1) In a paper presented by Justice Sackville in 2004, his Honour stated:
In Australia, after a slow start following the introduction of Part IVA of the ITAA in 1981, it is becoming increasingly apparent that the general anti-avoidance provisions are central to the operation of the Australian taxation system. This has been made clear by recent decisions of the High Court, notably FCT v Spotless and FCT v Hart. Each of these decisions extended the reach of Part IVA beyond the expectations of many commentators and, perhaps, of many tax planners.
2) One might also think that Division 165 of the GST Act has also had a slow start. Since the introduction of the legislation on 1 July 2000, the Courts and the Tribunal have had little cause to consider the application of Division 165. During that time, two decisions of the Administrative Appeals Tribunal have directly addressed the application of the provisions and two Courts have superficially done so. The Commissioner has also sought to regularly wave the sword of Division 165 in a steady stream of Taxpayer Alerts, GST Determinations and GST Rulings.
3) History tells us that Division 165 will likely follow in the steps of Part IVA and the New Zealand experience. In the Part IVA context it took some 13 years for the first significant decision. In New Zealand, it took some 17 years for the first significant GST anti-avoidance case to come before the Courts. In the Australian GST context, some 12 years on we are waiting expectantly for a decision of the Full Federal Court dealing with Division 165.
4) The aim of this paper is to look at the following matters:
a) A brief overview of Division 165;
b) The decisions of the Tribunal and the Federal Court dealing with Division 165;
c) The ATO’s “pre-emptive strike” approach to Division 165;
d) The types of transactions/issues that may arise with respect to Division 165 in the future.
Division 165 – an overview
5) Section 165-5(1) sets out the basis requirements of the operation of the Division, being:
a) The entity gets a “GST benefit” from a “scheme”;
b) The “GST benefit” is not attributable to the making, by any entity, of a choice, election, application or agreement that is expressly provided for by the GST law;
c) Taking account of the matters described in s 165-15, it is reasonable to conclude that either:
i) An entity (whether alone or with others) entered into or carried out the scheme, or part of the scheme, with the sole or dominant purpose of that entity or another entity getting a GST benefit from the scheme; or
ii) The principal effect of the scheme, or part of the scheme, is that the avoider gets the GST benefit from the scheme directly or indirectly.
6) Division 165 is similar to Part IVA of the Income Tax Assessment Act 1936 (Part IVA), so much is acknowledged in the Explanatory Memorandum, which states at 6.313:
Division 165 reflects the policy underlying the income tax general anti-avoidance provisions found in Part IVA of the Income Tax Assessment Act 1936. However, Division 165 has been designed to meet the needs of a transaction based tax, such as a GST, and accordingly has its own particular features.
At the end of this paper I have extracted paragraphs 153-202 of PLSA 2005/24 – Application of General Anti-Avoidance Rules. These paragraphs outline the ATO’s view as to the application of Division 165.
7) Like Part IVA, the central element of Division 165 is the identification of a “scheme”. Again, like Part IVA, the definition of “scheme” is very broad as is defined in s 165-10 as:
(a) 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; and
(b) any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise.
8) Division 165 is directed at “artificial and contrived schemes”. This can be compared to Part IVA, which does not have that express focus (although the words do appear in the Explanatory Memorandum to the Bill introducing Part IVA).
9) The second element in Division 165 is that an entity gets a “GST benefit” from a “scheme”.
10) Section 165-10(1) provides that an entity gets a GST benefit from a scheme if:
a) An amount that is payable by the entity under the GST Act apart from Division 165 is, or would reasonably be expected to be, smaller than it could be apart from the scheme or a part of the scheme;
b) An amount that is payable to the entity under the GST Act apart from Division 165 is, or would reasonably be expected to be, larger than it could be apart from the scheme or a part of the scheme;
c) All or part of an amount that is payable by the entity under the GST Act apart from Division 165 is, or could reasonably be expected to be, payable later than it would have been apart from the scheme or a part of the scheme;
d) All or part of an amount that is payable by to the entity under the GST Act apart from Division 165 is, or could reasonably be expected to be, payable earlier than it would have been apart from the scheme or a part of the scheme.
The concept of “GST benefit” focuses on quantum and also the timing of payments and refunds.
11) Unlike Part IVA, a “GST benefit” may arise from a part of a scheme.
12) Also, unlike Part IVA, s 165-10(3) provides that a GST benefit can arise “even if there is no economic alternative”. The sub-section states as follows:
An entity can get a *GST benefit from a *scheme even if the entity or entities that entered into or carried out the scheme, or a part of the scheme, could not have engaged economically in any activities:
(a) of the kind to which this Act applies; and
(b) that would produce an effect equivalent (except in terms of this Act) to the effect of the scheme or part of a scheme.
13) The Explanatory Memorandum describes the intended operation of these two sub-sections as follows (at 6.333-6.335):
Subsection 165-10(1) provides that an entity will get a GST benefit from a scheme if a GST benefit would not have arisen, or could not reasonably be expected to have arisen, apart from the scheme or part of the scheme.
This involves an enquiry into what would have occurred if the scheme or part of the scheme had not been entered into or carried out. That enquiry will be in relation to the most economically equivalent transaction to the scheme or part of the scheme actually entered into or carried out.
An entity that gets a GST benefit from a scheme, even if the entity claims it would not have entered into any type of transaction had the actual scheme not been entered into can still have the GST benefit negated under subdivision 165B: subsection 165-10(3).
Like the concept of “tax benefit” in Part IVA, determining whether there is a GST benefit from the scheme requires an investigation into what would have occurred if the scheme, or a part of the scheme, had not been entered into or carried out. The Explanatory Memorandum gives further direction as to the nature of the enquiry, which is to be focused on “the most economically equivalent transaction”. Further, the effect of s 165-10(3) would appear to be that it will not be open to argue that no GST benefit arises because absent the scheme nothing would have been done.
GST benefit is not attributable to a choice or election provided by the GST law
14) Expressly excluded from the operation of the Division is where the GST benefit is “attributable” to the making of a choice, election, application or agreement that is expressly provided for in the GST law.
15) Section 165-5(3) provides that this exclusion will not operate if the scheme, or part of the scheme was entered into or carried out for the sole or dominant purpose of creating a circumstance or state of affairs which was necessary to enable the choice, election, application or agreement to be made.
Dominant purpose/principal effect
16) Like Part IVA, s 165-15 contains a number of factors which must be taken into account in considering an entity’s purpose in entering into or carrying out the scheme. Unlike Part IVA, Division 165 includes the concept of “principal effect” of the scheme. The Explanatory Memorandum describes these tests as follows (at 6.316-6.318):
By considering the dominant purposes o[r] principal effect of a scheme, Division 165 will cover what is commonly considered to be tax avoidance. Bona fide supplies, acquisitions and importations do not come within the ambit of the test.
For example, a financial institution which as economic reasons for bringing its legal and accounting services ‘in house’ will not be caught by Division 165, even though the financial institution will get a GST benefit from that scheme in the form of additional input tax credits.
Another example of a scheme that will not be caught by Division 165 is where an exporter elects to have monthly tax periods in order to bring forward the entitlement to input tax credits.
17) There does appear to be a distinction between “purpose” and “effect”. The “purpose” is the effect with is sought to be achieved whereas the “effect” is the end accomplished or achieved.
18) The matters to be considered are similar to those in s 177D of Part IVA, and are as follows:
a) The manner in which the scheme was entered into or carried out;
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.
c) The purpose and object of the GST Act and any relevant provision of the GST Act (whether that purpose or object is stated expressly or not);
d) The timing of the scheme;
e) The period over which the scheme was entered into or carried out; 
f) The effect that this Act would have in relation to the scheme apart from Division 165; 
g) Any change in the avoider’s financial position that has resulted, or may reasonably be expected to result, from the scheme; 
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 avoider, whether the connection or dealing is or was of a family, business or other nature; 
i) Any other consequence for the avoider or a connected entity of the scheme having been entered into or carried out; 
j) The nature of the connection between the avoider and a connected entity, including the question whether the dealing is or was at arm’s length; 
k) The circumstances surrounding the scheme; 
l) Any other relevant circumstances. 
Declaration negating the GST benefits
19) Section 165-40 provides that for the purpose of negating a GST benefit, the Commissioner may make a declaration stating the amount that is (and has been at all times) the avoider’s net amount for a specified tax period, or the amount that is (and has been at all times) the amount of GST on a specified taxable importation that was made by the avoider.
20) Section 165-55 provides that for the purposes of making this declaration, the Commissioner may effectively reconstruct the transaction or arrangement giving rise to the GST benefit. The Explanatory Memorandum states (at 6.365) that the “reconstruction is linked to finding the most economically equivalent transaction to the scheme or part of the scheme”. The Commissioner may:
a) Treat a particular event that actually happened as not having happened; and
b) Treat a particular event that did not actually happen as having happened and, if appropriate, treat the event as:
i) Having happened at a particular time; and
ii) Having involved particular action by a particular entity; and
c) Treat a particular event that actually happened as:
i) Having happened at a time different from the time it actually happened; or
ii) Having involved particular action by a particular entity (whether or not the event actually involved any action by that entity).
Compensation to another entity
21) Section 165-45 provides that if the Commissioner has made a declaration to negate the GST benefit and the Commissioner considers that another entity gets or got a “GST disadvantage” from the scheme and that it is fair and reasonable that the loser’s GST disadvantage be negated or reduced, the Commissioner may make a declaration in favour of the loser.
22) It would appear that the purpose of this section is to potentially compensate another entity if it is disadvantaged because of the “reconstruction” of events by the Commissioner pursuant to s 165-55. Section 165-50 provides that the declaration has effect despite other provisions in the GST Act. The section is silent on how it interacts with the provisions of Schedule 1 to the Taxation Administration Act 1953, in particular s 105-50.
23) The provisions governing administrative penalties apply to GST benefits obtained under a scheme to which Division 165 applies. The base penalty amount is 50%, but that will be 25% if the matter is reasonably arguable. This will be the case if it would be concluded in the circumstances, having regard to relevant authorities, that what is argued for is as likely to be correct as incorrect, or is more likely to be correct than incorrect. Under this approach, which involves an objective test, the taxpayer must show that “the two arguments, namely, that which is advanced by the taxpayer and that which reflects the correct view will be finely balanced”.
The cases so far
VCE and Commissioner of Taxation  AATA 821; (2006) 63 ATR 1249
24) This was the first decision on Division 165 and it came before Deputy President Forgie of the Tribunal. The facts of the case were deceptively simple and the GST benefit was a timing benefit.
25) SH1 was registered for GST and had elected to account for GST on a cash basis. SH1 owned premises which were leased to a medical centre. GST was paid by SH1 on the rental.
26) On 11 April 2003 VCE was incorporated, with the shares held by SH1 and his wife, with SH1 being the sole director. VCE registered for GST and elected to account for GST on an accruals basis.
27) On 25 April 2003, SH1 and VCE entered into a Contract of Sale whereby VCE agreed to purchase the premises for the price of $770,000 (including GST). The price was payable on the following terms:
a) Deposit of $550 on executing the Contract of Sale;
b) $11,000 on 30 June 2008;
c) $11,000 on 30 June 2013;
d) Balance ($747,750) on 30 June 2018.
e) Until the final payment of the purchase price, ownership of the premises would remain with SH1, but possession would pass to VCE on execution of the Contract of Sale.
28) On 25 April 2003 SH1 issued a tax invoice stating that the GST was $70,000.
29) As at the date of the Contract, there was a mortgage over the premises and SH1 continued to make the repayments under the mortgage (the mortgagee was notified of the sale of the property on 19 February 2004). The monthly rental was continued to be paid to SH1 but the rental was deposited to a bank account in the name of VCE (on 7 January 2004 SH1 entered into a Deed of Renewal and Variation with the lessee, whereby VCE was substituted as the lessor).
30) On 2 May 2003, VCE lodged its first BAS whereby it claimed an input tax credit of $70,000. In the absence of the application of Division 165, there was no dispute that VCE was entitled to claim the credit (and that SH1 would be liable to pay GST progressively over the term of the Contract of Sale, with the majority of the GST due in 2018).
31) The Tribunal found that the scheme commenced with the incorporation of VCE on 11 April 2003 and its registration five days later for GST. The scheme included the entry into the Contract of Sale, the issue of the tax invoice.
32) In considering whether VCE obtained a GST benefit from the scheme, VCE put forward a range of “counterfactuals” and submitted that none of them were sufficient reliable to be regarded as “reasonable”. The Commissioner contended that there were only two possibilities that could have occurred, first that there was no sale by SH1 to VCE and second, there was a sale on terms which gave rise to a lesser GST benefit (eg, on the basis of the market value of the property in 2003, which was in the range of $220,000 to $250,000).
33) The Tribunal rejected VCE’s approach as being inconsistent with the approach mandated by s 165-10(1)(b), which is to look at what would be, or what could reasonably be expected to be, the position apart from the scheme. VCE’s approach would lead to the conclusion that none of the “counterfactuals” were relevant and also that the scheme itself was the only course that could be regarded as being reasonable. Rather, the provision required the Tribunal to look at what would or could reasonably be expected to be, in the case “apart from the scheme” – that is to look at is “separately” or “independently” from the scheme.
34) The Tribunal felt that it was unable to make a finding as to what “would have happened” apart from the scheme, leaving it to predict what would “reasonably be expected” to have happened apart from the scheme. In light of the facts, the Tribunal found that it was reasonable to expect that SH1 might not have sold the premises to VCE at all, thus giving rise to a GST benefit to the extent of the input tax credit.
35) The Tribunal also considered VCE’s submission that the GST benefit was “attributable” to an election that was expressly provided for in the GST Act. It was submitted that the GST benefit (ie, the entitlement to input tax credits) was “attributable” to VCE’s election to register for GST (its turnover being below the annual threshold). In considering this question, the Tribunal found that the expression “attributable to” suggested a causative connection between the GST benefit and a choice or election provided for by the GST law. The Tribunal found that in electing to register for GST, VCE made an election that was expressly provided for in s 23-10 of the GST Act. The Tribunal also noted that registration itself did not give a GST benefit to an entity, but was “an essential first step”. In finding that this “causal link” was not sufficient, the Tribunal found, as a matter of statutory construction, that (at ):
…the “necessary causation” between the GST benefit and a choice or election specifically provided for under the GST Act must be something other than a person’s choice or election to become subject to the GST regime. Therefore, a decision to register for the purposes of the GST Act cannot be properly characterised as being something to which the GST benefit can be attributable within the meaning of s 165-5(1)(b).
In making this finding, the Tribunal noted that if the fact of registration was of itself to be regarded as a sufficient causal link that excludes the operation of Division 165, those provisions would always be excluded.
The Tribunal was also not satisfied that the GST benefit was properly “attributable” to the election to register. The reasoning for this decision was outlined (at ) as follows:
…I am not satisfied that it is VCE’s choice or election to register that gives it the GST benefit. Certainly, registration entitles it to claim an input tax credit and so get a GST benefit but s 165-5(1)(b) is not looking simply to the fact of getting a GST benefit of any sort. Section 165-5(1)(b) refers to “the GST benefit” (emphasis added). That is the particular GST benefit that VCE was given. That is the GST benefit of $70,000. Although VCE would never have been given a GST benefit at all without registration, the particular GST benefit it was given under the GST Act was attributable to the Agreement it reached with SH1. In particular, it was attributable to the decision to defer consideration payable for the Property and to issue a Tax Invoice for the whole amount shortly after the date of the Agreement.
36) VCE also contended that it made an election to account for GST on an accruals basis. The Tribunal rejected that argument (at ) as there was no choice or election provided in the GST Act to so account (albeit that there is a choice or election to account on a cash basis). Further, the Tribunal found that even if it was wrong in taking this view, the GST benefit was not properly attributable to that choice or election.
37) One matter left open by the Tribunal was whether the matters in paragraphs 165-15(1)(k) and (l) allow for the introduction of evidence of the subjective state of mind of SH1 (in both his personal capacity an as the sole director of VCE). These paragraphs (being “the circumstances surrounding the scheme” and “any other relevant circumstance”) are not found in the equivalent provision in Part IVA. The Tribunal stated as follows (at ):
…it would seem that the “circumstances” referred to in ss 165-15(1)(k) and (l) may include those pertaining to SH1 and VCE and may even include their intentions. Those intentions may not determine the matter. They are but two of the twelve matters that mush be taken into account in deciding the questions posed by s 165-5(1)(c).
38) The Tribunal then reviewed each of the matters in s 165-15(1)(a), noting that the section required an evaluation of these matters, some of which may point one way, and others another way. Not surprisingly, after reviewing these factors, the Tribunal found that the dominant purpose of the scheme was to give rise to the GST benefit. In making this finding, some of the relevant findings of the Tribunal included:
a) Despite the lengthy term of the contract and the sizeable final payment, the Contract of Sale made no provision for VCE defaulting on the payment;
b) There was no provision for interest on the deferred payment;
c) There was no evidence that the mortgagee gave formal consent to the sale, as would be expected;
d) No immediate arrangements were made to insure VCE’s insurable interest in the premises as a result of entering into the Contract of Sale;
e) The lessee of the premises was not advised of the “oral assignment of the lease” from SH1 to VCE;
f) The Contract of Sale did not represent a transaction that made any sense whether in a commercial or domestic context. As noted by the Tribunal (at ):
SH1 continues to bear the cost of the Property at least in so far as payment of the mortgage is concerned. SH1 continues to bear the cost of the Property at least in so far as payment of the mortgage is concerned. At the same time, he does not have the benefit of the income stream unless he decides, as VCE’s sole director, to direct that stream to him. If he decides to do that, VCE is left without funds to invest and to pay the instalments when they fall due under the Agreement.
g) Alteration of the timing of the payment of GST and payment of a refund has been altered to the extent that payment of the bulk of the GST is deferred for some fifteen years but is immediately refundable. This results not from the attribution provisions of Division 29 themselves, but from the application of those provisions to the scheme;
h) All of the major elements of the scheme were in place in a period of less then three weeks.
39) The Tribunal (at ) upheld the Commissioner’s application of a 50% penalty and rejected VCE’s contention that its position was reasonably arguable (ie, being about as likely as not correct).
Taxpayer and Commissioner of Taxation  AATA 497
40) This was a far more complex and difficult case involving the margin scheme and GST grouping.
41) The applicant (Developco) was the representative member of a GST group, of which a number of the applicant’s subsidiaries were members (referred to as Oldco, Newco1, Newco2 and Contractors). The dispute centred on the development, and sale to third party purchasers, of apartments in two high-rise towers.
42) Oldco purchased land in April 1999 and obtained development approval for a three tower high-rise development. The first stage of the construction (a retail centre) was completed in October 2000 and Developco then turned its attention to the construction of the residential towers. Apartments in Tower One were sold “off the plan”, applying the margin scheme. Oldco engaged Contractors to construct Tower One in July 2001 and Tower Two in July 2002. By the end of November 2002 all but 27 of the 183 apartments in Tower One had been sold, 69 of the 288 apartments in Tower Two were unsold and 151 of 240 apartments in Tower Three were unsold.
43) By December 2002 construction of Tower One was completed and a survey plan was completed, whereby separate titles were created for the apartments in Tower One and separate lots were created for Towers Two and Three.
44) Up to this time, Developco had followed a pattern of using a separate company to undertake the development and sale of each development, including staged developments. During 2003 and 2004, Developco changed its approach and a decision was made to transfer the partly completed Tower Two and Tower Three developments from Oldco to separate special purpose companies (Tower Two to Newco1 and Tower Three to Newco2). The transfers were effected in April 2004 pursuant to agreements whereby the parties agreed that the sale was a supply of a going concern for a price to be determined by an independent valuer.
45) Following the transfers, the marketing and sale of the lots in Towers Two and Three continued with the same standard form contract of sale. After construction of the Towers was completed, the sales of lots were completed (with Oldco being the named vendor for some contracts and Newco1 and Newco2 respectively, for the remaining contracts) and Developco applied the margin scheme. Developco sought to apply the margin scheme by reference to the purchase price paid by Newco1 and Newco2 respectively to Oldco).
46) The Commissioner conducted an audit and issued assessments on the basis that the margin scheme had no application to the supplies to end purchasers and on the same day made a declaration under Division 165 negating GST benefits in the same amount.
47) The Commissioner initially contended that the sales by Oldco to Newco1 and Newco2 were not going concerns and also that s 48-40(2) of the GST grouping provisions did not operate. Those matters were conceded by the Commissioner and the matter proceeded on the basis that those sales were GST-free. The issues before the Tribunal were:
a) The appropriate “consideration for the acquisition” when calculating the margin scheme on the supplies to end purchasers; and
b) Whether the Commissioner was entitled to make a Division 165 declaration.
48) The Tribunal concluded that, subject to Division 165, for the supplies made to 16 March 2005, the appropriate consideration was a proportional amount of the sale price between Oldco and Newco1 and Newco2 respectively. For the supplies made after 16 March 2005 (after amendments to Division 75), the Tribunal found that acceptable valuations had not been provided for Tower Two or Tower Three, but it was agreed that the matters would be reconsidered upon provision of acceptable valuations. Accordingly, the issue was whether the Commissioner was entitled to make a Division 165 declaration with respect to the pre 16 March 2005 supplies.
Division 165 – preliminary comments
49) The judgment makes some initial comments about the evidence provided by the applicant, which clearly did not assist its case (at ):
There is, and was, an air of unreality that pervaded the written and oral evidence of these witnesses. Time and time again during the course of cross-examination, generally irrespective of the question, and at times uncalled for, references to notions of asset protection were raised. There was, as well, the complete absence of any reference in any document (apart from the accountant’s jottings) to the enormous GST savings, as it turned out, in the order of $21m, that would flow to Developco were the re-structure put in place.
50) The Tribunal also appeared to reject the earlier views of the Tribunal in VCE that subjective evidence may be relevant (at ):
We are however not concerned with matters of subjective motivation. This approach was made clear, among other places, in the decision of Gummow and Hayne JJ in Commissioner of Taxation (Cth) v Hart. It is neither necessary nor appropriate for us to conclude whether witnesses consciously overstated asset protection objectives and consciously omitted reference to potential GST savings, whether their evidence included ex post facto rationalisations or reconstructions (or both), or whether asset protection desires and objectives were embellished (innocently or otherwise) so as to assist in securing a conclusion that getting a GST benefit was not the dominant purpose of the transaction entered. As is often the case, the contemporaneous documents and the prevailing circumstances of the relevant transactions provide a more reliable guide as to the events that occurred than do individual recollections. Because the tests to be applied in determining the dominant purpose or principal effect of a scheme for the purposes of Division 165 are objective (having regard to the matters specified), we do not propose to concern ourselves with subjective assertions of asset protective motives and objects.
This statement shows that the Tribunal adopted a very traditional Part IVA approach to the legislation. It also shows the value of having contemporaneous documentary evidence.
51) The applicant did not dispute the Commissioner’s characterisation of the scheme which was described alternatively as follows (at ):
a) 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.
b) 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.
52) 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).
53) 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.
54) 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.
55) 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
56) As with the earlier Tribunal decision, 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.
57) 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
58) 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.
59) 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.
60) In coming to these findings, the Tribunal had regard to the following matters:
a) 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.
b) 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.
c) 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.
d) 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.
e) 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).
61) 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.
McDonald’s Australia Ltd v Commissioner of Taxation  FCA 37; (2008) 68 ATR 921
62) This case involved the second hand goods provisions in Division 66. In what the Federal Court described in the first paragraph of the judgment as “a novel move”, the applicant applied for summary judgment. The application was not successful. An application for leave to appeal to the Full Federal Court was not also not successful.
63) On 1 July 2002 the applicant was a wholly owned subsidiary of McDonald’s Australia Holdings Ltd (Holdings). Between 1 July 2000 and 30 June 2002, Holdings was the representative member of McDonald’s GST group.
64) On 26 June 2002 Holdings applied to the Commissioner, with an effective date of 1 July 2002, to revoke the approval of Holdings as one of the members of the GST Group, to cancel its registration and to approve the applicant to replace Holdings as the representative member of the GST Group. The application was processed.
65) On 1 July 2002 Holdings and the applicant executed an asset transfer agreement whereby certain plant and equipment was transferred to the applicant for a purchase price of $102,937,406. On 20 December the applicant entered into a number of transactions by which the plant and equipment was sold by the applicant to Lautrec Pty Ltd and leased back. In January 2003, the applicant claimed input tax credits of $9,357,946 in respect of the creditable acquisition and taxable supply of the plant and equipment purchased from Holdings and then onsold.
66) In August 2006 the Commissioner issued a GST assessment whereby the input tax credit was disallowed. The applicant objected to the assessment. In January 2007 the Commissioner made a declaration under s 165-40 of the GST Act purporting to negate a GST benefit in the amount of the input tax credits claimed.
67) The basis of the summary judgment application was that, by reference to the matters in the Commissioner’s appeal statement, it was quite clear that the applicant did not get a “GST benefit” from any scheme that has been or might be identified.
68) The Commissioner contended that the essence of the scheme was that the application by Holdings for deregistration at the time and on the basis upon which it was made with the result that it was not registered at the time of the sale of the plant and equipment to the applicant. The alternate hypothesis was that such application was not made at that time, but was made after the transfer of the assets but before the on-sale to Lautrec. The applicant contended that such an alternate hypothesis must be reasonable and based upon the evidence.
69) In refusing the application, the Court found (at ) that “it was too early” to rule out that hypothesis, which would have meant that input tax credits were not available.
70) The applicant also contended that any GST benefit was attributable to the making by Holdings of a choice, election or application that was expressly provided for by the GST Act, as the application to cancel GST registration was such a choice, election or application. In rejecting this claim, the Court found that this was a question of substance which should be determined in light of the facts as found and with the benefit of full argument as to the operation of the GST Act.
71) This case shows that the Court was reluctant to entertain a summary judgement application where the facts had not been properly found, and particularly given that the onus of showing that the assessments were excessive fell to the applicant. One would imagine that the scope for any taxpayer to succeed on a summary judgment application in Part IVC litigation to be limited.
Pre-emptive activity by the ATO
72) The Commissioner has been actively raising the potential application of Division 165 in attacking what it considers may be “schemes” out in the marketplace which he considers may give rise to a benefit outside the proper scope of the GST Act.
73) The Commissioner’s usual process is to issue a “Taxpayer Alert” describing the scheme, thereby putting taxpayers on notice that the Commissioner is aware of the scheme. The Commissioner will then publish a GST Ruling or Determination outlining his views on the issue in more detail. These views involve a technical analysis of whether the elements of the scheme actually work and, as a fallback position, outline his views on how Division 165 may apply.
74) A feature of most of these arrangements is that participants are introduced by tax advisers who promote the purported GST benefits of the scheme, and this is clearly something that the ATO considers to be relevant in the context of Division 165. In this regard, it is interesting to note the comments of the Tribunal in The Taxpayer where it found that the fact that the scheme had been brought to Developco by a specialist GST adviser did not bear great weight.
GSTR 2004/3 – joint venture provisions and new residential premises
75) This arrangement was initially published as Taxpayer Alert TA 2004/2.
76) This arrangement involved the formation of a GST joint venture for the construction and sale of residential premises. The entity nominated as the joint venture operator purports to sell the completed premises to a participant in the joint venture. It is argued that this sale is not a taxable supply because of s 51-30(2) and also, following this sale, the premises are no longer “new residential premises”. The subsequent sale to a third party is therefore input taxed. Further, input tax credits were claimed for the construction costs incurred by the joint venture operator.
GSTR 2005/3 – second hand goods
77) This arrangement was initially published as Taxpayer Alert TA 2004/9.
78) This arrangement involves the interposing of an entity between a supplier and a recipient so that input tax credits under Division 66 can be claimed. Three different arrangements were identified:
a) Arrangement 1 – cancellation of registration. This is effectively the arrangement considered in the McDonalds’ Case.
b) Arrangement 2 – imported goods.
E, an offshore entity, had previously leased high value goods to an Australian third party (TP). The leased goods are taken offshore where E sells the goods to D, and associated onshore entity registered for GST (not a taxable supply). D then sells the goods to F, an associated onshore entity (a taxable supply because the goods are stated to be delivered or made available in Australia). D does not import the goods. The lease is novated from TP to F. D claims an input tax credit pursuant to Division 66.
c) Arrangement 3 – exported goods.
G exports high value second-hand goods directly to overseas customers. H, an associated entity which is registered for GST, is interposed between G and the customers. H immediately onsells the goods and G claims an input tax credit under Division 66.
GSTR 2005/4 – grouping provisions and new residential premises
79) This arrangement was initially published as Taxpayer Alert TA 2004/7.
80) This arrangement involves the use of the Grouping provisions that purport to avoid GST on the supply of new residential premises. One group member supplies completed premises to another group member and it is argued that the intra-group sale is the first sale of ‘new residential premises’, but is not a taxable supply. The sale of the premises by the acquiring group member is an input taxed supply. The representative member is entitled to input tax credits for the acquisitions in relation to the construction of the premises.
GSTR 2005/5 – grouping provisions
81) This arrangement was initially published as Taxpayer Alert TA 2004/8.
82) The arrangement is similar to that considered by the Tribunal in The Taxpayer, whereby partially or substantially completed premises are sold to an associated entity as a going concern and the acquiring entity then sells the completed premises to third party purchasers under the margin scheme.
GSTD 2006/5 – barter exchanges
83) This arrangement was initially published as TA 2005/4.
84) The arrangement involves a barter exchange which acts as a member with its own trading account to record transactions with its members. The acquisitions always exceeds supplies by significant amounts, so that the barter exchange continually claims GST refunds.
GSTD 2007/2 – GST-free supplies of accommodation
85) This arrangement was initially published as Taxpayer Alert TA 2007/1.
86) The arrangement involves an entitlement to input tax credits by the treatment of otherwise input taxed supplies of residential accommodation as GST-free. The arrangements involved charitable institutions leasing land and buildings to associated charitable institutions in an attempt to increase the cost of making supplies of accommodation to residents and thereby satisfying the concession in s 38-250 where the supply is for consideration for less than 75% of the cost to the supplier of providing the accommodation.
GSTR 2010/1 – residential premises for lease
87) This arrangement was initially published as Taxpayer Alert TA 2009/5.
88) The arrangement involves a landowner (B) who engages an associate (A) to construct residential premises which are to be used to make input taxed supplies by way of lease. A undertakes the construction (or engages an arm’s-length builder) and claims input tax credits on the acquisition. Under the terms of the agreement, A cannot seek any payment from, nor issue an invoice to B until the premises are sold (thereby deferring any GST liability of A). B leases the completed premises to third parties.
Taxpayer Alert TA 2010/7 – retirement village operators
89) This Alert describes an arrangement whereby a retirement village operator (RVO) increases its claims for input tax credits (or for decreasing adjustments) by assuming the role of service supplier and on-selling those services under separate contracts to village residents living in independent living units. The supply of residential accommodation is input taxed but the RVO treats the separate contracts for services (eg, electricity) as taxable supplies. This allows the RVO to claim a higher recovery rate for input tax credits on its acquisitions generally with respect to the retirement village.
GSTD 2011/3 – reduced credit acquisitions
90) This arrangement was initially published as TA 2010/1.
91) The arrangement is where an entity (A) identifies a takeover target (G) and A establishes a subsidiary company (S) to purchase the shares in G. S engages an investment bank to prepare for and plan the takeover, a legal firm and accountants. B and A enter into an agreement whereby B undertakes to supply all the investment banking, legal and accounting services which are necessary to carry out A’s takeover of G. A then seeks to claim a reduced input tax credit on the acquisition of the “arranging service” provided by B.
What does the future hold?
Scope for planning
92) While Division 165 has a similar structure to Part IVA, the drivers for GST structuring is different to income tax. The GST Act is a tax on transactions (or more correctly, “supplies”), with limited exceptions and, as a general rule, the imposition of the GST is to be imposed only on the ultimate consumer. Save for potential timing benefits, there is little need for GST structuring for transactions between registered entities where full input tax credits will be available. Also, at 10% the GST rate is significantly lower than the income tax rate. Given these matters, one would expect that income tax structuring will usually receive greater attention than GST structuring.
93) Nevertheless, as can be seen by the cases to date, and the activities of the Commissioner in publishing Taxpayer Alerts, GST Rulings and Determinations, GST structuring (which the Commissioner considers may warrant the attention of Division 165) is occurring. Also, one would expect that the level of disputes in this area will grow, and that the structuring will get more and more sophisticated.
94) The cases to date, and the Commissioner’s publications, show that the focus of GST structuring has been on the following matters:
a) Timing benefits;
b) Input tax credits, in the context of second hand goods, residential premises and financial supplies;
c) Real property, particularly in the context of “new residential premises”.
In the future, I would expect that the focus of GST structuring will remain on these areas, and will potentially extend to any areas whereby an entity may be able to:
- Defer it’s GST liability or bring forward its entitlement to input tax credits;
- Change the treatment of a taxable supply to a GST-free supply or an input taxed supply;
- Become entitled to input tax credits where there was no corresponding liability to pay GST;
- Increasing its recovery rate for input tax credits for acquisitions used in a business that makes input taxed supplies (eg, retirement villages, financial institutions);
The role of evidence
95) A raft of recent Part IVA cases where the taxpayer has been successful has shown the importance of evidence. The same reasoning should apply for Division 165, as shown by comments made by the Tribunal in The Taxpayer.
96) When I talk of “evidence”, I refer to contemporaneous documents proving relevant facts. This can include:
a) Decision-maker records (eg Board papers)
b) Transaction documents (drafts and finals)
c) Implementation plans (often referred to as “Step Plans”)
d) Communications between parties and advisers (including emails)
e) Letters of advice
f) Financial documents
g) Regulatory documents.
h) Witness statements.
97) An example is found in the decision of Gordon J in Noza Holdings. The arrangement involved a complicated series of transactions between associated companies both here and overseas whereby no cash was actually paid, but the transactions gave rise to very significant Australian taxation consequences. The following extract from the judgment (at -) shows that the transactions likely did not pass the ATO’s “smell test”, but also that the evidence adduced before the Court painted a very different picture when it came to consider the application of Part IVA:
315. The fact that the transactions in issue are all intercompany transactions within a group of companies in which corporate dividends are paid otherwise than in cash, and are transactions believed to have very large Australian taxation consequences, if considered alone would very probably excite the closest attention to the possible application of Pt IVA. But once it is accepted (as it was) that the transactions are part of a legitimate series of intercompany transactions that were undertaken for reasons other than the avoidance of taxation (in Australia or the US), the question becomes whether the particular form of transactions undertaken was entered to achieve the relevant taxation purpose or effect.
316. When then it is observed (1) that the transactions had been partly effected (2) a problem emerged that required solution and (3) the solution chosen (which it was thought had very favourable taxation consequences) was chosen to avoid disturbance of the arrangements that had already been made and upon which the participants had relied in securing a favourable Private Letter Ruling from the IDR, the conclusion that Pt IVA is not engaged must follow.
In this case, the evidence provided to the Court included multiple witness statements and voluminous documentary evidence including step plans, emails, correspondence and advice. On the basis of this evidence, the Court accepted that an issue arising in the US required a solution, one which exposed the taxpayer to risks of disturbing a private ruling obtained to protect the Delaware taxation consequences, and the other which did not expose the taxpayer to those risks but was one which the taxpayer believed would have substantial taxation benefits.
98) As from 1 July 2010 it is open to taxpayers to object to GST private rulings. These rulings can include whether the Commissioner will seek to apply Division 165 to an arrangement.
99) However, there are limitations of the effectiveness of private rulings in the context of anti-avoidance issues. These limitations were noted by the Full Federal Court in Bellinz v Commissioner of Taxation (1998) 84 FCR 154 at 170:
While there is nothing to suggest that in an appropriate case a ruling could not issue on Pt IVA of the Act, both the Commissioner and the taxpayer must be aware of the difficult which a private ruling on a Pt IVA issue will create. Section 177D(b) sets out the various matters to which the Commissioner shall have regard in reaching the conclusion that a person or more than one person entered into or carried out the scheme or any part of the scheme for the purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with it. One of those matters is “the manner in which the scheme was entered into or carried out”. Where the arrangement in respect of which a private ruling is sought has not yet been carried out, it is difficult to see how there could be adequate facts upon which the base a private ruling. Even where the scheme has been carried out, there may in many cases be difficulty in obtaining all relevant facts, particularly those relating to the manner in which the scheme was entered into or carried out.
100) Notwithstanding the above comments of the Federal Court, my experience is that the Commissioner will give favourable private rulings on Part IVA, and there is no reason why he should not also do so on Division 165. However, such rulings will need to be supported with a complete disclosure of all the facts and be supported by evidence.
101) Division 165 has had a bit of a slow start, but the provisions now appear to be gaining momentum. The experience of the NZ equivalent and of Part IVA (in the context of income tax) shows that this is not unusual. Those experiences also show that the number of disputes before the Courts and Tribunals raising Division 165 issues will likely rise.
5 April 2012
DIVISION 165 OF THE GST ACT – GST
153. Division 165 of the GST Act is a general anti-avoidance provision. It is modeled on Part IVA of the ITAA 1936.
154. It gives the Commissioner the discretion to negate a ‘GST benefit’ that an entity gets or got from a scheme to which Division 165 of the GST Act applies. This discretion is contained in section 165-40 of the GST Act.
155. Before the Commissioner can exercise the discretion in section 165-40 of the GST Act, the elements of Division 165 of the GST Act must be satisfied. These may be summarised as follows:
(i) the existence of a ‘scheme’;
(ii) an entity (‘the avoider’) must have obtained a ‘GST benefit’ from the scheme; and
(iii) it must be reasonable to conclude that the sole or dominant purpose of any entity entering into or carrying out the scheme, or part of the scheme, or that the principal effect of the scheme, or part of the scheme, was the obtaining of a GST benefit from the scheme.
156. Regard must be had to the individual circumstances of each case in determining whether to make a declaration under section 165-40 of the GST Act to negate a GST benefit.
157. Division 165 of the GST Act applies whether the scheme, or any part of the scheme, was entered into or carried out inside or outside Australia: subsection 165-5(2) of the GST Act. Additionally, it only applies to schemes entered into on or after 2 December 1998 or carried out or commenced on or after that date; however, it does not apply to schemes carried out or commenced on or after that day that were entered into before that day: paragraph 165-5(1)(d) of the GST Act.
158. Division 165 of the GST Act and Part IVA are similar in their objects, structure and operation. However, there are key differences between Part IVA and Division 165 of the GST Act, and Division 165 has special features. These are highlighted in the following summary of the main provisions of Division 165 of the GST Act.
159. An analysis of the Part IVA cases referred to above will not be repeated. However, until any case authority on Division 165 of the GST Act develops, these cases are a useful guide to the interpretation and application of Division 165 of the GST Act, particularly where the provisions of Division 165 of the GST Act are similar to provisions of Part IVA.
Scheme – subsection 165-10(2)
160. For Division 165 of the GST Act to operate, the identified scheme must fall within the definition of ‘scheme’ in subsection 165-10(2) of the GST Act. The definition in this subsection is virtually identical to the one in the comparable Part IVA provisions (subsections 177A(1) and 177A(3)). Accordingly, paragraphs 54 to 60, in relation to the definition of a scheme in Part IVA, apply equally to the definition of a scheme in Division 165 of the GST Act.
161. Given the very wide definition of ‘scheme’ in subsection 165-10(2) of the GST Act, this element will in most cases be easily satisfied.
GST benefit – subsections 165-10(1) and 165-10(3)
162. Division 165 requires that an entity gets a ‘GST benefit’ from a scheme. Subsection 165-10(1) provides that an entity gets a ‘GST benefit’ if apart from Division 165:
(a) an amount payable by an entity under the GST Act is, or could reasonably be expected to be, smaller than it would be apart from the scheme or a part of the scheme;
(b) an amount payable to an entity under the GST Act is, or could reasonably be expected to be, larger than it would be apart from the scheme or a part of the scheme;
(c) all or part of an amount payable by an entity under the GST Act is, or could reasonably be expected to be, payable later than it would have been apart from the scheme or a part of the scheme; or
(d) all or part of an amount payable to an entity under the GST Act is, or could reasonably be expected to be, payable earlier than it would have been apart from the scheme or a part of the scheme.
163. Consideration of the GST consequences, but for the operation of Division 165 of the GST Act, of an alternative hypothesis or postulate – what would have happened or might reasonably be expected to have happened if the scheme (or part of the scheme) had not been carried out – is required. For guidance, refer to paragraph 69 and following paragraphs above regarding counterfactuals in the Part IVA context.
No economic alternative
164. A special feature of Division 165 of the GST Act, absent from Part IVA, is that Division 165 expressly provides that a GST benefit can arise even if there is no economic alternative to the scheme which produced the benefit. Subsection 165-10(3) of the GST Act provides that a GST benefit can arise even if an entity could not have engaged economically in activities other than the scheme activities. In this way, an entity will not be able to argue against the existence of a GST benefit on the basis that it would not have entered into any type of transaction had the actual scheme not been entered into: Explanatory Memorandum to the A New Tax System (Goods and Services Tax) Bill 1999 at paragraph 6.335.
165. Subsection 165-10(1) of the GST Act is not directed only at liabilities (permanent differences) but is additionally directed at timing benefits. The benefit in paragraph 165-10(1)(c) of the GST Act concerns the deferral of attribution of a liability to GST or an increasing adjustment, and the benefit in paragraph 165-10(1)(d) of the GST Act concerns the acceleration of attribution of entitlement to an input tax credit or decreasing adjustment: refer to paragraph 162.
166. The GST benefits referred to in subsection 165-10(1) of the GST Act operate in relation to net amounts payable by and to a taxpayer for a particular tax period, such as a particular month or quarter: sections 33-3 and 35-5 of the GST Act. Accordingly, in addressing the existence of a GST benefit, officers must determine the effect of a scheme or part of a scheme on net amounts on a tax period by tax period basis.
167. This may mean that a GST benefit could be obtained from a scheme even though a greater amount of GST would be payable under the GST Act over a period of time as a result of the scheme.
Causal nexus – paragraph 165-5(1)(a) of the GST Act
168. For Division 165 of the GST Act to operate, it is also necessary that a sufficient causal nexus between the GST benefit and the identified scheme exists. Paragraph 165-5(1)(a) of the GST Act provides that the GST benefit must be obtained ‘from’ the scheme. Subsection 165-10(1) of the GST Act provides that the GST benefit may also be obtained from ‘part of a scheme’.
GST benefits disregarded – paragraph 165-5(1)(b) of the GST Act
169. Paragraph 165-5(1)(b) of the GST Act essentially constitutes an exclusion from the definition of GST benefit. It provides that Division 165 of the GST Act will only operate if the GST benefit that has otherwise arisen is not attributable to the making of a choice, election, application or agreement expressly provided for by the GST law.
170. The equivalent provision in Part IVA, subsection 177C(2), is worded slightly differently. It qualifies the same exclusion by additionally providing that it will not operate where a scheme is entered into or carried out ‘for the purpose of creating any circumstance or state of affairs the existence of which is necessary to enable the declaration, agreement, election, selection, choice …’ to be made.
171. Despite the absence of an equivalent qualification in paragraph 165-5(1)(b) of the GST Act, the Tax Office considers that the paragraph will not be interpreted so widely as to enable those artificially creating a state of affairs to take advantage of a choice to escape the operation of Division 165 of the GST Act. The wide meaning that can be attributed to ‘scheme or a part of the scheme’ would enable the courts to have regard to steps taken to artificially create any circumstance or state of affairs the existence of which is necessary to enable the choice, election, application, or agreement to be made.
Tax avoidance conclusion – paragraph 165-5(1)(c) and section 165-15 of the GST Act
172. For Division 165 of the GST Act to operate, the drawing of a conclusion about purpose and effect is necessary. Specifically, paragraph 165-5(1)(c) of the GST Act provides that, taking account of the matters listed in section 165-15, it must be reasonable to conclude that either:
(i) an entity entered into or carried out the identified scheme, or a part of the scheme, with the sole or dominant purpose of that entity or another entity getting a GST benefit from the scheme; or
(ii) the principal effect of the identified scheme, or a part of the scheme, is that the avoider gets the GST benefit from the scheme directly or indirectly.
For ease of reference, a conclusion that either of these is the case will be referred to in this practice statement below as a ‘tax avoidance’ conclusion.
173. Accordingly, Division 165 of the GST Act requires the drawing of a conclusion as to either purpose or effect. A determination as to whether either conclusion would be reasonable must be arrived at by taking into account the same twelve matters set out in subsection 165-15(1) of the GST Act.
Dominant purpose test
174. The dominant purpose test in Part IVA, found in section 177D (see also subsection 177A(5)), is essentially mirrored in the test in subparagraph 165-5(1)(c)(i) of the GST Act. Accordingly, the propositions contained in paragraphs 79 to 111 are equally applicable to the dominant purpose test in Division 165 of the GST Act.
175. However, the application of the dominant purpose test in Division 165 of the GST Act requires consideration of the twelve matters in subsection 165-15(1). Paragraph 177D(b) only requires consideration of eight factors. This difference in the matters to be considered in determining purpose (and effect) is addressed separately below.
Principal effect test
176. Division 165 of the GST Act contains an alternative basis for a tax avoidance conclusion, being the principal effect test in subparagraph 165-5(1)(c)(ii) of the GST Act. There is no Part IVA equivalent to this test. Part IVA applies to a scheme only on the basis of it being concluded that a relevant person has the requisite dominant purpose.
177. This principal effect test focuses on the result of a scheme rather than on the purpose attributed to those entering into or carrying out the scheme. Both purpose and effect are ascertained objectively by a consideration of the matters listed in subsection 165-15(1) of the GST Act. However, the enquiry to be undertaken in relation to the principal effect test is directed to the outcome of the scheme, without regard to the imputed purpose of those entering into or carrying out the scheme. The test specifically applies to the avoider and the GST benefit obtained by the avoider: Explanatory Memorandum to the A New Tax System (Goods and Services Tax) Bill 1999 at paragraph 6.344.
178. The effect produced by the scheme must also be ‘the principal’ effect. This means that the most significant or main effect of the scheme must be the securing of a GST benefit by the avoider. It is not sufficient for the GST benefit to be one of several main effects. It must be the most significant or main effect: Senate Supplementary Explanatory Memorandum to the A New Tax System (Goods and Services Tax) Bill 1999 at paragraph 1.121.
179. The test may be satisfied even if a GST benefit, which is the principal effect of the scheme, is obtained in an indirect way. It is not confined to GST benefits directly obtained. That is, it will be satisfied even if the principal effect of the identified scheme is that the avoider got the GST benefit from the scheme ‘indirectly’.
180. While the principal effect test is an alternative test, the criteria for its consideration mirror the objective analysis required to distinguish ordinary commercial dealings from tax avoidance arrangements.
The 12 matters to be considered in determining purpose or effect
181. The propositions contained in paragraphs 79 to 90 concern the correct approach to the consideration and weighing up of the eight factors in paragraph 177D(b) in determining purpose. Where context permits, and with due allowance being made for the absence of the principal effect test in Part IVA, these propositions will generally be equally applicable to a consideration and weighing up of the twelve matters in subsection 165-15(1) of the GST Act in determining purpose or effect.
182. As indicated above, paragraph 177D(b) in Part IVA requires regard to be had to eight factors in considering whether it can be concluded that a relevant person has the requisite purpose, whereas subsection 165-15(1) in Division 165 of the GST Act requires regard to be had to twelve matters.
183. The matters in paragraphs (a), (b), (f), (g), (h), (i) and (j) of subsection 165-15(1) of the GST Act correspond to the factors in subparagraphs (i), (ii), (iv), (v), (vi), (vii) and (viii) of paragraph 177D(b). Paragraph 165-15(1)(b) of the GST Act also refers to the form and substance of a scheme but, in addition to subparagraph 177D(b)(ii), elaborates on the meaning of the ‘form and substance’ of a scheme by indicating that this includes ‘the legal rights and obligations involved in the scheme’ and ‘the economic and commercial substance of the scheme’.
184. The matters in paragraphs (d) and (e) of subsection 165-15(1) of the GST Act together correspond to the factor in subparagraph (iii) of paragraph 177D(b). That is, the timing and period of a scheme are combined into one factor in Part IVA whereas the timing and period of a scheme are separate matters in Division 165 of the GST Act.
185. Accordingly, paragraphs (c), (k) and (l) of subsection 165-15(1) of the GST Act are the only matters in subsection 165-15(1) for which there are no equivalents in paragraph 177D(b) of Part IVA.
186. The matter in paragraph 165-15(1)(c) of the GST Act is ‘the purpose or object’ of the relevant Acts. This matter requires that regard be had not only to the legislative purpose of the GST Act and the Customs Act 1901 but also to any relevant provision of these Acts. If a scheme frustrates the legislative purpose (that is, the legislative scheme), this matter will point in the direction of tax avoidance; if the outcome of the scheme is consistent with the object of the legislation, this will point against a tax avoidance conclusion. In considering legislative purpose officers should have regard to the legislative scheme provided by the legislation together with relevant extraneous material such as explanatory memoranda as appropriate.
187. The matters in paragraphs (k) and (l) of subsection 165-15(1) of the GST Act are, respectively, ‘the circumstances surrounding the scheme’ and ‘any other relevant circumstances’. This requires officers considering Division 165 of the GST Act to consider the surrounding circumstances or any factor that is relevant to the question of whether the arrangement has the purpose or effect of tax avoidance. For example, in determining purpose or effect, officers could have regard to prevailing economic conditions or industry practice attending the scheme.
188. The propositions contained in paragraphs 91 to 111 explain the nature and meaning of the eight factors in paragraph 177D(b). These propositions will be equally applicable to a consideration of the nature and meaning of the equivalent matters in subsection 165-15(1) of the GST Act.
Matters apply to part of a scheme as if it were the entire scheme
189. Subsection 165-15(2) of the GST Act provides that the matters in subsection 165-15(1) of the GST Act apply to part of a scheme as if the part were the entire identified scheme from which the GST benefit was obtained: Explanatory Memorandum to the A New Tax System (Goods and Services Tax) Bill 1999 at paragraph 6.347.
List of public rulings dealing with Division 165 of the GST Act
190. Attachment 6 is a list of taxation rulings and taxation determinations which includes rulings that deal with the application of Division 165 of the GST Act to particular kinds of arrangements.
Declaration to negate GST benefit – sections 165-40, 165-50 and 165-60 of the GST Act
191. If the foregoing elements are satisfied, the Commissioner may exercise the section 165-40 discretion to negate the GST benefit obtained. Section 165-40 of the GST Act provides that the Commissioner may negate a GST benefit by making a declaration stating the net amount payable for a particular tax period or the GST payable on an importation to be a higher amount. It also allows for reductions in net amounts for other tax periods which may be required if the GST benefit is a timing benefit.
192. As is the case with the comparable Part IVA provision, subsection 177F(1), the discretion in section 165-40 of the GST Act must be exercised in good faith.
Single scheme, multiple GST benefits (but not alternative counterfactuals) – same avoider, same tax period(s)
193. If an avoider has obtained two or more separate GST benefits under Division 165 of the GST Act in the same counterfactual scenario (for example, a permanent benefit and a timing benefit), a single declaration identifying each GST benefit and stating the avoider’s net amount for the tax period should be made.
Single scheme, alternative counterfactuals – same avoider and same tax period(s)
194. The correct approach in the case of alternative counterfactuals in respect of a single scheme is to make a single declaration identifying each GST benefit obtained by the avoider and stating the avoider’s net amount for the tax period using the highest ‘GST benefit’.
Multiple schemes, multiple GST benefits – same avoider and same tax period(s)
195. If an avoider has obtained more than one GST benefit from more than one scheme in a particular tax period, a single declaration should be made. This declaration must identify each GST benefit from each scheme and state the avoider’s net amount for the tax period.
Declaration is self-executing
196. The word ‘determination’ is used in section 177F in Part IVA for the decision to cancel a tax benefit. Apart from terminology, another difference between Part IVA and Division 165 of the GST Act is that under subsection 177F(1), to give effect to a determination, the Commissioner must issue an assessment or amended assessment in the usual case. No such requirement exists in Division 165 of the GST Act as a declaration is self-executing: section 165-50 of the GST Act provides that a declaration under section 165-40 of the GST Act has effect according to its terms for the purposes of Division 33 and Division 35 of the GST Act, despite the provisions of the GST Act outside those Divisions and Division 165.
197. Accordingly, the comments concerning the issue of assessments and amended assessments to give effect to Part IVA determinations, in paragraphs 126 to 130, are inapplicable. Nevertheless, it is the Tax Office’s practice, in the absence of extraordinary circumstances, to issue assessments. This is consistent with the Tax Office’s usual practice of issuing assessments at the conclusion of GST audits where a shortfall is found to exist, even though for GST purposes the liability for GST exists independently of and without the need for an assessment.
Declaration may cover several tax periods and importations
198. A single declaration can relate to net amounts for several tax periods and several taxable importations: section 165-60 of the GST Act.
Compensatory adjustments – section 165-45
199. Section 165-45 of the GST Act provides that where an entity gets a GST disadvantage due to another entity getting a GST benefit, the Commissioner may make an adjustment to compensate the disadvantaged entity. The section operates if the following conditions are met:
(a) the Commissioner has made a declaration under section 165-40 of the GST Act;
(b) the Commissioner considers that another entity (the loser) gets a GST disadvantage; and
(c) the Commissioner considers it fair and reasonable that the loser’s GST disadvantage be negated or reduced.
200. The comments in relation to the comparable provision in Part IVA, subsection 177F(3), in paragraphs 136 to 138, are equally applicable. There are no substantive differences between section 165-45 of the GST Act and subsection 177F(3), save that in the case of the latter the additional procedural step of giving effect to a determination is required.
Time limits – sections 22 and 35 of the TAA 1953
201. In the absence of fraud or evasion, the effective time limit for the Commissioner to make a declaration under section 165-40 of the GST Act is within 4 years after the time GST became payable by an entity. A declaration may be able to be made outside that period if the Commissioner has required payment of the relevant net amount of GST by giving a notice to the avoider within the period, but generally officers should make declarations within the 4 year period: section 35 of the TAA 1953. However, any declaration made after 4 years because there has been fraud or evasion must be approved by a DCTC or the CTC.
202. The same penalty regime applies to both Division 165 of the GST Act and Part IVA. Accordingly, paragraphs 142 to 144 are equally applicable.
 Justice Ronald Sackville, Avoiding Tax Avoidance: The Primacy of Part IVA, TIA Victorian/Tasmanian State Convention, 9-11 September 2004.
 A New Tax System (Goods and Services Tax Act) 1999.
 VCE and Commissioner of Taxation  AATA 821; The Taxpayer and Commissioner of Taxation  AATA 497 – this decision has been appealed to the Full Federal Court and judgment was reserved on 1 March 2011.
 McDonalds’ Australia Ltd v Commissioner of Taxation  AATA 497; Platypus Leasing Inc v Commissioner of Taxation  NSWCA 399.
 Peabody v Commissioner of Taxation (1993) 40 FCR 531 and in the High Court, Federal Commissioner of Taxation v Peabody (1994) 181 CLR 359
 Trombotis, E, New Zealand Experience with a GST General Anti-avoidance Rule, GST in Australia Looking forward from the first Decade, at 284 referring to Case W22 (2003) 21 NZTC 11,212.
 Unit Trend Services Pty Ltd ACN 010 382 242 v Commissioner of Taxation, judgment reserved on 1 March 2011.
 S 165-1
 The Explanatory Memorandum to the A New Tax System (Goods and Services Tax) Bill 1998 (Explanatory Memorandum) at 6.304 states “[t]his Division applies to schemes which seek to reduce or delay paying GST, or increase or bring forward a refund of GST”.
 See Barkoczy, The General Anti-Avoidance Provisions –Part IVA with a GST Twist, (2000) 3(1) Journal of Australian Taxation 35 at 6.3.1.
 See s 177D(b)(i)
 See s 177D(b)(ii) save that it does not contain equivalents to sub-paragraphs (i) and (ii).
 There is no equivalent in s 177D
 See s 177D(b)(iii)
 See s 177D(b)(iii)
 See s 177D(b)(iv)
 See s 177D(b)(v)
 See s 177D(b)(vi)
 See s 177D(b)(vii)
 See s 177D(b)(viii)
 There is no equivalent in s 177D
 There is no equivalent in s 177D
 Hill J in Walstern v Commissioner of Taxation (2003) 54 ATR 423 at ; referred to with approval by the Full Federal Court in Pridecraft Pty Ltd v Federal Commissioner of Taxation (2004) 213 ALR 450 at [108-9]
 At .
 At .
 The Tribunal did not consider that the sale of the premises to VCE at the market value could reasonably be expected to occur apart from the scheme.
 At , adopting the approach in Part IVA cases.
 The taxpayer has been appealed to the Full Federal Court. The appeal was heard on 1 March 2011 and judgment remains reserved.
 Federal Commissioner of Taxation v AXA Asia Pacific Holdings Ltd (2010) 189 FCR 204; RCI Pty Ltd v Federal Commissioner of Taxation 2011 ATC 20-275; Federal Commissioner of Taxation v News Australia Holdings Pty Ltd (2010) 79 ATR 461; Noza Holdings Pty Ltd v Federal Commissioner of Taxation 2011 ATC 20-241.
 The Commissioner appealed to the Full Federal Court, but not on the issue of Part IVA.