On 19 August 2012 the Full Federal Court handed down its decision in Unit Trend Services Pty Ltd v Commissioner of Taxation  FCAFC 112. This was an appeal by the taxpayer from the decision of the Tribunal in The Taxpayer and Commissioner of Taxation  AATA 497. In a majority decision (2:1), the Full Court allowed the taxpayer’s appeal and found that Division 165 did not apply because the GST benefit was “attributable” to a choice, election, application or agreement that is expressly provided for in the GST law.
The decision is important because it is the first time the Federal Court has had an opportunity to consider the operation of the anti-avoidance provisions in Division 165 of the GST Act. Unfortunately, the scope of the appeal was limited to the construction of s 165-5(1)(b) and whether the GST benefit was “attributable” to a choice etc. The taxpayer did not appeal the findings of the Tribunal that there was a GST benefit and that the dominant purpose (and principal effect) in entering into the scheme was to obtain the GST benefit.
After reviewing the judgments, it appears that the majority agreed with the Tribunal’s construction of s 165-5(1)(b) but not with the application of that construction to the facts. In his dissent, Dowsett J may have preferred a slightly narrower test, but came to the same view as the Tribunal as to the application of the test to the facts of the case.
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 applicant did not dispute the Commissioner’s characterisation of the scheme which was described alternatively as follows (at ):
- A owns and buys land for development and undertakes the development to a point where the development has substantially progressed, and the overall value is considerably higher than the price paid for the land. A then sells the partially completed land to B (a group entity) at market value and the sale is GST-free as the supply of a going concern or because the entities are within a registered GST group. B completes the development and sells to end buyers. Any sales made by A to end buyers would be honoured and completed by B. B chooses to apply the margin scheme for the supplies to end buyers calculated by reference to the consideration paid to A for the land.
- The transfer by Oldco of Towers Two and Three to Newco1 and Newco2 respectively in a manner which did not attract GST and the making of the transfers for a consideration which reduced the margin which would have otherwise applied had Oldco completed the sales and choosing to apply the margin scheme in respect of the subsequent supplies by Newco1 and Newco2 to third party purchasers.
The applicant argued that there was no GST benefit because asset protection was the end sought and that the only way to achieve this outcome was to do what it did. The necessary comparison was therefore the GST outcome that actually ensued. The Commissioner contended that it was necessary to remove the scheme and look to see what GST liability would have arisen (ie, removing the insertion of Newco1 and Newco2 as interposed entities).
In rejecting the applicant’s approach, the Tribunal adopted the same approach to the Tribunal in VCE in noting that the applicant’s approach ignores the phrase “apart from the scheme or a part of the scheme”. Apart from the scheme, Oldco would have continued to be the vendor of all the apartments and would have conveyed the completed lots, paying GST, at best, based on a valuation of the towers at 1 July 2000.
Importantly, the Tribunal also noted that Division 165 had at least one important difference to Part IVA, in that subsection 165-10(3) indicates that an entity can “get a GST benefit from a scheme” even if the entity could not have economically engaged in activities that would produce the equivalent commercial effect of the scheme, or part thereof, other than by entering into or carrying out the scheme”. The Tribunal found that this provision answered the applicant’s assertion that there was no GST benefit because the Group would have done something to secure the benefits of asset protection and the only options were to do what was done.
The Tribunal appeared to accept that the Commissioner’s approach was a “shorthand description” of a postulation that the course of action that would have been adopted (in absence of the scheme) was a continuation of the pre-existing arrangements entered into and executed by Oldco. To the extent that this prediction was sufficiently reliable to be regarded as reasonable, the approach was consistent with authority. In considering this question, the Tribunal stated:
While the Commissioner’s alternate postulate tends to overlook that there were factors that induced an awareness of both the need to take steps to protect assets, that there were benefits that taking such steps would or could deliver, that Developco took advice in this regard and that the scheme did produce a degree of protection that was said to be sought (albeit there is debate as to the extent of that degree), that postulate is not inconsistent with the requirement that there needs to be a hypothesis as to what would have occurred but for the scheme and that that hypothesis is sufficiently reliable to be regarded as reasonable.
The Tribunal accepted the Commissioner’s alternate postulate and that the applicant got a GST benefit from the scheme.
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.
Dominant purpose or effect
In considering this issue, the Tribunal reinforced its position (at ) that the test was an objective one, and each of the 12 factors in s 165-15(1) involved objective tests. Also, the Tribunal helpfully outlined its view as to the application of the tests in the following way (at )
It is clear that the transfers of Tower Two and Tower Three by Oldco to Newco1 and Newco2 were commercial transactions which changed ownership arrangements in relation to very valuable interests in land, changed responsibilities under contracts to sell apartments either constructed or to be constructed on the land, and changed responsibilities within the Group for meeting obligations to financiers. However, being a part of a commercial transaction does not, of itself, put the transaction beyond the reach of Division 15 as noted about at paragraph . Accordingly, even if the ultimate objective of the transaction is genuinely commercial or the transaction producing the GST benefit also delivers a desired non tax commercial outcome, Division 165 may still operate. Division 165 might apply if there is enough in the way in which a transaction is entered into or carried out, viewed through the prism of the matters listed in s 165-15(1) of the GST Act, that the purpose of obtaining the GST tax benefit outweighs the commercial objectives. The greater the degree of artificiality or contrivance in the transaction directed to obtaining the GST benefit the greater the prospect that the commercial pursuits of the transaction will not be dominant. Similar conclusions can be drawn if the way the transaction has been entered has “no explanation other than…fiscal consequences…contrived by the particular form of the…transaction.” [emphasis added]
The underlined part of the extract above is interesting. It is similar to applying a “smell test” to a transaction, very much in the way that the ATO appears to undertake audits of transactions.
After considering each of the 12 limbs of s 165-15(1), the Tribunal concluded that the dominant purpose of entering into the scheme for the “Oldco contracts” (being those contracts with purchasers which were entered into prior to the transfer of the Tower to Newco1 or Newco2) was to obtain the GST benefit. For the Newco contracts (ie, contracts with purchasers entered into after the transfer of the Tower), the dominant purpose was found to be asset protection.
In coming to these findings, the Tribunal had regard to the following matters:
- It was necessary to address the analysis of the 12 tests against a backdrop of other possibilities that existed so as to form a view as to whether the steps taken are explained by reference to commercial or non-tax considerations. In this regard, to achieve asset protection it seemed to the Tribunal that there were no immediate answers beyond the mechanism adopted by Developco (ie, transferring Tower Two and Tower Three into separate entities). Further, the steps undertaken were steps commonly taken by corporations to protect assets. This matter was not one where the steps could only be explained by reference to the GST advantages thought to be obtained.
- The fact that the scheme had been brought to Developco by a specialist GST adviser did not bear great weight. Division 165 should not be brought to life merely by the involvement of external advisers. Also, the Tribunal noted that Developco did not proceed with earlier proposals from the adviser which had no asset protection qualities.
- In many respects the transfers of the Towers took the form of ordinary transactions, save that it was between Group entities so in that regard it was expected that the transactions would not contain all the formalities expected if the parties were at arm’s-length.
- The legal form was generally consistent with the economic substance, save that a distinction could be drawn between the supplies made to purchasers where the contracts were entered into with Oldco. For these contracts, Oldco remained liable to potential claims by purchasers and these risks remained, notwithstanding the transfers.
- The delay in the transfer of the Towers pointed to a dominant purpose of obtaining the GST benefit, as the delay produced a greater GST benefit (and also reduced the efficacy of asset protection).
The Tribunal also considered the “principal effect” limb, which does not exist in Part IVA. In doing so, the Tribunal focused not on Developco (as the representative member) but on the participants in the scheme who undertook the transaction. The Tribunal considered each of the 12 tests in s 165-15(1) and appeared to come to a similar conclusion as with the dominant purpose test.
Grounds of the appeal
Interestingly, the taxpayer’s appeal with respect to Division 165 was limited to the question of whether the GST benefit was “attributable” to a choice, application or agreement expressly provided for by the GST law. The taxpayer did not appeal the findings of the Tribunal that there was a GST benefit and that the taxpayer’s dominant purpose of entering into the scheme for the “Oldco contracts” (being those contracts with purchasers which were entered into prior to the transfer of the Tower to Newco1 or Newco2) was to obtain the GST benefit. Accordingly, the Full Court did not discuss that part of Division 165 in the judgment and we will have to wait for another day see how the Federal Court approaches the purpose and effect provisions.
The ground in the Notice of Appeal was as follows:
The Tribunal applied the wrong test in assessing whether Division 165 might apply to the alleged GST benefit, by applying a gloss to the words used by Parliament. The Tribunal erred in saying that the exclusion did not extend to benefits that have some connection with choices that are provided for, in the GST Act, where the benefit is not explained by the choice, but is explained by something else. The Tribunal should instead have found that the alleged GST benefit in this case was attributable to the making of certain elections and choices referred to below, in the sense that there was a causative connection between the making of those elections and choices and the GST benefit, whether or not that was the sole causative connection or the primary causative connection. The elections, choices or agreements in question are those referred to in the reasons of the Tribunal at paragraph 105. [emphasis added]
The elections, choices or agreements relied on by the appellant were as follows:
- The choices made by Blesford and Mooreville to be come members of the GST group, a choice made under s 48-5 of the GST Act;
- The agreement by Simnat and Blesford that the supply of Tower II was of a going concern, an agreemend made under s 38-325(1)(c) of the GST Act;
- The agreement by Simnat and Mooreville that the supply of Tower III was of a going concern, an agreemend made under s 38-325(1)(c) of the GST Act;
- The choices made by Blesford and Mooreville to apply the margin scheme, choices made under s 75-5 of the GST Act.
The appellant’s argument was described by Dowsett J as follows (at ):
A liability for GST would have arisen on the intra-group sales but for Blesford’s and Mooreville’s either joining the group, or agreeing with Simnat that the intra-group sales should be of going concerns. And but for those agreements and the agreements to apply the margin scheme on the end sales, the applicant would have paid full GST on both the transfers from Simnat and on the end sales. This is what the [Commissioner] and the [AAT] ignored. It is only because both of those agreements and choices provided for by the Act that the applicant is liable (but for Div 165) for less tax than if Blesford and Mooreville had not been interposed, that is to say, that the GST benefit exists.
The majority decision
The majority found (at ) that on either version of the “scheme” proposed by the Commisisoner, the integrated steps or arrangements comprising the scheme were:
- Step 1 – a GST-free transfer by Simnat of Towers II and III to Blesford and Mooreville (either because of the application of the going concern provisions or the provisions dealing with transfers between members of a GST group;
- Step 2 – a GST-free supply by Simnat of Towers II and III to Blesford and Mooreville at a supply price which gave rise to a margin between Blesford and Mooreville’s re-supply price for each completed unit to end purchasers and the proportionate acquisition price paid by those companies for each unit, less than the margin that would have prevailed had Simnat completed each unit to an end purchaser; and
- Step 3 – Blesford and Mooreville choosing to apply the margin scheme to supplies by them of units to third party purchasers.
The majority noted that the approach of the Tribunal to s 165-10(1) of the GST Act (ie, whether an entity has obtained a GST benefit apart from the scheme) was not a live issue. Nevertheless, the majority approved of the “hypothetical postulate” approach applied in the context of Part IVA. At  the majority stated:
Having regard to the similarity in the language of the two provisions, and the history of the evolution of Division 165 and its modelling as an anti-avoidance device on the content and structure of Part IVA, there seems to be no good reason not to apply to s 165-10(1), an analysis that involves and inquiry into what the taxpayer would or might reasonably be expected to have done had the scheme as defined in s 165-10(2), and, as found on the facts, not been entered or carried out.
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.
What does this mean?
Each of the judges of the Full Federal Court appeared to ask the same question, namely whether the GST benefit was “attributable” to the choices provided for in the GST law. The majority saw the test as one of “sufficient nexus” between the GST benefit and the choice (or choices) and Dowsett J saw the need for a direct link between the GST benefit and a single choice. At the end of the day there may well be little difference between the tests. The essential difference between the majority and dissenting judgments appears to be found in the application of the tests. The majority found that the relevant cause of the GST benefit was the choice to treat the intermediate sales as going concerns, whereas Dowsett J identified what he saw as “the heart of the scheme”, namely the intermediate sales themselves.
The decision of the majority appears to move away from a narrow construction of “attributable”, which may have supported the conclusion that a single choice etc must be identified or that the GST benefit must be “solely” attributable to a choice etc. Nevertheless, it must be shown that the choice etc is “the predominant cause or the direct cause” of the GST benefit. The challenge going forward may be in the application of that test, as evidenced by the different conclusions reached by the majority and dissenting judges.
This potential uncertainty can be tested by revisiting some of the arrangements identified by the Commissioner in Taxpayer Alerts and Rulings, particularly where the Commissioner identified the existence of an alternative argument surrounding “attribution” in the context of Division 165.
The first arrangement involved the cancellation of GST registration and the subsequent transfer of equipment to a related entity, who then recovered input tax credits under Division 66 for second hand goods. The ruling (at paragraphs 96-97) acknowledges the alternative argument that Division 165 would not apply because the GST benefit was “attributable” to the application made under s 25-55(1) to cancel GST registration. The Commissioner does not accept this argument on the basis that the GST benefit is attributable to the intermediate transfer of equipment from A to B and its subsequent sale to C.
Applying the reasoning of the majority in Unit Trend, the question is whether the application to cancel GST registration was “the predominant cause or the direct cause” of the GST benefit (being the entitlement to input tax credits under Division 66). The intermediate transfer of equipment between A and B and the subsequent sale to C may well be what lies “at the heart of the GST benefit”, however, in the absence of the application to cancel GST registration, there would have been no GST benefit as the intermediate transfer of equipment would have been between members of a GST group. In this context, it may be arguable that the “the predominant cause or the direct cause” of the input tax credits was the application to cancel GST registration.
The arrangement described in this Taxpayer Alert has some similarities with the scheme considered by the Tribunal in VCE and Commissioner of Taxation  AATA 821. Both involve transactions with the following elements:
- purportedly inflated consideration;
- delay in payment;
- a purchaser who accounts on an accruals basis; and
- a vendor who accounts on a cash basis.
The GST benefits from the scheme would appear to be the “inflated” input tax credit to which the purchaser is immediately entitled and the delay in the supplier’s obligation to pay GST until such time as payment is actually made. As found in VCE,the first entitlement to input tax credits would appear to be attributable to the entry into the transaction. However, the delay in the supplier’s payment of GST may well be “attributable” to the choice of accounting for GST on a cash basis.
The GST Act contains a large number of choices, elections and applications that may have a direct impact on whether GST is payable or the timing of GST or input tax credits (the very things giving rise to a GST benefit). In this context, the construction of s 165-5(1)(b) and the word “attributable” is of arguably greater importance than in the income tax context. It remains to be seen whether the Commissioner decides to seek special leave to appeal to the High Court.