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

Recap

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

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

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

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

The decisions so far are set out below:

• ACN 154 520 199 Pty Ltd (in liq) and Commissioner of Taxation [2019] AATA 5981 – Tribunal found in favour of the Commissioner – the taxpayer appealed.
• ACN 154 520 199 Pty Ltd (in liquidation) v Commissioner of Taxation [2020] FCAFC 190 190 – Full Federal Court allowed the appeal and remitted the matter to be heard again by the Tribunal.

In similar proceedings running at the same time we have:

• STNK and Commissioner of Taxation [2021] AATA 3399 – Tribunal found in favour of the taxpayer – the Commissioner appealed.
• Commissioner of Taxation v Complete Success Solutions Pty ltd ATF Complete Success Solutions Trust [2023] FCAFC 19 – Full Federal Court allowed the appeal and remitted the matter to be heard again by the Tribunal. My post on the decision can be accessed here.

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

• “All that glitters is not gold”: GST and missing trader fraud (2020)
• “All that glitters is not gold”: Part II – an uncertain future (2021)

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

HNMF and Commissioner of Taxation

Initial observations

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

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

Giving context to the defined terms in this description assists:

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

The Tribunal further observed as follows:

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

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

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

Issue before the Tribunal

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

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

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

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

The Tribunal concluded that the applicant had discharged this burden.

The applicant’s submissions

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

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

The Commissioner’s submissions

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

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

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

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

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

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

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

Division 165

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

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

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

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

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

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

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

Concluding observations of the Tribunal

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

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

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

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

Concluding observations

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

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

The Tribunal has handed down two decisions relating to GST. One confirming the Commissioner’s view of the taxable treatment of a flavoured yoghurt product sold in a plastic tub which included a separate compartment containing a blend of cookie pieces and white chocolate chips which were intended to be “flipped” into the yoghurt for consumption. The other addressed the meaning of a “deposit” for the purposes of Division 99 of the GST Act

Chobani Pty Ltd and Commissioner of Taxation

In Chobani Pty Ltd and Commissioner of Taxation [2023] AATA 1664 the Tribunal agreed with the Commissioner that the sale of the Chobani Flip Strawberry Shortcake flavoured yoghurt (“the Product”) was subject to GST. The Product comprised strawberry flavoured yoghurt which sits in the main compartment of a plastic tub and dry inclusions which sit in a separate smaller compartment of the same plastic tub. The dry ingredients are a blend of cookie pieces and white chocolate chips. The decision discloses that the case was a test case, given the applicant sold a range of “flip” products with different flavours and dry inclusions.

The central question was whether the Product fell within the exclusion from the GST-free treatment of “food” in s 38-3(1)(c), specifically whether the Product falls within the exclusion for “food of a kind specified in the third column of the table in clause 1 of Schedule 1, or food that is a combination of one or more foods at least one of which is food of such a kind.”

The extract in bold was relevant because the dry ingredients included cookie pieces and white chocolate chips, both of which potentially fell within taxable items specified in the table, namely:

• Item 8 – confectionery, *food marketed as confectionery, food marketed as ingredients for confectionery or food consisting principally of confectionery.
• Item 32 – *food that is, or consists principally of, biscuits, cookies, crackers, pretzels, cones or wafers

The Applicant’s primary argument was that the Product was not a “combination” of foods of the kind covered by s 38-3(1)(c). The Applicant submitted that the expression referred to combinations that leave the components sufficiently distinct from one another “that one cannot be regarded as practically, economically and commercially consumed into the other”. The Commissioner submitted that the combination required by s 38-3(1)(c) refers to food “that gives the overall impression of being the product of joining together” two or more food items. That approach, reflecting characterisation cases referring to an overall impression, may conflate construction of the legislation and characterisation of the product: the outcome or product of joining together is a suggested construction of the phrase while the overall impression may inform whether the product has that character.

The Tribunal concluded that there was nothing in the text of the legislation considered in context or the policy of either the food provisions generally or s 38-3(1)(c) that warrants confining the provision in the way the Applicant submitted. Rather, the exclusion applies at least when a product meets the description: food that is a combination of foods that includes separately identifiable food or foods excluded by the table in clause 1 of Schedule 2 or foods of that kind. The Tribunal observed as follows (at [74]):

There may be cases where excluded items remain separately identifiable but nevertheless are so integrated into the overall product, or so insignificant, that they would not affect the characterisation. That is clearly not so in respect of the Product in this case. As discussed below, the dry inclusions are not integrated into the yoghurt and are significant as indicated by their physical separation in the product as sold; relative weight and cost; the marketing of the Product and consumer experience; and indeed, even its naming as a “flip” product.

The Tribunal considered a range of factors in order to form an overall impression of the Product. Ultimately, the Tribunal concluded as follows (at [144]):

Having regard to the physical composition and presentation of the Product; how it is marketed; and the significance of the dry ingredients to the marketing of the Product and the consumer experience, in my view the overall impression that the Product is a combination of strawberry-flavoured yoghurt, cookie pieces and white chocolate chips – in which the cookie pieces and chocolate chips are not insignificant; remain readily identifiable; and are not subsumed into a separate product – is inescapable. It follows that, if the dry inclusions are biscuit goods and/or confectionary, the exclusion in s 38(10(c) applies and the supply of the Product is a taxable supply.

Alternatively, the Applicant submitted that the “dry ingredients” did not fall within items 8 (confectionary) or 32 (cookies) because those ingredients should be regarded as a blend, being acquired from the supplier as a single mix of products. The Tribunal did not find this submission persuasive, observing that it surely would make no difference to the classification of the Product whether the Applicant were to procure the dry inclusions as a blend or procure them separately and undertake the blending itself (at [157]). The Tribunal also observed that the cookie prices comprised 70% of the dry ingredients by weight, suggesting that the “blend” consisted principally of cookies, which also fell within item 32 as “food that…consists principally of…cookies“.

The decision is an example of the difficulties involved in the classification of food products for GST purposes. As observed by the Tribunal (at [75]):

That is the inevitable consequence of the policy decision to exempt some but not all foods, as evidenced by the unfortunate history of sales tax, customs duty and GST litigation here and elsewhere.

Container Homes Designer Domain Pty Ltd and Commissioner of Taxation

In Container Homes Designer Domain Pty Ltd and Commissioner of Taxation [2023] AATA the Applicant entered into an arrangement for King Island Links Pty Ltd (“King Island Links”) to be supplied with 20 customised container homes at $37,300 per unit. Upon entry into the arrangement, King Island Links paid $373,000 (“the Payment”), being 50% of the agreed total price for the units, to Container Homes. Subsequently, King Island Links unilaterally withdrew from the arrangement without taking delivery of any of the homes but stated Container Homes could retain the $373,000. The question was whether a payment equal to 50% of the total price was properly characterised as a “deposit” for the purposes of Division 99. If so (as contended by the Commissioner), its forfeiture was treated as consideration for a supply by the applicant and GST was payable.

The Tribunal observed (at [7]) that the parties referred to the issue whether the Payment was a “deposit” as shorthand for the statutory question of whether it was a “deposit held as security for the performance of an obligation”. The Tribunal adopted the same convenient abbreviation of the issue in the reasons.

The Tribunal made a number of observations on the meaning of a “deposit” and Division 99:

• a deposit is regarded as “an earnest to bind the bargain”
• a deposit may be forfeited by a purchaser irrespective of a vendor having sustained any loss;
• division 99 is not limited to land transactions and is intended to also apply in analogous circumstances to supplies of things other than land
• while the percentage a deposit bears to the total purchase price is relevant, mere consideration of that aspect is not sufficient to determine whether an amount paid by the recipient of a supply is a true deposit – the Courts have accepted that a seller at greater risk between contract and completion might justify a higher deposit on that basis – the Commissioner noted the additional risk borne by Container Homes in entering into the contract to supply the homes; a risk which, as the Commissioner pointed out, came home to Container Homes in this case when it was left liable to pay significant amounts to the supplier and unable to find a buyer for the four units of which it took delivery. The length of the contract, which provided for 120 days between acceptance and completion, may also be relevant in that regard.
• the cases do acknowledge, at least in a real estate context, that a higher percentage deposit may be acceptable where the risks for the vendor are higher than usual. And there were obvious risks for Container Homes in this case. Further, the characterisation of a payment may, depending on the circumstances, be inferred from the use of the word “deposit” and the conduct of the parties.

Ultimately, the Tribunal concluded that the payment was a not a deposit, stating as follows (at [64]):

The amount involved in this case is substantial. As a deposit, it would be extraordinary as a percentage of the selling price. The contract most prominently describes the Payment not as a deposit but as an advance. The potential commercial consequences of characterising a payment as a deposit rather than an advance or part payment – forfeitable in the event of default regardless of whether the seller suffers any loss – are serious. The Tribunal should not rush to infer that the Payment was a deposit without a sound foundation for doing so.

In Konebada Pty Ltd v Commissioner of Taxation [2023] FCA 257 the Federal Court has affirmed the decision of the Commissioner to deny the taxpayer’s claim for input tax credits with respect to invoices paid for legal and other services provided with respect to legal proceedings concerning third parties.

The taxpayer was a family trust and the legal proceedings involved members of the family and affiliated entities (the “family group”). The Court found that the taxpayer had acquired taxable supplies from the advisers, but that these were not “creditable acquisitions” because the acquisitions were not made in the course of the taxpayer’s enterprise – the acquisitions were not made for a “creditable purpose”.

The Commissioner did not dispute that the taxpayer was carrying on an enterprise, but he contended that the enterprise did not extend to include litigation funding activities or the provision of consulting or advisory services to which the acquisitions related. The Court agreed, rejecting the taxpayer’s contention that it was sufficient that the acquisitions were made “while carrying on an enterprise”. The Court found that there was an insufficient connection between the taxpayer’s acquisitions and the achievement of some commercial purpose of the taxpayer to stamp the acquisitions as being made by the taxpayer in carrying on an enterprise.

The decision provides an interesting discussion on the requirements for a “creditable acquisition” under s 11-5 of the GST Act, in particular the need for there to be a sufficient connection between acquisitions made by registered entities and the enterprise carried on by the entity.

Facts

The taxpayer was the trustee of a family trust (Trust). The taxpayer was controlled by a single individual (WL), who was the “Specified Beneficiary” of the trust. The general beneficiaries were defined by reference to their relationship with WL, including the WL’s wife and sons. The Trust was registered fro GST. The Trust and WL were registered tax agents.

The Trust was a party to a number of deeds dated 16 November 2016, each entitled “Litigation Funding Agreement”. The deeds were executed in October 2017. The terms of the deeds were essentially the same. The recital stated that the deed “records the agreement between the Litigation Funder and the Beneficiaries in relation to the payment of Litigation Costs and Litigation Proceeds arising in connection with the Proceedings”. The Proceedings were those court preceedings described in the schedule to the deed.

Clause 2 of the deed provided that the parties acknowledged and agreed that “the Litigation Funder” (the Trust) had, prior to the date of the deed, paid all Litigation Costs and, after the date of the deed, would continue to pay all Litigation Costs. “Litigation Costs” was defined to mean “all costs and expenses paid or payable by the Beneficiaries, or incurred for the benefit of the Beneficiaries, that relate to or arise in connection with the Proceedings”. This included all legal costs.

Clause 3 of the deed provided that in consideration for the payment of the Litigation Costs by the Trust, each of the beneficiaries agreed to pay the Trust any Litigation Proceeds within 5 business days of receipt of such amounts. “Litigation Proceeds” was defined to mean all moneys paid or payable to the beneficiaries in respect of the proceedings, including settlement, court ordered judgement and any costs order. One deed was in slightly different terms, with Litigation Proceeds defined to mean amounts only to the extent that the settlement or judgment amount was greater than $5 million.

The Trust paid invoices rendered by solicitors, barristers and accountants. WL’s evidence was that the Trust was authorised to “conduct” the litigation on behalf of the persons who were the parties to the litigation. All instructions to the lawyers were provided by WL, who considered that he was providing those instructions “as a representative of the [Trust]”. WL’s evidence was that he gave instructions to the lawyers and made a strategic decision about whether and, if so, how to act on the advice. He claimed to have received the advice from the barristers and lawyers on behalf of the Trust and that he, as representative of the Trust, “disseminated” that advice to the members of his family.

The Court accepted that WL was the directing mind of the Trust and that WL sought to co‑ordinate the direction of complex interrelated litigation and that he directed the strategy for the conduct of that litigation. The Court also accepted WL’s evidence that having litigation proceeds paid to the Trust rather than individuals might insulate the proceeds from the claims of future creditors against those individuals. The Court accepted that: WL instructed the lawyers; was the party to whom the lawyers conveyed their advice; WL made strategic decisions concerning whether to accept advice given by the lawyers; and, the Trust paid the invoices rendered by the professional service advisers.

However, the Court observed that the arrangements as described by WL had an air of artificiality, stating that by WL’s description, the Trust received legal advice relating to proceedings or matters to which it was not a party and then formulated recommendations and advised family group entities, and provided instructions to the professional advisors advising in relation to those proceedings or matters and the legal representatives for the parties to those proceedings. The Court observed that: there was no contemporaneous evidence that the Trust conducted, or was legally able to conduct, a practice entailing the provision of legal advice; there were no trustee resolutions or board papers or other documents to support a conclusion that the Trust provided legal advisory services; there was no evidence that the Trust received fees or remuneration for the provision of such services.

The Court did not accept that WL instructed lawyers and received the legal and other services on behalf of the Trust – rather, the Court concluded that he did so for and on behalf of the individuals or entity that was party to the proceedings.

The Court also did not accept that the Litigation Funding Agreements were really agreements for the provision of services. The agreements did not require the Trust to provide some form of service to the beneficiary which would have created a need for the Trust to acquire legal services for its own account. The agreement required the Trust to fund the provision of services by others.

Consideration

The Court observed that two issues were to be resolved:

• Whether the Trust acquired anything by way of taxable supplies; and
• whether the Trust’s acquisitions were made in carrying on an enterprise.

Whether the Trust acquired taxable supplies

The Court accepted the evidence of the advisors that they issued the invoices to the Trust and they considered the Trust to be liable for the payment of the fees. The Court observed that the contemporaneous evidence of any arrangement between the Trust and the lawyers pursuant to which legal services would be provided to the Trust was limited to the fee agreements and engagement letters.

The Commissioner contended that the payments made by the Trust to the beneficiaries’ legal representatives were consideration for the legal services that were supplied to the beneficiaries. It was contended that the Trust had an administrative arrangement with the beneficiaries to pay the invoices that were rendered by the lawyers and the decision of Edmonds J in Professional Admin Service Centres Pty Ltd v Commissioner of Taxation [2013] FCA 1123 was applicable. In that case, the Court denied the claim for input tax credits where the taxpayer had paid the legal fees of third parties. The Court found that the taxpayer did not acquire anything from the lawyers and had simply agreed to pay his legal bills (see [51] of the decision).

The Trust contended that the supply of the Litigation Services was a supply to two parties at the same time – to the beneficiary who was the party to the preceding and to the Trust.

The Court found that the facts were distinguishable from those considered by Edmonds J in Professional Admin Service Centres. Unlike in that case, there was evidence of a pre-existing framework between the Trust and the legal service providers under which the Trust was liable to make payments to the legal service providers as consideration for services provided to the beneficiaries. The engagement with the legal services providers (whether reduced to writing or not) was an arrangement to which the Trust was a party. Unlike the facts in Professional Admin Service Centres, there was more here than the fact that, as a practical matter, the legal service providers looked to the Trust for payment of their fees.

The Court characterised the arrangement as follows:

• By the terms of the arrangements with the advisors, the Trust acquired a right to require the legal advisor to provide legal services to the beneficiaries.
• The Trust acquired from the legal advisor who provided legal services to the beneficiaries a service — the provision of legal advice or services to the beneficiaries. That service was acquired by the Trust in implementation of the arrangement it had agreed with the legal service providers.
• When legal services were provided to the beneficiaries and invoiced to the Trust, the Trust became liable for the payment.
• There was an acquisition by the Trust each time legal services were provided to the beneficiaries.
• The occasion for the payment was the provision of legal services to the beneficiaries.
• The Trust acquired from the legal service providers a service, being the provision of legal advice or legal services to the beneficiaries

Upon finding that the Trust had made an “acquisition” of a taxable supply, satisfying the requirements in paragraphs s 11-5(a) and (b) of the GST Act, the Court observed that this did not mean that the Trust’s acquisition was for a “creditable purpose”. Pursuant to s 11-15(1), a thing thing is acquired for a creditable purpose to the extent that it is acquired in carrying on an enterprise.

Whether the acquisitions were made by the Trust in carrying on an enterprise

The Trust submitted that it made the acquisitions while carrying on its enterprise of providing services and information to the members of the family group.

The Commissioner did not dispute that the Trust was engaged in carrying on some form of enterprise which involved the provision of management‑related services to certain entities, but contended that the nature and extent of the Trust’s enterprise did not extend to include its litigation funding activities or the provision of consulting or advisory services to which the litigation and other services.

The Court observed that it was it is necessary to consider the extent to which the Trust made its acquisitions in carrying on its enterprise. Contrary to the Trust’s contention, it is not sufficient that an acquisition be made “while carrying on an enterprise”. The phrase “in carrying on” requires more than a temporal nexus. Further, the nature and extent of the enterprise must be identified with some precision. Whether a taxpayer is engaged in an enterprise (more specifically, a business) is a matter of fact and degree and requires a “wide survey and exact scrutiny” of the taxpayer’s activities.

The Court found that there was an insufficient connection between the Trust’s acquisition and the achievement of some commercial purpose of the Trust to stamp the acquisition by the Trust as being made in carrying on an enterprise. The Court relied on the following matters:

• The evidence did not support a finding that the Trust carried on a business of providing or disseminating legal advice or of managing professional services for members of the family group. There was no acquisition of services by the Trust in carrying on an enterprise of providing services and information to the members of the family group.
• Nor is there evidence to support a conclusion that the engagement of service providers or the funding of the provision of the litigation or other services was made in the course of an enterprise involving the Trust providing procurement services for the members of the family group.
• The Litigation Funding Agreements do not support a finding that the Trust carried on an enterprise involving the provision or procurement of litigation‑related consultancy or advisory services. The obligation of the Trust under those agreements was to pay invoices.
• Nor do the Litigation Funding Agreements themselves evidence a concern in the nature of trade. The Litigation Funding Agreements required the Trust to incur significant costs which it needed to fund without an entitlement to fees for a service. As was the case in Professional Admin Service Centres at 455–6 [51] (Edmonds J), the prospect of the Trust ultimately making a return on any of the Litigation Funding Agreements was so remote that it had no meaningful nexus to the services that were supplied.

Given the finding of the Court, it was not necessary to consider whether, if the Trust acquired legal services by way of taxable supplies in carrying on an enterprise, the acquisitions relate to making supplies that would be input taxed by reason of being financial supplies.

Welcome to 2023. We start off the year with two decisions of the Full Federal Court.

The decision in Commissioner of Taxation v Landcom [2022] FCAFC 204 (handed down just before Christmas) appears to end the controversy about how the margin scheme in Division 75 of the GST Act applies to the sale of unimproved land by State entities. The decision also clarifies the rights “State” entities have to dispute GST issues with the Commissioner through the objection and appeal regime in Part IVC of the Taxation Administration Act.

In contrast, the decision in Commissioner of Taxation v Complete Success Solutions Pty ltd ATF Complete Success Solutions Trust [2023] FCAFC 19 appears to continue the “gold” saga and the uncertainty as to how the anti-avoidance provisions in Division 165 of the GST Act may apply to combat “missing trader fraud”. The Full Court allowed the appeals both parties and remitted the matter to be heard again by the Tribunal. The Full Court took the same action in ACN 154 520 199 Pty Ltd (in liquidation) v Commissioner of Taxation [2020] FCAFC 190, which also involved gold and missing trader fraud. My post on that decision can be accessed here. We appear to be back to square one on both matters, and without any real clarity going forward. Ultimately, the matter may need to be addressed by the High Court.

Landcom

The Facts

As I appeared for the taxpayer, I deferred posting on this matter until the matter was finalised. I understand that the Commissioner has not sought special leave to appeal to the High Court.

The dispute arose out of the sale of four lots of land by Landcom under a single Contract of Sale, where the parties agreed in writing that the margin scheme was to apply. The lots were contiguous save that one of the lots was separated by a train line. The lots had been held by the State of New South Wales since before 1 July 2000, when the GST was introduced. The lots were previously owned by the New South Wales Land and Housing Corporation (LAHC). On 1 January 2002, the lots were transferred from LAHC to Landcom pursuant to an order of the Minister made under s 17 of the Landcom Act.

A number of the lots had been used for the purpose of farming activities, although these activities had ceased a number of decades before Landcom became the owner of the lots. The lots had also been subject to other human interventions. One lot, for example, had an aero club for remote control plane enthusiasts, including a runway and a clubhouse.

Landcom applied to the Commissioner for a private ruling on whether item 4 of the table in s 75-10(3) of the GST applied to the sale of the lots on the basis that the sale of the freehold interest in each Lot was a single supply. Item 4 of the table provides for a concessional calculation of GST payable under the margin scheme for the sale of a freehold interest in land where the land has been held by the State since 1 July 2000 and the land was unimproved at 1 July 2000. It was common ground that at all times since 1 July 2000 the land and been held by “the State” for the purposes of the GST Act and the margin scheme in Division 75. It was also common ground that the land in each Certificate of Title represented a “freehold interest in land”.

As observed by the primary judge (at [15]), the question of significance for Landcom was the operation of Division 75 in circumstances where four freehold interests in land were sold in one contract. For the purposes of the application of Division 75, was there one supply of all of the lots the subject of the Contract or single supplies of each of the lots. If the sale was a single supply for Division 75 purposes, then any improvement on any one of the lots would be sufficient to take the supply of all of the land outside of the exception provided by Item 4; any improvement on one lot would ‘taint’ all of the lots – in this context, one of the lots contained a runway. If the transaction involved separate supplies of individual freehold interests in land, then some of the lots might fall within Item 4 and some might not.

The Commissioner gave a private ruling concluding that the item 4 of the table required identification of the land that is the subject of the “supply” and for item 4 purposes the supplies of the freehold interests in the Lots comprising the single Contract wa a single supply of land. Therefore item 4 applied to the land in totality. The genesis for the Commissioner’s response is found in GSTR 2006/6 ‘Goods and services tax: improvements on the land for the purposes of Subdivision 38-N and Division 75’, and what is described as the “single supply rule” at paragraphs 47A-51E of the ruling

Landcom objected to the private ruling. By an objection decision, the Commissioner disallowed Landcom’s objection. Landcom lodged an appeal to the Federal Court pursuant to s 14ZZ of the TAA, seeking to invoke the Court’s original jurisdiction to hear and determine an appeal against an objection decision.

The Jurisdiction Issue

Before the Federal Court, the Commissioner contended that the Court did not have jurisdiction to consider the appeal. At the heart of the issue was s 114 of the Constitution which prohibits the Commonwealth imposing “any tax on property of any kind belonging to a State”. To address this prohibition, when the GST was introduced the States and the Commonwealth entered into an “Intergovernmental Agreement” whereby State entities would “voluntarily” pay an amount to the Commissioner equal to the GST they would have had to pay without the prohibition. This voluntary payment is also known as “notional GST”. A detailed discussion of this regime is set out in a paper I presented in 2022 at the Taxation Institute of Australia National GST Conference – “Notional” GST – political compact or Pandora’s box.The paper also has a detailed discussion of the decision of the primary judge with respect to the Commissioner’s contentions on jurisdiction.

The primary judge rejected the Commissioner’s submission that it did not have jurisdiction to hear the appeal brought under Part IVC of the TAA. The reasons can be summarised as follows:

• Landcom voluntarily included “notional GST” in a GST return results in an assessment of a net amount which gives rise to a debt to the Commonwealth and which is enforceable by the Commissioner unless a finding of invalidity is made by a Court of competent jurisdiction. And Landcom could object to such an assessment. Landcom could object to this assessment.
• Landcom has a real interest in knowing how much notional GST to include, voluntarily, in its GST return. It is common practice to obtain the Commissioner’s views via a private ruling before engaging in a proposed course of action (“scheme”). That is one of the purposes of the private ruling system: at [139].
• The statutory scheme, being one which enables a taxpayer to obtain an advisory opinion in advance of taking a step or entering into a scheme, is underscored by s 14ZVA of the TAA 1953 which operates to limit Landcom’s right of objection against a future assessment to a right to object on grounds that neither were, nor could have been, grounds for the objection against the ruling: at [140].
• The Commissioner’s private ruling and objection decision were not “purported” or undertaken as a matter of mere courtesy. They were each authorised by, and made in accordance with, the statutory scheme. Landcom has exercised its right to appeal to this Court under Part IVC of the TAA 1953: at [141].
• Even if a self-assessment which included notional GST did not give rise to a legally enforceable debt, as there was a “matter” before the Court – there was “some immediate right, duty or liability to be established by the determination of the Court”.

The Commissioner did not appeal the finding of the primary judge that the Court had jurisdiction to consider the appeal.

The substantive issue

Landcom’s principal submission before the primary judge was that s 75-5(1)(a) of the GST Act provides separate treatment for any taxable supply of real property made by selling a freehold interest in land. Even if it was possible for a supply of multiple freehold interests to be a single supply under the basic rules, s 75-5(1)(a) (contained in the special rules) focusses upon and treats separately each supply made by selling “a freehold interest in land”. 

The Commissioner submitted that the logical and necessary starting point is identification of “the supply”. The nature of “the supply” will affect whether and how the items in the table in s 75-10(3) apply because s 75-10(3) only applies if “the circumstances specified in an item in the second column of the table in this subsection apply to the supply”: s 75-10(3)(a). Item 4 of the table in s 75-10(3) raises the question whether there were improvements on the “land or premises in question” as at 1 July 2000. Given that the circumstances in Item 4 have to apply to “the supply”, the term “land or premises in question” refers to whatever has been supplied. This is to be understood as a reference to the “tangible land that has been supplied”.

The primary judge agreed with Landcom’s approach and concluded (at [193]) that the logical starting point for the application of Div 75 of the GST Act is s 75-5(1). Relevantly for present purposes, the question was whether there has been a “taxable supply” made “by selling a freehold interest in land”. Contrary to the Commissioner’s submission, s 75-10(3)(a) does not indicate that the identification of “the supply” under s 9-5 is the necessary starting point for the purpose of determining the application of Div 75.

The primary judge concluded (at [196]) that for Item 4, the reference to “the interest” is a reference to the particular freehold interest referred to in s 75-5(1)(a). Contrary to the Commissioner’s submission, the reference to “the land … in question” is a reference to the land to which the particular freehold interest relates, not to the “tangible land that has been supplied”.

The Appeal

On appeal, the Commissioner contended that the primary judge erred in concluding that Div 75 of the GST Act applies separately to each individual freehold interest and that it is not necessary to consider whether the sale of multiple freehold interests constitutes a single supply or four separate supplies. The construction of the primary judge was incorrect because, in applying the GST Act, it is first necessary to identify the “supply” before ascertaining how to calculate the GST payable on that supply. Section 75-10 is concerned with calculating the margin for “the supply”. The term “taxable supply” is defined in s 9-5 of the GST Act and the term “supply” is defined in s 9-10(1) of the GST Act. The “supply” is to be identified pursuant to s 9-10(1). Applying the statute in this way results in there being a single supply and Div 75 is to be applied to that single supply (at [21]).

The Court, in a unanimous decision, dismissed this ground of appeal and agreed with the conclusions of the primary judge. In doing so, the Court made the following observations:

• Characterising a supply as a single supply or multiple supplies under s 9-5 does not determine the calculation of the amount of GST payable, whether that calculation is to be determined for the purposes of s 9-70 or Div 75. The amount of GST payable is to be calculated by applying the terms of Sub‑div 9-C or, if the supply is a taxable supply of real property, the terms of the special rules in Div 75 (at [26]).
• Section 75-5(1) applies to work out the amount of GST on “a taxable supply of real property” where, relevantly, the taxable supply takes the form of a sale of a freehold interest in land: s 75‑5(1)(a). The Commissioner’s contention focusses on the word “supply”, whereas the concept employed in s 75-5(1) is a “taxable supply of real property”. The gateway to Div 75 is a taxable supply of real property. Once a taxable supply of real property has been identified, there is no further need to embark on an inquiry as to whether that supply is a component of another supply by recourse to s 9-10 (at [28]).
• For the purposes of applying the special rules in Div 75, the terms of s 75-5(1)(a) define the subject-matter of the relevant supply as real property that is in the form of “a freehold interest in land”. The subject-matter of the margin scheme in Div 75 is relevantly the sale of a particular freehold interest in land (at [29]).
• The terms of s 75-10 direct attention to the individual freehold interest. Section 75-10 applies to the calculation of GST payable for the supply of the particular legal interest by reference to the “margin for the supply”: s 75-10(1). The margin for the supply is calculated by reference to “the interest, unit or lease in question”: s 75-10(2). The interest, unit or lease in s 75-10(2) is a reference back to the different forms of “real property” in s 75-5(1)(a), (b) and (c), being the juridical concept or intangible legal interest specified in each of those paragraphs: Sterling Guardian Pty Ltd v Commissioner of Taxation  [2006] FCAFC 12;  (2006) 149 FCR 255 at 260  [21] (Heerey, Dowsett and Conti JJ). The reference to “the interest, unit or lease” appears again in item 4 of the table in s 75-10(3). It, too, is a reference back to the legal interest specified in each of the paragraphs of s 75-5(1) (at [30]).
• Where there is a supply of more than one interest, s 75-10, by its terms, applies to each interest (at [31]).

Implications of the decision

The decision of the Full Court confirms that Division 75 applies to the sale of individual freehold interests in land. In the context of sales of land by State entities, I expect the Commissioner will re-visit GSTR 2006/6 ‘Goods and services tax: improvements on the land for the purposes of Subdivision 38-N and Division 75’, and what is described as the “single supply rule” at paragraphs 47A-51E. It is also now clear that State entities have the same review and objection rights as other taxpayers.

The decision may also have broader implications. The observations of the Full Court extended to the margin scheme as a whole, including each of the items in the table under s 75-10(3). Accordingly, where any taxpayer sells land comprised in a number of Certificates of Title under a single contract of sale, the requirements of the items in the table are to be applied individually to each Certificate of Title. This includes the obtaining of an “approved valuation” under s75-35. It would now appear that any such valuation needs to provide a separate valuation for each Certificate of Title.

Complete Success Solutions

“Missing trader fraud” is a problem inherent in value added tax regimes around the world. The fraud occurs here a supplier within a supply chain, upon being funded the GST (or VAT) by the acquirer through an increase in price, fails to pay the GST. The Revenue is left out of pocket where an input tax credit has been paid to the acquiring entity but the corresponding GST revenue is not received.

The decision of the Full Court is another in a line of cases involving missing trader fraud in the context of dealings in gold. A detailed discussion of those cases is beyond the scope of this post, but a deep dive into the issue generally and the previous decisions is available in the papers I presented at the Taxation Institute of Australia National GST Intensive in 2020 and 2021:

• “All that glitters is not gold”: GST and missing trader fraud (2020)

• “All that glitters is not gold”: Part II – an uncertain future (2021)

The Facts

The applicant acquired scrap gold from a single supplier through a series of transactions. The transactions involved two periods which were dealt with differently by the Tribunal. The Commissioner sought to apply Division 165 to both periods.

During the first period, the applicant acquired scrap gold and caused them to be refined into gold bullion and sold as GST-free supplies to two dealers in precious metals. The Full Court observed that the series of transactions could be summarised in the following way:

• An entity known as Manila Exchange acquired gold bullion under a GST-free supply. It defaced or adulterated the gold bullion such that it became scrap gold.
• Manila Exchange sold the scrap gold to GB Refiners. This was a taxable supply. Although the scrap gold had a lower value than the bullion, the supply of scrap gold attracted GST. Manila Exchange was able to profit from its value-lowering operations only because of its fraud, constituted by charging and not remitting GST. The Commissioner did not and does not allege that the applicant was aware of Manila Exchange’s activities in defacing or adulterating the gold.
• GB Refiners on-sold the scrap gold in a taxable supply to PM Melt Service Pty Ltd (PMMS). The scrap gold was then sold by PMMS to the applicant, albeit not coming into the applicant’s possession.
• The applicant caused the scrap gold to be refined and the applicant claimed it then sold the gold bullion to ABCRA and La Gajjar. The applicant treated its sales of gold bullion to ABCRA and La Gajjar as GST-free supplies and claimed input tax credits in relation to its acquisitions of scrap gold. The applicant’s business in the first period was only cashflow positive because: (a) its sale of the bullion did not attract GST; and (b) it was refunded the input tax credits arising in respect of its purchase of the scrap gold.

During the second period, the gold was sold as scrap gold to an offshore entity (Emirates Gold) as a GST-free export. The series of transactions could be summarised as follows:

• A bullion dealer in Singapore sold gold to QN Traders. The sale was at 100.782% of the prevailing spot price.
• QN Traders sold the gold bullion to Manila Exchange at 101.026% of the prevailing spot price. This was a supply of precious metal and therefore not a taxable supply.
• Manila Exchange adulterated the gold bullion thereby producing scrap gold.
• Manila Exchange sold the scrap gold to GB Traders at 92.327% of the prevailing spot price. The supply of scrap gold by Manila Exchange was a taxable supply in respect of which GST was payable. The price charged to GB Traders was a GST-inclusive price. GB Traders claimed an input tax credit for the GST it paid. Manila Exchange did not remit the GST it collected but retained it.
• GB Traders sold the scrap gold to PMMS at 96.518% of the prevailing spot price. This was a taxable supply in respect of which GST was payable.
• PMMS sold the scrap gold to the applicant at 99.097% of the spot price. This was a taxable supply in respect of which GST was payable.
• The applicant exported the scrap gold to Emirates Gold in Dubai at 98.996% of the spot price. The supply of scrap gold by the applicant was GST-free.
• As with the First Period, the applicant never took possession of the scrap gold it acquired from PMMS. The Tribunal described PMMS as “arranging the export of scrap gold on behalf of and in the name of” the applicant. PMMS was paid partly in advance and partly in arrears. the applicant had granted access to PMMS as a signatory to the applicant’s bank account into which the proceeds of sale of scrap gold and the GST refunds were deposited
• Both PMMS and GB Traders made substantial profit though their respective purchases and on‑sales of scrap gold. The profit in respect of the 12 January 2017 transaction was about $20,000 (PMMS) and $35,000 (GB Traders). the applicant made a comparatively small gain of a little over $4,300.
• The applicant treated its sales of scrap gold as GST-free supplies and claimed input tax credits in relation to its acquisitions of scrap gold. Similarly to the position with respect to the First Period, the applicant’s business was only cashflow positive because: (a) its export sale of scrap gold did not attract GST; and (b) it was refunded the input tax credits arising in respect of its purchase of the scrap gold.

The Tribunal’s findings

With respect to the first period, the Tribunal found that the applicant had not established that the two purchasers (ABCRA and La Gajjar) were “dealers in precious metal” as required by s 38-385. Accordingly, the supplies were not GST-free and the applicant was entitled to input tax credits on it acquisitions of the gold and was liable for GST on the supplies it made. The Tribunal did not consider the application of Division 165 because having concluded that the applicant had made taxable supplies, CSS did not obtain a GST benefit for the purposes of Div 165.

With respect to the second period the Tribunal found that the applicant had made export sales of gold and was therefore entitled to input tax credits on its acquisitions of the gold and was not liable for GST on the exports. Further, in relation to the operation of Division 165, while the series of transactions by which the applicant came to acquire and sell scrap gold to Emirates Gold constituted a scheme and the applicant  obtained a GST benefit in the form of input tax credits on its purchases of scrap gold in circumstances where it had no GST liability on its export sales, it would not be concluded that any entity had a dominant purpose of securing the applicant’s entitlement to input tax credits. Further, the principal effect of the scheme was the non-payment of GST by Manila Exchange and not the applicant obtaining input tax credits.

The Full Court observed that the Tribunal’s reasons in relation to the operation of Division 165 were heavily focussed on what it considered to be the “real mischief”, namely Manila Exchange’s failure to remit the GST which it has received in respect of its supplies of scrap gold. The Full Court referred to the following observation of the Tribunal at [113]-[114]:

The real mischief in this case is the non-payment of GST by Manila Exchange. That was the dominant if not sole purpose of the adulteration of the bullion – to allow the bullion to be sold at a GST-inclusive price. That in turn allowed Manila Exchange to retain the GST component of the price it obtained from GB Traders and profit by failing to pay its GST liability to the Commissioner

In those circumstances, accepting the Commissioner’s submission would visit punishment of that fraudulent endeavour not upon its perpetrator but instead upon [CSS], an unconnected entity that received no substantial net benefit from, and had no knowledge of, the scheme. However, I must, and do, put aside that unfortunate prospect and determine whether Division 165 applies solely by reference to the statutory criteria.

Applicant’s cross-appeal re the first period

The principal issue was whether the applicant was denied procedural fairness in respect of the finding that it had not discharged its burden of proving that each of ABCRA and La Gajjar was a dealer in precious metal within the meaning of the GST Act. The applicant contended that the Commissioner did not produce documents in his possession relevant to determining whether ABCRA and La Gajjar were each a dealer in precious metal. This failure was said to be contrary to s 37(1)(b) of the AAT Act.

Although the Commissioner did not accept that there was a denial of procedural fairness in relation to the Tribunal’s findings, having reviewed the material before him, the Commissioner accepted on appeal that a principal part of ABCRA’s enterprise was the regular supply and acquisition of precious metal and that, therefore, ABCRA was a dealer in precious metals. The Commissioner also accepted that the supplies by CSS to ABCRA were of precious metals. The Commissioner therefore conceded that the matter had to be remitted for reconsideration by the Tribunal.

The Court observed that it appeared from the Commissioner’s concession that  the Tribunal miscarried in its statutory function because it was not provided with materials which were not only relevant but were, apparently, critical to the Tribunal’s ability properly to conduct the review of the objection decision before it. The Court was satisfied that the matter ought to be remitted to the Tribunal for reconsideration of the issues concerning the First Period. 

Upon reconsideration, the issue of Division 165 will be live before the Tribunal.

Appeal re the second period

The Full Court observed that the Commissioner’s grounds of appeal largely took issue with the merits of the Tribunal’s conclusions as to dominant purpose and principal effect (questions of fact) rather than identifying a wrong approach or an error of law. At the hearing of the appeal, it appears that a further ground of appeal developed, involving the purpose of entities other than CSS in entering into or carrying out the scheme or parts of the scheme, as was the principal effect of parts of the scheme. After the hearing, the Full Court invited and received submissions on whether the the Tribunal failed properly to address the whole of what was required by s 165‑5(1)(c) in failing properly to consider whether: the sole or dominant purpose of each participant in the scheme, or part of the scheme, engaged s 165-5(1)(c)(i); and for the purposes of s 165-5(1)(c)(ii), the principal effect of the scheme, or of part of the scheme, was that CSS would get the GST benefit from the scheme directly or indirectly.

The Full Court observed that the Tribunal’s analysis of the dominant purpose of GB Traders and PMMS was limited. The Tribunal’s analysis of principal effect was limited to what it considered to be the principal effect of the scheme as a whole – it did not consider the principal effect of parts of the scheme. As a matter of substance, this was because the Tribunal considered that Manila Exchange not remitting GST was: (a) the dominant purpose of one of the parties to the scheme (Manila Exchange) which for some reason was considered to predominate the purposes of other parties to the scheme; and (b) the predominating or principal effect of the scheme as a whole.

The Full Court concluded that on a fair reading of the Tribunal’s reasons it id not complete its statutory task – the Tribunal did not address the whole of what was required by s 165-5(1)(c) because it did not:

• separately examine each entity’s purpose whether focussing on its participation in the scheme as a whole or in relation to particular parts of the scheme; or
• examine the principal effect of the various parts of the scheme.

The Full Court ordered the matter to be remitted to the Tribunal for reconsideration according to law.

Two recent decisions of the Tribunal have dealt with the perennial issue of taxpayers seeking to recover input tax credits after the expiration of the 4 year period in s 93-5 of the GST Act and the membership requirements for a GST group.

In JHKW and Commissioner of Taxation [2022] AATA 2875 the applicant, as a partner of a partnership formed with their spouse sought review of an objection decision of the Commissioner disallowing a claim for input tax credits for the quarterly tax periods between 1 July 2012 and 31 March 2017 on the basis that the business activity statements (BAS) for those tax periods were lodged outside of the four year time limit in s 93-5 of the GST Act.

The Partnership had failed to lodge GST returns for the tax periods commencing July 2012 and the Commissioner had issued a number of letters in relation to the lodgement of those GST returns. On 23 May 2016, the partnership’s ABN was cancelled. On 21 June 2021, the applicant lodged GST returns for the quarterly tax periods between July 2012 and March 2017, claiming input tax credits of $16,361. The Commissioner reversed the claims on the basis that they were claimed outside of the four-year-time-limit within which ITCs can be claimed.

At the hearing, the applicant gave evidence that they had understood that they had been given an extension of time to lodge the BAS and they were not aware of the 4 year time limit – nor were they informed of the limit by the Commissioner.

The Tribunal found that the partnership’s entitlement to input tax credits had ceased by reason of the operation of s 95-3. The Tribunal referred to the following observation of the operation of s 93-5(1) by SM Lazanas in Rosebridge Nominees Pty Ltd (In Liq) v Federal Commissioner of Taxation  [2019] AATA 426,  109 ATR 988 at [998-44]:

With respect to tax periods following 1 July 2012, s 93-5(1) of the GST Act similarly makes it abundantly clear that the entitlement to the ITCs is extinguished in certain circumstances. The use of the word “ceases” is unequivocal in describing the end of the entitlement to claim ITCs, unless certain events have occurred. This conclusion is consistent with the following decisions describing the operation of Division 93: Re Trustee for the SBM Trust and FCT [2015] AATA 174;  (2015) 101 ATR 191 and Re SE Sedgwick and YE Sedgwick and FCT [2015] AATA 690;  (2015) 97 ATR 696.

The Tribunal found that there was no evidence to suggest that the Commissioner granted an extension of time for the partnership to lodge its BAS. In the absence of an extension, the operation of s 93-5 means that after the expiry of 4 years after the day on which the BAS was required to be given to the Respondent, the entitlement to ITCs immediately ceases. Further, the provision of further time within which to give a BAS to the Commissioner cannot be provided retrospectively outside of the relevant 4 year period. There is no discretion to get around the operation of s 93-5.

The decision is a further illustration of the harsh operation of Division 93 of the GST Act.

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In Adcon Resources Vic Pty Ltd and Commissioner of Taxation [2022] AATA 2629 the Tribunal found that the applicant and a related entity did not meet the GST group membership requirements for the period 1 July 2018 to 30 June 2021 and the parties were therefore not entitled to form a GST group for that period.

The applicant was incorporated on 12 March 2018 and registered for GST on a cash basis. On 10 July 2019 the applicant gave notice to the Commissioner that it was seeking to form a GST group with Adcon Contracting Pty Ltd (Adcon Contracting) with a date of effect of 1 July 2018. Adcon Contracting was registered for GST on 25 July 2018, with effect from 1 July 2018, on an accruals basis.

The Commissioner queried the GST group on the basis that it appeared that the companies were not part of the same 90% owned group. ASIC searches disclosed that the shares in the applicant were held by DI, who was also sole director of the applicant. The shares in Adcon Contracting were held by Chale Pty Ltd which was recorded as not being the beneficial owner of the shares. The shares in Chale Pty Ltd were all held by DI.

The applicant said that Chale Pty Ltd held the shares in Adcon Contracting as trustee for a Chale Asset Trust and that it was intended that the shares in the applicant were to also be held by Chale Pty Ltd as trustee for the trust. Due to an error by the accountant, DI was made the shareholder of the applicant and a notice had been lodged with ASIC to correct the shareholding of the applicant. DI also contended that he held the shares in the applicant as trustee pending transfer of the legal title in the shares to Chale Pty Ltd.

At the hearing, the Commissioner contended that at all material times, DI was the sole shareholder of the applicant and Chale Pty Ltd was the non-beneficial shareholder of the shares in Adcon Contracting – and as such, no single company held a 90% stake in both companies. The Commissioner also contended that the GST Act does not allow a trustee for a trust to be the 90% owner – it requires a company to be the 90% owner.

The Tribunal observed that the basis of the applicant’s contentions is that an error was made during the setup of the applicant and as such, its shares were not meant to have been owned by DI. Consequently, he must have been holding them as a nominee or on trust for Chale Pty Ltd. The difficulty for the applicant was the lack of evidence to support this position. For example: there was no evidence before the Tribunal that DI acted on behalf of Chale with regards to the operations or sale of the applicant; there was no evidence that as to the actual submission of the Form 492 to ASIC or any subsequent correspondence between ASIC and the applicant; the share register was not produced; there was no evidence as to whether the applicant paid dividends or who they were paid to. Based on the lack of evidence, the Tribunal was not satisfied that the applicant had discharged its onus.

In Ian Mark Collins & Mieneke Mianno Collins ATF The Collins Retirement Fund and Commissioner of Taxation (Taxation) [2022] AATA 628 (4 April 2022) the Tribunal determined that the applicant taxpayer was liable to pay GST on the subdivision of land into 11 lots and the sale of those lots. The Tribunal found that the applicant was “required to be registered” for GST at the time the sales occurred.

The decision deals with some important issues in the context of GST and the subdivision of land. In particular, whether – as contended by the applicant – the sales were to be excluded from GST turnover pursuant to s 188-25 of the GST Act on the basis that the sales were the mere realisation of a capital asset, or alternatively that the sales were made solely as a consequence of the applicant ceasing to carry on an enterprise or substantially or permanently reducing the size or scale of an enterprise. In considering these questions, the Tribunal observed that in the income tax context, the capital vs revenue distinction was well-traversed, however s 188-25 had not been the subject of judicial consideration and raised untested issues concerning the extent to which the income tax jurisprudence is relevant for GST purposes and the proper application of s 188-25.

The applicant was registered for GST and paid GST on rental receipts from the unsubdivided land, which comprised Lots 11 and 12 and 50 acres in total. Lot 11 was acquired in 1986 and Lot 12 was acquired in 1992. The land was leased from August 2004 and in July 2015 an application was lodged to subdivide the land into 11 rural residential lots. The application was approved in February 2016 and the leases expired in August 2016. In October 2016, the applicant applied to cancel its GST registration and a plan of subdivision was registered in June 2017. 10 of the lots were sold with settlements occurring between June and November 2017. Each lot sold for a price in the order of $1m.

The question was whether the applicant was required to register for GST due to the sales. Registration was required if the applicant was carrying on an enterprise and it met the GST turnover threshold. It was common ground that the applicant, as  the trustee of a superannuation fund, is taken to have carried on an enterprise. The value of the sales exceeded the GST turnover threshold and the issue was whether the sale proceeds were to be excluded from the applicant’s GST turnover pursuant to s 188-25, which required the following supplies to be disregarded:

(a) any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset of yours; and 
(b) any supply made, or likely to be made, by you solely as a consequence of:

(i) ceasing to carry on an * enterprise; or
(ii) substantially and permanently reducing the size or scale of an enterprise.

S 188-25(a) – the sales were not of capital assets

The Commissioner submitted that the expression ‘capital asset’ does not appear elsewhere in the GST Act and that the context of the characterisation of the supply of an asset as a transfer of ownership of a capital asset in s 188-25(a) – in determining an entity’s projected turnover – is quite different to the role played by the revenue/capital distinction in determining the assessibility of receipts or deductibility of outgoings or losses. Further, in the income tax context, in determining whether the proceeds of sale of an asset are on revenue or capital account attention is focused upon whether the seller had an intention, at the time of acquisition of the asset, that the asset would be sold at a profit. In contrast, for s 188-25(a) purposes, the character of an asset must be determined at the time of the supply. This was described by the Commissioner as a ‘key point of distinction from the income tax framework’.

The Commissioner submitted that whether the taxpayer had a profit-making intention at the time of the acquisition of an asset is not determinative for s 188-25(a) purposes. The focus must be on the time a supply of the asset is made or is likely to be made. The applicant agreed with this proposition and the Tribunal adopted the proposition that for s 188-25(a) the character of an asset must be determined at the time the supply is made. The Tribunal observed that the Commissioner did not submit that income tax cases on the capital/revenue distinction should be wholly disregarded and both parties referred to the concept which has evolved in the cases of the mere realisation of an asset in an enterprising way being on capital account.

The Tribunal was of the view that the the applicant’s undertaking amounted to more than a mere realisation of the property in an enterprising way. The works required to achieve the subdivision were substantial. The applicant acknowledges that it spent in total $4,538,757.64 in developing the property in the context of land that in aggregate sold for around three times that amount. The extent of the works is reflected in the nature of the development as stated in the advertising material for the subdivided lots, which referred to fully sealed roads with rolled curb edges; security gates and front road fencing; 2 extensive lakes plus a peaceful pond; landscaping throughout the estate; picnic areas; and a pontoon. The applicant twice applied to modify the development approval; and obtained multiple, costly expert reports in relation to engineering, geotechnical, soil testing, environmental and vegetation management issues. The Tribunal considered that these activities took the character of this matter beyond mere realisation into a commercial venture entered into for the purpose of obtaining the gain on sale of the subdivided lots.

In coming to this view, the Tribunal made the following observations about the role undertaken by the applicant in the development and that the lots were sold as vacant land:

• The engagement by the applicant, who had no professional experience in land development, to provide advice and carry out engineering and construction works and real estate agents to market land is a hallmark of modern subdivision projects. While that may mean the applicant was relatively passive in respect of these activities, the Tribunal did not accept that this weighed heavily in the applicant’s favour in the context of a development of this nature which involved the undertaking of extensive skilled work.
• That the applicant chose to sell vacant land and, as the applicant expressed it, left further profits on the table by not constructing and selling houses on the lots for further profit, provides little assistance to the applicant. Every operator of a land development business that chooses to sell allotments rather than house and land packages has made such a choice.

The Tribunal was not persuaded that the supplies of the subdivided lots were or were likely to be made by way of transfer of ownership of capital assets.

S 188-25(b) – the sales were not solely as a consequence of ceasing to carry on an enterprise

The Tribunal did not accept the Commissioner’s submission that the “enterprise” referred to in s 188-25(b) must be the same enterprise that the applicant acknowledges it carried on; that is, carrying out activities as trustees of a complying superannuation fund. The Tribunal found that the section in its terms refers to ‘an’ enterprise. The Tribunal could see nothing in the context of this provision which would warrant limiting the enterprise referred to in s 188-25(b) to a particular enterprise. The Tribunal accepted the applicant’s submission that it is sufficient to demonstrate that the sales were made solely as a consequence of the applicant ceasing to carry on an enterprise of subdividing and selling the subdivided lots. However, that was not the end of the matter.

The Tribunal did not consider the applicant’s characterisation of the sales, or even the final sale, as made as a consequence of ceasing to carry on the land development was reasonably open, let alone solely as a consequence of the ceasing of that enterprise. The Tribunal considered that it would be quite artificial to say such sales occur in consequence of the business ceasing. The sale of lands was the central objective of a land development enterprise and the sales occurred as part and parcel of – as a consequence of – the ongoing conduct of the enterprise.

Observations

The main takeaway from this decision appears to be that if the applicant had simply sold the pre-subdivided land (lots 11 and 12) after the leases had expired, the sale proceeds would have been excluded under both (a) and (b) of s 188-25. Those lots being capital assets of the leasing enterprise carried on by the applicant. Also, the sale of the lots was made solely as a consequence of ceasing to carry on the leasing enterprise.

The difficulty for the applicant arose due to its decision to subdivide the lots for sale and to undertake activities the Tribunal saw as being more than merely realising the properties in an enterprising way. If the applicant had undertaken a smaller-scale subdivision, the position may well have been different. The line between realising the properties in an enterprising way and carrying on commercial activities is notoriously difficult to draw. There is no bright line test. As observed by the Tribunal, the task inevitably becomes a matter of scale and impression.

Over the last few days three decisions relating to GST have been handed down. One by the Full Federal Court on the GST treatment of gambling supplies (allowing the Commissioner’s appeal) and two by the Tribunal, one on development leases and whether excess GST has been “passed on” (partially in favour of the taxpayer and partially in favour of the Commissioner) and the other on whether the taxpayer was required to be registered for GST (in favour of the Commissioner).

In Commissioner of Taxation v Burswood Nominees Limited as Trustee for the Burswood Property Trust [2021] FCAFC 151 the question was how the special rules in Division 126 of the GST Act for “gambling supplies” applied to amounts paid between junket tour operators and the casino. Section 126-10 provides for the calculation of a “global GST amount” for gambling supplies, being calculated by taking the “total amount wagered” and subtracting the “total monetary prizes”. The resulting amount is then multiplied by 1/11. The effect of the provision is that GST on gambling supplies is to be applied to the margin of the person providing the gambling supplies.

The expression “total amount wagered” is defined as meaning the sum of the “consideration for all of [the taxpayer’s] gambling supplies” that are attributable to the relevant tax period. The word “consideration” is defined by reference to s 9-15 of the GST Act – being “in connection with” the supply. The expression “total monetary prizes” is defined as meaning the sum of (relevantly) “the monetary prizes [the taxpayer] is liable to pay, during the tax period, on the outcome of gambling events…”.

The primary judge ([2020] FCA 1295) agreed with the taxpayer that the special rules in Division 126 of the GST Act applied to the total amount payable between the parties. On appeal, the Full Court agreed with the Commissioner’s contention that the special rules did not apply to commissions and rebates, those being dealt with under the ordinary GST rules. The Full Court concluded that commissions and rebates did not form a part of “total monetary prizes” or “total amount wagered” and were not to be taken into account in calculating the taxpayer’s “global GST amount” under s 126-10.

With respect to commissions and rebates payable by the casino to the junket operator, the Full Court concluded that these amounts were not “monetary prizes” and observed as follows:

• the commission is payable for the marketing, promotion and arrangement of junkets by the junket tour operator to the casino.
• the commissions and rebates are not “prizes” within the ordinary meaning of the word – they are amounts payable by the casino to the junket operator referable to the commercial relationship between them and additional to any amount referable to winnings
• the commissions and rebates are not payable “on the outcome of gambling events” – they re payable as consideration for the provision or marketing and other services of the junket tour operator.

With respect to rebates payable by the junket tour operator to the casino, the Full Court observed that these amounts were not part of the “total amount wagered”, observing as follows:

• the rebates payable by a junket tour operator to the casino are payments to be made as part of, and in connection with, the commercial arrangements for the junket agreed between the casino and the junket tour operator
• the rebates are not payments to be made in consideration for the gambling supplies.

In WYPF and Commissioner of Taxation [2021] AATA 3050 (as I appeared in this matter I provide no comment and merely outline the essential findings) the Tribunal found that certain works constructed by the applicant (Preparatory Works) formed part of the consideration for the acquisition of development land (as non-monetary consideration) but other works (Building Works) did not form part of the consideration for the acquisition of the development land. The applicant chose to to account for GST on its sales of the apartments under the margin scheme conservatively and in calculating the GST the applicant treated the monetary consideration paid for the land as consideration for the acquisition of the land, but did not include the value of the Preparatory Works or the value of the Building Works in calculating the margin on the sales. The Tribunal found that to the extent of the Preparatory Works, the applicant had paid excess GST that it did not pass on to the recipients of its supplies so s 142-20 of the GST Act did not apply to prevent the excess GST being refunded to the applicant.

In Royal Lion Capital Pty Ltd and Commissioner of Taxation [2021] AATA 3049 the Tribunal affirmed the Commissioner’s decision to to register the applicant for GST on the basis that it had exceeded the GST registration turnover threshold of $75,000 from 1 April 2018 and that it was carrying on an enterprise of providing investment services. The Commissioner formed this view based on information obtained in relation to 22 deposits into two bank accounts, from which the Commissioner calculated the applicant’s quarterly sales and corresponding GST payable. The Commissioner did not allow input tax credits in respect of withdrawals amounts from the bank accounts. The Applicant conceded that 8 transactions $91,305.87 were commission and should be classified as GST income. Of the other transactions the Applicant submitted that they related to loans to the applicant from individuals or were interest income received from a loan between other entities for which the applicant acted as intermediary. At the hearing, the Tribunal accepted the contention of the Commissioner that the evidence provided by the applicant was properly described as lacking and unreliable – the applicant had not been able to provide a clear picture of the arrangements between it and the parties with whom it interacted. Critically, the applicant had produced no documentary evidence to support its contention that it did not meet the $75,000 threshold and that effectively the applicant was asking the Tribunal to accept its contentions, based on the word of the applicant. In the absence of corroborating evidence to the contrary, the Tribunal found that the applicant was required to be registered for GST and that the applicant had failed to discharge its onus to prove that the assessments were excessive.

In Federal Commissioner of Taxation v Travelex Limited [2021] HCA 8 the High Court has unanimously allowed the appeal brought by the Commissioner against the decision of the Full Federal Court in Commissioner of Taxation v Travelex Limited [2020] FCAFC 10. This is the second case to reach the High Court, with the first being handed down in 2010 – Travelex v Commissioner of Taxation [2010] HCA 33. The issue in the first case was whether certain supplies of foreign currency by Travelex were GST-free or input taxed. The issue in the second case was, having been successful in the first case, whether Travelex was entitled to interest on subsequent refunds paid by the Commissioner on account of an entitlement to additional input tax credits.

The appeal involved the operation of the “Running Balance Account” provisions in Part IIB of the Taxation Administration Act 1953 (TAA) and whether Travelex was entitled to interest under the Taxation (Interest on Overpayments and Early Payments) Act 1983 (TIOEP Act) on an amount which the Commissioner in fact treated as an “RBA surplus” and and in fact paid to Travelex in the aftermath of the first High Court decision (“Travelex No.1”). The High Court observed that in the course of litigation, the dispute had evolved into a dispute about whether the amount which the Commissioner in fact treated as an RBA surplus was in law an RBA surplus and, in consequence, about whether the Commissioner was obliged to pay interest at all.

It should be noted that the case arose under the “self-actuating” provisions that applied to the GST before the introduction of the self-assessment regime on 1 July 2012.

The High Court set out the facts as follows:

• Travelex No.1 was decided in September 2010. Before the decision, Travelex had on 16 December 2009 notified the Commissioner in a GST return forming part of its Business Activity Statement for its November 2009 tax period of a positive net amount for that period of $37,751. Travelex had soon afterwards paid that positive net amount to the Commissioner.
• After Travelex No. was decided, Travelex wrote to the Commissioner in June 2012 requesting the Commissioner to amend Travelex’s GST return for the November 2009 tax period to increase the amount claimed for input tax credits for creditable acquisitions by $149,020.
• Proceeding on the assumption that it was then permissible to amend a GST return, the Commissioner complied with Travelex’s request. On 28 June 2012, the Commissioner credited the RBA he had established for Travelex by an amount of $149,020 by reference to a “transaction” described in an entry made that day in the RBA as “amended self-assessed amount for the period ended 30 Nov 09”. The date assigned to the entry then made in the RBA was 16 December 2009. On 3 July 2012, the Commissioner sent Travelex a document entitled “Confirmation of revised activity statement for the period 01/11/2009 to 30/11/2009”. The document stated that “the total amount of your activity statement has been changed from $37751Dr to $111269Cr”. Three days later, the Commissioner paid an amount of $149,020 to Travelex by electronic funds transfer.
• Having treated the amount of $149,020 so paid as RBA surplus which he was obliged to pay and did pay to Travelex under the TAA, the Commissioner did not initially dispute that he was obliged to pay interest on the amount under the TIOEP Act. The scope of the dispute between the Commissioner and Travelex was initially limited to the date from which that commonly assumed obligation to pay interest arose. The Commissioner took the view that interest was payable from 17 July 2012. Travelex took the view that interest was payable from 1 January 2010.
• Travelex commenced a proceeding against the Commissioner in the original jurisdiction conferred on the Federal Court by s 39B(1) of the Judiciary Act 1903 (Cth) seeking declaratory and injunctive relief to resolve the dispute about the date from which the commonly assumed obligation to pay interest under the TIOEP Act arose. The Commissioner and Travelex agreed on a Statement of Agreed Facts (“SOAF”) in the proceeding. The SOAF stated as a “fact” that the Commissioner had on 28 June 2012 allocated the amount of $149,020 to Travelex’s RBA with an “effective date” of 16 December 2009. The SOAF also stated as a “fact” that the amount of $149,020 so allocated constituted an RBA surplus.

At first instance, Wigney J resolved the dispute in favour of Travelex. In doing so, his Honour held that neither the GST Act nor the associated provisions in the TAA (as they stood before the introduction of the self-assessment regime on 1 July 2012) gave a taxpayer or the Commissioner authority to amend a GST return. On appeal, the Commissioner’s grounds included that Travelex and the Commissioner lacked statutory authority to amend a GST return ought to have led Wigney J to reject the agreed “fact” in the SOAF that the amount of $149,020 which the Commissioner had on 28 June 2012 allocated to Travelex’s RBA constituted an RBA surplus, with the consequence that his Honour erred in concluding that the Commissioner was obliged to pay interest on that amount to Travelex under the TIOEP Act at all.

The Full Court was unanimous in accepting as correct the holding of Wigney J that neither Travelex nor the Commissioner had statutory authority to amend Travelex’s GST return for the November 2009 tax period. The High Court observed that the correctness of the holding is no longer in dispute and the Full Court divided as to the consequence of that lack of authority. Derrington J agreed with the Commissioner, finding that because the amount then allocated failed to reflect any underlying entitlement of Travelex to a refund of a net amount under the GST Act, the allocation by the Commissioner of the negative amount of $149,020 to Travelex’s RBA on 28 June 2012 was incapable of resulting in an RBA surplus. The net amount for the November 2009 tax period remained in law the positive amount of $37,751 of which Travelex had notified the Commissioner in its GST return on 16 December 2009 and which it had paid. Steward J (Kenny J agreed) took the view that the fact that the Commissioner on 28 June 2012 allocated the amount of $149,020 to Travelex’s RBA with an effective date of 16 December 2009 was enough to result in the amount having the legal status of an RBA surplus as at 16 December 2009. The foundation for that view was an understanding that Pt IIB of the TAA operated to give “the balance recorded in an RBA legal efficacy, even though the balance may be mistaken”.

The sole ground of appeal was that which divided the Full Court and the High Court found that the answer accords with that given by Derrington J. In coming to this conclusion, the High Court made the following observations (at [29]):

• The overall result is that a balance recorded in an RBA must be refunded by the Commissioner as an RBA surplus or paid to the Commissioner as an RBA deficit debt only if the balance is the product of allocations of amounts which accurately reflect obligations of the Commissioner and of the taxpayer under taxation laws.
• An allocation that the Commissioner in fact makes to an RBA of an amount the Commissioner is not legally obliged to pay to a taxpayer under a taxation law cannot result in an RBA surplus any more than an allocation in fact of an amount not legally due to the Commonwealth under a taxation law can result in an RBA deficit debt.

The High Court also dismissed the Notice of Contention filed by Travelex to the effect that the Full Court should have found that the Commissioner had, on or around 28 June 2012, made an assessment of a negative net amount for the November 2009 tax period of $111,269 (being $149,020 less $37,751). The High Court described an “assessment” as a deliberative process directed to, and culminating in, the giving of a notice of assessment, which constitutes conclusive evidence that the amounts and particulars in the assessment are correct except in so far as the assessment might be challenged on a review or appeal under Pt IVC of the TAA.

“Missing trader” fraud occurs where a supplier within a supply chain, upon being funded the GST by the acquirer through an increase in price, fails to pay the GST.

The issue of missing trader fraud in the gold industry was highlighted by two recent decisions of the Administrative Appeals Tribunal where the Tribunal upheld the Commissioner’s decisions to deny the applicants’ entitlement to input tax credits with respect to the acquisition of gold:  

• ACN 154 520 199 Pty Ltd (in liq) and Commissioner of Taxation [2019] AATA 5981
• Cash World Gold Buyers Pty Ltd and Commissioner of Taxation [2020] AATA 1546 – my post on this decision can be accessed here

The issue of “missing trader fraud” was a common theme. Both decisions:

• Disclosed the involvement of “intermediaries” in the supply chain who were able to purchase and sell very large amounts of gold while having limited financial means, and who agreed to sell gold at a price that would mean selling at a loss if the GST was remitted to the Commissioner – making the transactions uncommercial unless the GST was to be retained. 
• Raised the spectre of gold being “recycled” through the supply chain, with its taxable form being altered at some stage in the supply chain from gold bullion (non-taxable) to “scrap gold” (taxable), and one or more suppliers failing to remit GST. 

In the first case the applicant, a gold refiner, satisfied the Tribunal that the gold was acquired in taxable form, but the Tribunal affirmed the decision of the Commissioner to deny the entitlement to input tax credits on the basis that:

• The gold was not acquired for a creditable purpose because the gold was not “refined” by the applicant within the meaning of s 38-385 of the GST Act and the sales of gold bullion by the applicant were therefore not GST-free as the first supply of “precious metal” – rather the sales were input taxed under s 40-100 as a supply of “precious metal”.
• Alternatively, if the gold was acquired for a creditable purpose, the applicant’s entitlement to input tax credits should be denied pursuant to the operation of the anti-avoidance provisions in Division 165 of the GST Act – on the basis that there was a scheme where the dominant purpose or principal effect of acquiring the gold was to obtain the input tax credits.

The taxpayer appealed to the Full Federal Court. In ACN 154 520 199 Pty Ltd (in liquidation) v Commissioner of Taxation [2020] FCAFC 190 the Full Federal Court has unanimously allowed the taxpayer’s appeal and ordered the matter be remitted to a differently constituted Tribunal for determination according to law. The case is complex, with 34 grounds of appeal being relied on by the taxpayer and the judgment running to 232 paragraphs. I have sought to focus on the views of the Court which led to the appeal being allowed.

The construction issue – s 38-385 of the GST Act

Before the Tribunal, the Commissioner’s primary argument was that the applicant did not make creditable acquisitions because the supplies of bullion were not GST-free pursuant to s 38-385 – rather, they were input taxed supplies of precious metal pursuant to s 40-100. This was because the gold acquired was already at 99.99% fineness and the process applied by the applicant to put the gold into bullion form was not “refining” for the purposes of s 38-385 – the gold had already been refined to the requisite standard (ie, 99.5%) before it was acquired by the applicant. The supply of the gold bullion was therefore not “the first supply of that precious metal”. The Tribunal agreed with the Commissioner’s argument.

The Court agreed with the taxpayer that the Tribunal erred in its construction of s 38-385 of the GST Act. The Court found (at [137]) that neither the text nor the context of s 38-385 supports the construction adopted (or preferred) by the Tribunal, namely that “processes which are not directed towards increasing the metallic purity of the gold above the requisite standard of fineness (99.5% in the case of gold) should not be regarded as ‘refining’”. Rather, the ordinary meaning of the word “refining” and he statutory context suggest that the word “refining” in s 38-385 is referring to a process by which metal is brought to a finer state or form. Accordingly, a process that increases the metallic fineness, for example, from 99.5% to 99.99% would constitute “refining”, even though the gold was already at the level of fineness required for precious metal.

The Court concluded (at [142]) that once the Tribunal’s preferred construction of “refining” is rejected, it was clear on the findings of the Tribunal, and the unchallenged evidence before the Tribunal, that the processes of smelting and fluxing undertaken by the taxpayer (a refiner of precious metal) in relation to the scrap gold it received constituted refining. The Court agreed with the taxpayer that the supply of this refined gold, being a precious metal bar that was not previously in existence, was the “first supply of that precious metal”. The Court rejected the Commissioner’s argument that the relevant focus is on the gold that had been refined – which had here previously been supplied as gold bullion in investment form and then deliberately defaced. Accordingly, the supplies of gold bullion by the taxpayer were GST-free as the “first supply of that precious metal” and the taxpayer was entitled to recover input tax credits with respect to the acquisition of the scrap gold.

The Court found that the taxpayer was entitled to input tax credits totalling $122,112,065 in respect of its acquisitions of scrap gold from the suppliers.

The Division 165 issue

Before the Tribunal, the Commissioner’s alternative submission was that the anti-avoidance provisions in Division 165 were engaged to deny the taxpayer’s entitlement to input tax credits with respect to its gold acquisitions totalling approximately $73 million.

The successful grounds of appeal were described by the Court as “the procedural fairness issue”, being whether the Tribunal denied the taxpayer procedural fairness in making certain findings: in particular, whether the Tribunal had denied the taxpayer procedural fairness by relying on three documents which had not been the subject of cross-examination or submission.

The taxpayer’s submissions focused on adverse findings that were said to have been made by the Tribunal as to the credit of the director of the taxpayer, comments that the taxpayer did not put on any evidence to explain matters in the documents and the inference drawn by the Tribunal that the director and the taxpayer were aware that at least some of the scrap gold had been sourced from a related entity of the taxpayer. The documents at issue were two emails between employees of the related entity and the transcript of the director’s compulsory examination by the Commissioner. These documents had been included in the Hearing Book but the documents were not the subject of any cross-examination or submission.

The Court concluded that the Tribunal’s reliance on these documents constituted a denial of procedural fairness. While the the documents were included in the Hearing Book without objection, in the circumstances it could not have been reasonably expected that the Tribunal would rely on these documents to form an adverse view as the director’s credit or to make adverse knowledge findings against the taxpayer.

The Court also found that the Tribunal’s findings of the director’s credit and the knowledge of the taxpayer were integral to the Tribunal’s consideration of whether Division 165 operated. The Tribunal made various points in the reasons regarding the knowledge of the director and the taxpayer and it was  impossible to exclude the possibility (and, to the contrary, it seemed distinctly possible) that these findings were influenced by the adverse view the Tribunal had formed as to the director’s credit on the basis of the two emails and the compulsory examination transcript. The Court found that it was not possible to isolate and put to one side the Tribunal’s reliance on the two emails and the compulsory examination transcript on the basis of the objective nature of the test under Division 165.

The Court concluded that due to the procedural fairness issue, the the Tribunal’s conclusion relating to Division 165 must be set aside and the issue re-determined. The Court observed that while it had power under s 44(7) of the AAT Act to make findings of fact, in the circumstances of this case it would be going beyond the proper role of the Court to re-determine whether Division 165 operates. Among other things, in the process of re-determining the issue it would be necessary to consider afresh, and making findings about, whether (as the Commissioner contended) the taxpayer ought to have known certain matters.  An intensive fact-finding exercise of that nature went beyond the proper role of the Court in an appeal on a question of law under s 44 of the AAT Act. Accordingly, the Court considered it necessary to remit the matter to the Tribunal for determination according to law (that is, to re-determine whether Div 165 operates).

The Court ordered that the matter be remitted to a differently constituted Tribunal to determine the matter according to law.

Where a company becomes an “incapacitated entity” Division 58 of the GST Act seeks to shift the company’s obligation to pay GST and its entitlement to input tax credits to the “representative”, such as the administrator, receiver or liquidator. In Richard Albarran, Brent Kijurina and Cameron Shaw as Joint Administrators of Cooper & Oxley Builders Pty Ltd as trustee for the Cooper & Oxley Builders Unit Trust and Commissioner of Taxation [2020] AATA 4325 the Tribunal was required to address the difficult question of who was entitled to input tax credits where:

• the company accounted for GST on an accruals basis and made the acquisition prior to the appointment of an Administrator; and
• the Administrator accounted for GST on a cash basis and paid for the acquisition after its appointment.

The parties agreed that the company and the Administrator were not each entitled to the input tax credits. The Administrators contended that they were entitled to the credits. The Commissioner contended that the company was entitled to the credits. The Tribunal agreed with the Commissioner.

The nub of the dispute appears to have been whether Division 58, particularly s 58-10(1) which entitles the representative entity to input tax credits “to the extent that the making of the acquisition to which the…input tax credit…relates is within the scope of the representative’s responsibility or authority for managing the incapacitated entity’s affairs“, is only engaged where the acquisition is “made” during the period of appointment – with the effect that the entitlement to input tax credits for creditable acquisitions made prior to the appointment remaining with the company.

The Tribunal undertook a detailed consideration of the text of the provisions, policy considerations and the extrinsic materials and agreed with the Commissioner’s construction of s 58-10 of the GST Act, which confined the section to supplies and acquisitions made by the representative. The Tribunal considered that this reflected a more natural reading of the provision and was coherent with the scheme of the GST Act in relation to GST on taxable supplies and ITCs on creditable acquisitions and their attribution to tax periods. The Tribunal also considered that:

• Nothing in the context of the surrounding provisions, nor the EM, clearly indicates otherwise.
• The practical outcome of this construction – that representatives are only liable for GST on taxable supplies, and entitled to ITCs on creditable acquisitions, which they actually make, and not on supplies and acquisitions made before their appointment by an entity over which they had no control – was not suggestive of a manifestly absurd, unreasonable or improbable intention to attribute to Parliament.