input tax credit entitlement. The approach of the Tribunal appears to be consistent with the need for the applicant to be involved in, or at least have some kind of knowledge of, or wilful blindness to, the fraud.

The Tribunal also observed that an object of the GST Act is to ensure that goods that are exported do not bear GST, and that the applicant’s sales to Emirates Gold being GST-free was consistent with that object. The inconsistency with the object of the GST law lay in the adulteration of the bullion and the fraudulent non-payment of GST, not in an export being GST-free.

(d) the timing of the scheme

The first transaction occurred within a fortnight of the incorporation of Manilla Exchange. The Tribunal accepted that this suggested that Manila Exchange was incorporated to participated in the scheme. However, it did not follow that the timing supported a conclusion that the scheme was entered into to secure a benefit for the applicant. Manila Exchange intended to obtain an advantage for itself. This did not lend much weight to a conclusion that any entity entered into or carried out the scheme to secure a benefit for the applicant.

Similarly, the Tribunal accepted that the completion of the back-to-back transactions within a few days suggests an artificial arrangement to secure a benefit. However, it did not necessarily follow that this significantly supports a conclusion that any entity entered into or carried out the scheme to secure a benefit for the applicant.

The Tribunal agreed that PMMS and the earlier entities stood to benefit from the applicant purchasing scrap gold from PMMS as that funded PMMS’s purchases from GB Traders which in turn funded GB Traders’ purchases from Manila Exchange. But GB Traders and PMMS only benefitted from the scheme to the extent of their profit on each of the series of transactions. That profit could have been achieved by direct sale to a refiner or export customer. Sales to the applicant were not required to achieve that outcome, nor GB Traders’ or PMMS’s entitlement to input tax credits.

This observation of the Tribunal appears to recognise that the transactions between PMMS, the applicant and Emirates Gold involved the ordinary and orthodox application of the GST regime. The entities in the supply chain could recover input tax credits for the on-sale of goods (here scrap gold) provided that the on-sale was not input taxed. It did not matter whether the on-sale, or some ultimate sale, was taxable or GST-free. Nor did it matter that some ultimate supplier may export the goods as a GST-free supply and receive a refund of the input tax credits from the Commissioner.

(e) the period over which the scheme was entered into or carried out

The Commissioner submitted that in the period over which the scheme was entered into and carried out GST gold schemes were rife, and also that the scheme ceased when the applicant’s refunds were withheld. The Tribunal agreed that these factors weighed in favour of a conclusion that an entity or entities had a dominant purpose of securing the applicant’s input tax credits.

(f) the effect the Act would have in relation to the scheme apart from [Division 165]

The Tribunal acknowledged the Commissioner’s contention that but for Division 165 the applicant would be entitled to input tax credits of $503,084. However, the Tribunal also observed that but for the scheme the applicant would not have outlaid the purchase price of the scrap gold or received the selling price. As observed by the Tribunal:

An exporter receiving input tax credits on goods purchased for and in fact exported is an entirely orthodox and common application of the GST law. It is consistent with the scheme of the GST law.

Seen in this context, the Tribunal considered that the mere fact that the applicant became entitled to the input tax credits did not, in itself, strongly support a conclusion that an entity had a dominant purpose of the applicant obtaining the input tax credits.

(g) any change in [the applicant’s] financial position that has resulted, or may reasonably be expected to result, from the scheme

The Commissioner submitted that the applicant made a modest profit, but without the scheme (which was taken by the Tribunal to mean without the input tax credits), the applicant would have made substantial losses.

The Tribunal acknowledged that the modest profit was consistent with a conclusion that the applicant entered into the scheme for the purpose of generating a profit. However, that the applicant would suffer a loss but for the input tax credits did not, in the Tribunal’s view, provide strong support for a conclusion that an entity had a dominant purpose of the applicant obtaining the input tax credits. The Tribunal observed that the same may be said of any business with relatively low margins – denial of input tax credits may put it into losses.

(h) any change that has resulted, or may reasonably be expected to result, from the scheme in the financial position of an entity (a connected entity) that has or had a connection or dealing with the [applicant] . . .

PMMS and Emirates Gold were identified by the Commissioner as connected entities of the applicant. For both entities, the Tribunal acknowledged that but for the GST refunds the applicant would not have been in a position to pay PMMS a GST-inclusive price for the scrap gold, and it could only profit by selling scrap gold to Emirates Gold if it obtained input tax credits on the purchases.

However, the Tribunal observed that “but again GST on acquisitions is intended to be creditable to a business purchaser in the usual course”. Nevertheless, the Tribunal accepted that this weighed in favour of a conclusion that PMMS had an interest in, and therefore one might say a purpose of, the applicant securing its input tax credit entitlement. While the Tribunal did not address this point, one could say that every entity making taxable supplies where the price is to be grossed up for GST has an interest in, and a purpose of, securing the input tax credit entitlement of the purchaser – ensure the funding of the supplier’s GST liability by the purchaser.

(i) any other consequence for the [applicant] or a connected entity of the scheme having been entered into or carried out

The Commissioner did suggest any further matters in respect of this factor.

(j) the nature of the connection between the [applicant] and a connected entity, including the question of whether the dealing was at arm’s length

The Tribunal accepted that that the close involvement in PMMS in the applicant’s transactions weighed in favour of a conclusion that PMMS had a purpose of assisting the applicant in its business which necessarily included obtaining the benefit of the input tax credits.

5.4 The Tribunal distinguished ACN

Both parties sought to draw support from the decision of the Full Court in ACN.

The applicant sought to draw support from ACN for a proposition that Division 165 could not apply because the applicant was unaware of the scheme. This was said to arise out of the Full Court remitting the matter to the Tribunal in connection with a denial of procedural fairness, relating to adverse findings the Tribunal made concerning awareness of the scheme by persons associated with the scheme. The Tribunal was not prepared to make a “leap” from that decision to a principle that if an applicant was not aware of the scheme that is fatal to the application of Division 165. In the Tribunal’s view, that was a leap too far.

The Commissioner drew the Tribunal’s attention to the following passage of the Tribunal’s reasons cited in the Full Court’s judgment:

268. The applicant’s arguments have a superficial appeal, but the reality is that the applicant’s entitlement to the input tax credits was more important to the operation of the scheme than the GST liabilities evaded by the Division 165 Supplying Entities. The input tax credits paid by the Commonwealth to the applicant funded the round-robin arrangements because, in simple terms, it was only economically feasible for the applicant to pay those GST-inclusive prices to the Division 165 Supplying Entities in the knowledge that the applicant would receive the input tax credits. Without the entitlement to the input tax credits, the applicant would not have paid those prices to the Division 165 Supplying Entities and, consequently, there would have been no acquisition of precious metal by the third-party suppliers (including the Division 165 Supplying Entities) from the Dealers. There would have been no defacing of that precious metal, no taxable supplies in altered form to the applicant, no processing of the metal by the applicant, and no sale of an equivalent amount of precious metal back into the market by the applicant to the Dealers, and so on. In other words, the round robin arrangements would have fallen over if the applicant had not been able to claim the input tax credits. It was the GST benefit in the form of the larger input tax credits payable by the Commonwealth to the applicant, because of the Division 165 Supplying Entities making taxable supplies to the applicant, that underpinned the scheme.

The Tribunal’s response was as follows (at [157]): (my emphasis added)

However, to the extent that the Commissioner suggests the ACN case provides support for his approach in the current matter, I am unable to accept the submission. Obviously, each case turns on its own facts. In the ACN case, the Tribunal found the defaced gold bars in respect of which ACN claimed input tax credits included gold that had itself been refined by ACN and sold as bullion. I make no observation regarding the validity or otherwise of the Tribunal’s comments in ACN, as set out above. However, the case is significantly different to the current matter which did not feature what the Full Court in the ACN case described as a ‘surging’ turnover of sales amounting to some hundreds of millions of dollars, apparently arising out of the circular and repeated nature of the transactions. Further, as already noted, the scrap gold could have been sold directly to a refiner or export customer rather than to the applicant without substantially impacting upon the efficacy of the scheme.

The central point of distinction appears to be that in ACN the “scheme” could be characterised as a “round robin” set of transactions whereby gold bullion was sold by the refiner free of GST, that bullion was altered in some way by a party in the supply chain – thereby making it taxable, the altered gold was sold back to the refiner for a GST inclusive price – who sold the bullion again through that supply chain. However, in this case, it was not put that there was a “round robin” arrangement. There was a series of transactions, each of which resulting in the acquisition of scrap gold by the applicant and the GST-free export of that gold, but unknown to the applicant, the scrap gold had been purchased as gold bullion, adulterated, and sold as taxable supplies earlier in the supply chain.

5.5 The Tribunal’s conclusion on Division 165

In concluding that Division 165 was not engaged, the Tribunal noted the following matters (at [160]-[168]):

It was plain that the conduct of Manila Exchange was of an artificial nature designed to obtain an advantage from the GST system. There was no other rational explanation for adulteration gold bullion, so it was no longer precious metal, with a resultant reduction in value. It may be that other entities in the chain of transactions were also involved in that nefarious endeavour.
There was no evidence that the applicant or its Director were aware of or had dealings with any of the entities in the chain of transactions or their controllers, other than PMMS and Emirates Gold. The Tribunal accepted the Director’s evidence that they did not. However, there was nothing in Division 165 to suggest that knowledge of a scheme participant’s purpose by an entity that obtained a GST benefit is necessarily a pre-requisite to the application of the Division. Whilst each case must always turn on its own facts, such an approach could reward wilful blindness and may involve departure from the objective nature of the inquiry required under s 165-10.
There was no evidence that the applicant profited from the scheme, other than through the modest margin it achieved on each transaction. The Tribunal found that it did not.
In these circumstances, it could not reasonably be concluded that the applicant had a dominant purpose of securing input tax credits. It did not enjoy any substantial net benefit from obtaining the input tax credits because it paid a GST inclusive price to PMMS. In keeping with the scheme of the GST legislation, the applicant’s entitlement to input tax credits merely achieved a GST-neutral outcome from a business-to-business transaction.
The Commissioner submitted that the applicant’s input tax credits were the engine that drove the scheme, and that it was only because the applicant was able to obtain input tax credits that the applicant was able to pay a GST-inclusive price to PMMS which in turn funded the earlier transactions in the chain. The Tribunal rejected the Commissioner’s submission that an analogy could be drawn with the ACN case.
The same GST-neutral outcome would have been achieved by PMMS selling the scrap gold to an arm’s length purchaser, a refinery or an overseas customer. In all three cases, the seller would have been entitled to input tax credits on purchase of the scrap gold.
Having regard to these aspects of the operation of the GST law, and looking at the whole of the circumstances surrounding the scheme, the Tribunal was persuaded that the applicant has discharged the burden of proving that it would not be concluded that any entity had a dominant purpose of securing the applicant’s input tax credit entitlements.
The principal effect of the scheme was the non-payment of GST and not the applicant obtaining the input tax credits. The applicant obtaining the input tax credits was an effect of the scheme, and not an insignificant effect. But measured against the non-payment of GST by Manila Exchange, and seen its proper context as effectively a GST-neutral return of GST embedded in the price of the applicant’s business acquisitions, the Tribunal was unable to accept that the applicant’s input tax credit entitlement is the principal effect of the scheme.

6 Where are we now?

6.1 The relevance of knowledge

As discussed in my earlier paper, the focus of the Tribunal in ACN on what the taxpayer “knew” or “should have known” bore a similarity to the principles adopted by the Courts in the United Kingdom where acquirers of goods may be denied credits where they “knew or should have known” that a supplier was not remitting the VAT.

The importance of the Tribunal’s findings on knowledge was also acknowledged by the Full Court in considering the procedural fairness issue. The Full Court identified that an integral part of the Tribunal’s decision on the Division 165 issue were findings made on the knowledge of the taxpayer and its director. Findings such as the applicant was “at least, wilfully blind” to what was going on.

While the Full Court did find in the taxpayer’s favour on some other grounds of appeal, it may be doubted whether the Full Court would have ultimately allowed the appeal if it had taken a different view on the procedural fairness issue and found that it was open to the Tribunal to make the findings that it did on the knowledge of the taxpayer and its director. Critically, the Full Court found that the applicant had not established that the Tribunal adopted a wrong approach, or made an error of law, in its consideration of dominant purpose and principal effect for the purposes of s 165-5. In other words, save for the procedural fairness issue, the appeal may well have been unsuccessful on the Division 165 issue.

6.2 Can Division 165 be engaged where the purchaser has no knowledge of the fraud?

The importance attributed by the Tribunal (and the Full Court) in ACN to what the taxpayer knew, or ought to have known, raises the question of whether it would be open to the Commissioner to rely on Division 165 where the taxpayer has no knowledge of the fraudulent non-payment of GST by one of the suppliers in the supply chain and is not privy to any information that would put a reasonable person “on notice” of the existence of that fraud.

In my earlier paper, I referred to the practice of “phoenixing” by property developers which led to the introduction of the GST wtithholding regime in Subdivision 14E of Schedule 1 to the TAA. Under this practice, a registered entity undertakes a property development and recovers input tax credits with respect to the development costs. During the construction phase, no taxable supplies are made and for each BAS the developer is entitled to a cash refund of the input tax credits. Once the development is completed, the developer makes taxable supplies of the developed lots and receives the GST component of the price from purchasers. However, the developer dissolves its business before lodging its BAS to avoid remitting the GST. The developer thereby pockets the cash refunds from the input tax credits plus the unpaid GST.

Assuming that the development at issue involved commercial premises, each of the supplies of lots to purchasers on completion would be taxable supplies and GST would be included in the sale price on the basis that the purchasers would be entitled to an input tax credit for that amount of GST. For each sale, the purchaser has provided funds to the supplier on account of GST, and the developer has failed to remit the GST to the Commissioner. Is it open to the Commissioner to apply Division 165 to deny the purchasers’ their input tax credits?

The answer would appear to be yes, at least in theory. The sale of the commercial premises was part of a “scheme”. The purchasers each received a “GST benefit” from the scheme, being the entitlement to input tax credits. If the sole or dominant purpose of the developer (as an entity involved in the scheme) was to give the purchasers the GST benefit (ie, the entitlement to input tax credits), the elements of Division 165 would be engaged – regardless of any knowledge to be attributed to the purchasers. I have difficulties with that proposition. It would mean that Division 165 could be engaged whenever an entity made a taxable supply on which GST was charged to the purchaser and a tax invoice provided, but the supplier had no intention of remitting the GST to the Commissioner.

In STNK, both parties sought to raise the issue of knowledge. The Commissioner submitted that it was irrelevant whether the applicant knew of the scheme or its participants. In contrast, the applicant submitted that Division 165 could not be engaged unless there was knowledge. The Tribunal appeared to reject both submissions, although it accepted that there is nothing in Division 165 to suggest that knowledge of a scheme participant’s purpose by an entity that obtained a GST benefit was necessarily a pre-requisite to the application of the Division.

Nevertheless, the Tribunal did appear to have difficulty with the concept that Division 165 could apply where an entity made creditable acquisitions in the ordinary course of its enterprise and thereby funded the GST liability of the supplier, but unknown to the recipient, the supplier fraudulently failed to remit GST. This is reflected in the following observation (at [138]-[139]):

138. It is true that, but for the scheme, the applicant would not be entitled to those input tax credits, but nor would it have outlaid the purchase price of the scrap gold or received the selling price. An exporter receiving input tax credits on goods purchased for and in fact exported is an entirely orthodox and common application of the GST law. It is consistent with the scheme of the GST law.

139. Seen in that context, the mere fact that the applicant became entitled to the input tax credits in my view does not, in itself, strongly support a conclusion that an entity had a dominant purpose of the applicant obtaining the input tax credits.

Noting that the decision in STNK has been appealed by the Commissioner to the Federal Court, I consider that the knowledge (actual or imputed) or wilful blindness of a taxpayer will likely play an important role in the application of Division 165 to schemes involving missing trader fraud. Similar to the position in the United Kingdom, it is that knowledge or wilful blindness which distinguishes the transaction, and the entitlement of the taxpayer to input tax credits, from – to the use words of the Tribunal in STNK – “an entirely orthodox and common application of the GST law”. In the absence of that knowledge or wilful blindness, every taxable supply where GST is added to the price will involve a “scheme”, a “GST benefit” to the recipient through the entitlement to input tax credits, and an intention or purpose of the parties that the recipient be entitled to an input tax credit. For these orthodox and common transactions, it is difficult to see how the non-payment of GST by the supplier can justify the application of Division 165 without something more.

This approach recognises that GST will not always be remitted by suppliers, for a variety of reasons – including fraud. But a fundamental plank of the GST regime is – and must be – that purchasers of goods and services are entitled to recover input tax credits to compensate them for the cost of paying a price to suppliers that is “grossed up” for GST. If the entitlement of purchasers to claim input tax credits is diluted, or subject to the actual remittance of GST by suppliers – a matter usually beyond the control of purchasers, the efficacy of the GST will be put at risk. Some of the potential implications include:

The Commissioner using his powers under s 8AAZLGA of the TAA to withhold refunds claimed by taxpayers while he investigates whether the corresponding GST has been paid by the supplier and if not, why not.
Purchasers refusing to pay GST to suppliers until such time that the suppliers have lodged their GST returns and confirmed that the GST was paid.

6.3 What is the requisite level of “knowledge”?

What then is the requisite level of knowledge or involvement of a taxpayer for Division 165 to be engaged?

At the heart of the approach in the United Kingdom is a finding that the acquiring entity “knew or should have known” that by the purchase, it was taking part in a transaction connected with the fraudulent evasion of VAT, irrespective of whether or not it profited by the resale of the goods. On the question of what constitutes knowledge, Moses LJ in Mobilx Ltd v Revenue and Customs [2010] EWCA Civ 157 observed that “If a taxpayer has the means at his disposal of knowing that by his purchase he is participating in a transaction connected with fraudulent evasion of VAT he loses his right to deduct…”.

The concept was further developed in Davis & Dann Ltd v HMRC [2016] EWCA Civ 142 where Arden LJ observed that, in order to establish that the taxpayer should have known that its transactions were connected with fraudulent evasion of VAT, the Revenue had to reach the high hurdle of showing that the taxpayer ought to have known that the only reasonable explanation of the transactions was that they were connected to a VAT fraud. This level of knowledge was referred to as knowledge meeting “the no other reasonable explanation standard”, with the facts to be evaluated as follows:

The question is whether or not a reasonable person mindful of those circumstances ought to have concluded that the transactions were connected with fraud. What matters is the perspective of the person alleged to have such knowledge.

This concept of knowledge extends beyond actual knowledge and include wilful blindness. As observed by Briggs J in Megitan Limited (in administration) v HMRC [2010] EWHC 18 (Ch) at [34]: (my emphasis added)

In my judgment, there are likely to be many cases in which a participant in a sophisticated fraud is shown to have actual or blind-eye knowledge that the transaction in which he is participating is connected with the fraud…

As discussed in my earlier paper, the Tribunal in ACN appears to have adopted a similar approach, relying heavily on findings that the taxpayer was “at best, wilfully blind to the creation of a contrived market in gold transactions which entitled it to claim input taxed credits upon its acquisitions of scrap gold from the [missing traders]” and that “the applicant facilitated and willingly participated in the round robin arrangement and benefited from the input tax credits that were created”. In coming to this finding, it appears that an important matter for the Tribunal was its finding (at [224]) that “it was only economically feasible for the suppliers to undertake the transactions if they recovered the GST in the price of the scrap gold from the applicant but did not remit the GST to the Commissioner” (emphasis added). This analysis would arguably satisfy “the no other reasonable explanation standard” within the UK regime.

In contrast, in STNK there was no evidence that the applicant had any knowledge of, or connection with, the entities involved earlier in the supply chain. In this context, the applicant was simply acquiring scrap gold from the supplier and exporting that gold as GST-free supplies, making a small profit on the transactions.

6.4 Onus of proof re knowledge

In the United Kingdom, the onus falls on the Revenue “to reach the high hurdle” of establishing that the taxpayer ought to have known that the only reasonable explanation of the transactions was that they were connected to a VAT fraud: Davis & Dann per Arden LJ.

The position under Division 165 is different, with the statutory onus falling on the taxpayer. In this context, it falls to the taxpayer to establish, on the balance of probabilities, that the elements of Division 165 are not engaged – including that the sole or dominant purpose of a participant of the scheme (which may not be the applicant taxpayer) was not for the applicant taxpayer to obtain the GST benefit. Where a supply chain contains multiple entities, some of which may have had no direct contact or connection with the applicant taxpayer, this will often be a difficult task.

7 Conclusion

It is clear that missing trader fraud is a significant issue for GST in Australia. It is also clear that a mechanism is needed to combat missing trader fraud. The question is whether the anti avoidance regime in Division 165 is the appropriate mechanism to achieve that end.

In my view, the regime developed over a number of years in the United Kingdom to combat missing trader fraud better fits within the structure and operation of the GST as a value added transaction tax. That regime recognises that the knowledge of the purchaser (actual or imputed) is key to its operation. It is the presence of that knowledge which removes the transaction from the ordinary course where credits are properly available. The regime also provides an appropriate balance by shifting the statutory onus to the Revenue to establish the requisite level of knowledge.

However, I feel that the train may have already left the station. Over the coming years, I expect to see the Tribunal, the Federal Court and the Full Federal Court – and ultimately the High Court – clarify the scope and role of Division 165 in combatting missing trader fraud. It should be a fascinating journey.

Chris Sievers

Lonsdale Chambers

22 November 2021

^[1] In this paper references to the GST Act are to The A New Tax System (Goods and Services Tax) Act 1999.

^[2] The Guardian Newspaper, “Mobile phone scam costs VAT billions”, 17 August 2002.

^[3] The Australian Newspaper, “Tax office: $700m GST scam saw gold mules sell in parks”.

^[4] At [4] referring to s 165-1.

^[5] Section 165-10(2).

^[6] Section 165-10(1).

^[7] The Tribunal observed that the relevant purpose need not be attributed to the taxpayer, it was sufficient that the purpose can be attributed to any one participant in the scheme, referring to Federal Commissioner of Taxation v Macquarie Bank Ltd (2013) 210 FCR 164 at [289]-[290]; Federal Commissioner of Taxation v Ludekens (2013) 214 FCR 149 at [243]-[246].

^[8] Referring to Allied Pastoral Holdings Pty Ltd v Federal Commissioner of Taxation [1983] 1 NSWLR 1 at 10-11; Federal Commissioner of Taxation v Cassaniti (2018) 266 FCR 385; also Evidence Act 1995 (Cth), s 164.

^[9] Referring to Australian Securities and Investments Commission v Hellicar (2012) 247 CLR 345, especially at [153].

^[10] Federal Commissioner of Taxation v Hart (2004) 217 CLR 16 at [47] per Gummow and Hayne JJ; Federal Commissioner of Taxation v Star City Pty Ltd (2009) 175 FCR 39 at [204]-[213] per Dowsett J.

^[11] The Commissioner has filed an appeal to the Federal Court.

By Chris Sievers, Barrister

5.4 The Tribunal distinguished ACN

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