The issue before the High Court formed only a small part of the decision dealt with by the Tribunal and the Full Federal Court. For a detailed analysis of the facts and the issues in this case please see my analysis of the Full Federal Court decision which can be found here.
The issue before the High Court
The Commissioner sought special leave to appeal from the decision of the Full Federal Court concerning the interpretation of s165-5(1)(b) of the GST Act. The provision relatively provides as follows:
(1) This Division operates if:
(a) an entity the (avoider) gets or got a *GST benefit from a *scheme; and
(b) the GST is benefit is not attributable to the making, by an entity, of a choice, election, application or agreement that is expressly provided for by the *GST law…
The question before the Court was described as follows:
Whether GST benefits obtained by Unit Trend are not attributable to the making of a choice, election, application or agreement (collectively a “choice) that is expressly provided for by the GST Act.
The High Court noted that this question was resolved by the AAT in favour of the commissioner and on appeal, the Full Federal Court found in favour of Unit Trend. The High Court allowed the Commissioner’s appeal.
Unit Trend is the representative member of a GST group, including Simnat (Pty Ltd), Belsford (Pty Ltd), Mooreville Investments (Pty Ltd) and Repcivic Contractors (Pty Ltd).
On 14 December 1998 Simnat entered into a contact to purchase land for $30m and the contract settled on 20 April 1999. Simnat obtained development approval for the construction of three high-rise towers. On 31 July 2001 Simnat appointed Rapcivic to construct Tower 1 on the site, which was completed by December 2002 and the units were sold to the public. The margin scheme was used to calculate the GST payable.
By contract dated 1 July 2002 Simnat engaged Rapcivic to construct Tower II. By contract dated 14 April 2004 Tower II was sold to Blesford and the purchase price was to be determined by an independent valuer. The sale was agreed to be the sale of a going concern and the price was determined by a valuation of $149,800,000. Under the contract of sale, Simnat assigned to Blesford all of its rights under the sale contracts it had entered into with purchasers of the units prior to the sale of the Tower.
The contract settled on 7 May 2004 and Blesford (as the new owner) continued marketing units in the tower and made off the plan sales to the public.
When the construction was completed, Blesford settled the sales contracts (including those assigned from Simnat). Blesford applied the margin scheme for the GST on the sales to the public. In determining the margin, Blesford adopted the price it paid to Simnat for Tower II and determined the margin between that price and the value of the end sales (applying an apportionment of the acquisition price to each unit).
This operated in a similar way to Tower II. By contract dated 29 January 2003, Simnat engaged Rapcivic to construct Tower III. By contract dated 15 April 2004, Simnat sold Tower III to Mooreville, with the price to be determined by an independent valuer. The value was $10,500,000. The sale was agreed to be a going concern and Simnat assigned the rights to existing sales contracts to Mooreville. On completion, Mooreville settled contracts (including sales made on its own behalf and sales assigned from Simnat). Mooreville applied the margin scheme and used the price it paid to Simnat as the consideration for the acquisition of the units.
The Tribunal – the “choice” issue
An issue was whether the GST benefit was attributable to the making of a choice, election, application or agreement expressly provided for by the GST Act. The applicant identified the relevant choices or elections as: the choices of Newco1 and Newco2 to become members of the GST group; the agreement by Oldco and Newco1 and Newco2 respectively to treat the sales as going concerns; the choices by Newco1 and Newco2 to apply the margin scheme.
The essential argument of the applicant was that if the election to sell the lots under the margin scheme had not been made, GST would have been payable at 1/11th of the sale price. The Tribunal rejected this argument, finding that the exclusion in s 165-5(1)(b) did not extend to benefits that had “some connection” with choices that are provided for where the benefit is not explained by the choice but is explained by something else – in this case the sales of Tower Two and Three to Newco1 and Newco 2. The GST benefit was “attributable” to the use of the higher acquisition amount used in the calculation of the margin. As noted by the Tribunal (at ):
The higher amount is not the product of the election to adopt the margin scheme but is a result of the transfers of Tower Two and Tower Three and the consideration agreed to be paid for them. We take the view that a development group, such as Developco, which acquires land in respect of which no input tax credits are available, will always sell the developed product under the margin scheme if the end purchasers, such as those who purchased from Developco, would not be able to enjoy any benefit of input tax credits. Accordingly, we consider that the margin scheme would have been applied to any sales of completed apartments in the development in any event. Thus the GST benefit arises not out of any election but from the effect of the transfers of Tower Two and Tower Three.
The Full Federal Court
With regards to the “attribution” question, the majority found that for the Tribunal, giving effect to the statutory purpose of s 165-5(1)(b) meant that demonstrating “some connection” between the GST benefit and the choices made and provided for, is not a “sufficient” connection unless the GST benefit is “explained” by the choice, rather than “something else”. Further, the Tribunal found that the GST benefit (being the lower margin) was not explained by the choices, but rather was explained by, and was attributable to, the “use” of the higher intermediate amount. The GST benefit could only be “explained” by the antecedent transactions and the intermediate higher price.
Unit Trend contended that the Tribunal’s approach was to import the notion of “solely attributable” into the section. In this regard, the majority found that the object, focus or aim of Division 165 does not suggest that the nature of the attribution contemplated is that the choice etc, be the sole or dominant cause of the GST benefit. Further, the majority found that a scheme may contemplate a number of steps, each potentially involving choices etc expressly provided for by the GST law and also steps chosen or dictated by the particular commercial circumstances. In this context, the majority saw the question to be decided in the following terms (at ):
In those circumstances of mixed choices determined in part by the commercial arrangements and in part by choices expressly provided for by the GST law, the question to be decided is whether, as a matter of proper construction of s 165-5(1) in context, the GST benefit is attributable to the choices or elections implemented within the scheme expressly provided for by the GST law, or whether, because the scheme is comprised of those choices and other steps or choices not expressly provided for by that law, the GST benefit is attributable to the aggregated arrangement, that is, the scheme rather than the choices forming part of the scheme, expressly provided for by the GST law itself.
The majority found that s 165-5(1)(b) ought to be construed in a way that gives effect to its statutory purpose of preserving the entitlement to, and the effect of, specific legislative options, choices, elections etc expressly provided for by the GST law. The rule in s 165-5(1)(b) prevents Division 165 where the GST benefit “has the relevant degree of connection” with the making of expressly conferred choices etc. This approach appears to introduce a “nexus” test between the GST benefit and the choice etc expressly provided for. The relevant nexus was explained by the majority in the following extract (at ):
…the language of s 165-5(1)…seems to more properly contemplate causation in an allocative sense asking whether the nexus between the GST benefit and the exercise of the statutory choice is sufficiently close to provide an answer to the question, is the choice etc made by the taxpayer as expressly provided by a GST law, the predominant cause or the direct cause of the GST benefit? In that sense, the subsection does not import by its terms…a concept of causation in which the relevant choice etc is simply one of a number of contributory causes, as a sufficient connection. Otherwise, the Division would seem to have little field of operation.
Applying this “nexus test” to the facts, the majority found that the GST benefit was “attributable” to a number of choices etc made by Unit Trend expressly provided for under the GST law. This included the agreement to sell the Towers as going concerns (the intermediate sale) and the choice to the use margin scheme on the ultimate sale. The majority dealt with each of these issues in the following way:
- The Commissioner contended that the choice to enter into the intermediate sales of the Towers was a commercial election or choice that brought about, in effect, the uplift in the intermediate cost base. In essence, the Commissioner appeared to contend that the GST benefit was “attributable” to the intermediate sales. The majority found that the entry into these sales was consistent with a sale of a going concern in a manner which conformed with the provisions in s 38-325. As noted by the majority (at ): “The taxpayer was entitled to make a choice or election to enter into a going concern transaction in conformity with s 38-325 which had the effect that GST would not become payable on settlement of the transfers from Simnat to those entities.”
- The majority appeared to find that the uplift was “attributable” to the choice to treat the sales as going concerns, rather than the choice to enter into the sale transactions. But for making the choice to treat the sales as going concerns, a GST liability would have arisen by reason of settlement of the transfer. With respect, this reasoning appears to assume that the intermediate transactions would have proceeded in the absence of the going concern provisions.
- The majority disagreed with the Tribunal’s conclusion that the application of the margin scheme to the end transactions did not involve a choice because that would have necessarily applied in any event. The majority found that while it may have been a prudent choice to use the margin scheme, the supplier nevertheless had a choice to apply the margin scheme (or not).
- In conclusion, the majority (at [204) agreed with the Tribunal’s finding that for the purposes of s 165-5(1)(b), the notion of “attributable to” means that the GST benefit must be “explained by” a choice, election, application or agreement in the sense of an allocative concept in which the GST benefit belongs to or is directly explained by that choice etc. Where the Tribunal fell into error was concluding that the GST benefit was not properly “explained by” the choices etc made by Unit Trend.
The dissenting judgment
In his dissenting judgment, Dowsett J (at ) found that the word “attributable” involved a decision as to whether the relevant benefit is attributable to the scheme under consideration or to a choice, such choice presumably being one aspect of the scheme. His Honour found that the section contemplated a direct connection between the GST benefit and the relevant choice. In this regard, his Honour doubted the submission of Unit Trend that the GST benefit should be seen as the product of a number of choices and that the benefit is attributable to them collectively.
In the context of the appeal, the issue was described as follows:
…whether or not the reduction in Unit Trend’s GST liability, effectively as the result of the intermediate sales by Simnat to Blesford and Mooreville, was attributable to the identified scheme or to a choice expressly provided for by the GST law.
In finding against Unit Trend, his Honour found that the GST benefit was attributable to the scheme, rather than to any particular choice. His Honour’s conclusion was set out as follows (at ):
In any event, in the present case, the scheme which produced the benefit included the intermediate sales by Simnat to Blesford and Mooreville. Such sales lay at the heart of the scheme, even if the various choices were also necessary integers of it. In my view, the GST benefit was attributable to the events of which such sales were necessary parts, in other words, the scheme. In those circumstances, the benefit was attributable to the scheme, and not to any particular choice expressly provided for by the GST Act.
The Commissioner submitted that the decision of the majority of the Full Federal Court did not “best achieve the purpose or object” of Division 165 in that the purpose of s 165-5(1)(b) was to prevent the anti-avoidance provisions applying to a person merely by reason of the exercise of a right to make a choice expressly provided for by the GST Act. The section was intended to only make Division 165 inapplicable where the GST benefit was produced by an individual statutory choice. Further, a mere contributory causal connection with a statutory choice was not sufficient. There must be a “direct link” between the GST benefit and the choice.
The Court approached the question as one of statutory construction, noting that this task must begin with a consideration of the statutory text, but that context and purpose are also important. In this regard, the critical question asked by the section was whether the GST benefit got by the scheme was “not attributable” to a “choice”. In this context, to embark on an inquiry as to whether the GST benefit in question was “attributable” to a choice (as contended for by Unit Trend) was apt to distort somewhat the inquiry invited by the text. On this analysis (at -):
…the words “not attributable to” in s 165-5(1)(b) do not invite and enquiry as to causality to differentiate the effects of the scheme from the exercise of a statutory choice. Rather, the phrase is concerned with whether the GST benefit in question, which (ex hypothesis) has been got from the scheme, is not one to which the exercise of a statutory choice has entitled the taxpayer.
It should be noted that the observations in Sun Alliance on which Unit Trend relies were made in a markedly different context. While the word “attributable” was considered in Sun Alliance to be concerned with a contributory cause rather than source, the phrase “not attributable to” in s 165-5(1)(b) is used in a context in which a causal link is assumed to have been established in terms of the getting of a benefit from a scheme in which a statutory choice is an element. The expression “not attributable to” in s 165-5(1)(b) is used in a context in which a causal link is assumed to have been established in terms of the getting of a benefit from a scheme in which a statutory choice is an element. The expression “not attributable to” in s 165-5(1)(b) is not concerned to identify another relationship of cause and effect which might or might not proceed on a different level of cause and effect from that expressed by “got…from”. Rather, the expression is, in its context, concerned with the absence of a statutory entitlement to the GST benefit in question.
The Court then found that based upon the undisputed facts the GST benefit was “not attributable” to a statutory choice. The GST benefit got from the scheme reflected the amount agreed to be paid to transfer Towers II and III, which reflected the increase in the value of the properties by reason of the work done on them. The choice to form a GST Group and to use the margin scheme did not operate to confer the GST benefit, being a reduction in the GST payable on supplies to end buyers.