FEDERAL COURT OF AUSTRALIA
Unit Trend Services Pty Ltd v Commissioner of Taxation [2012] FCAFC 112
IN THE FEDERAL COURT OF AUSTRALIA | |
UNIT TREND SERVICES PTY LTD ACN 010 382 242 Applicant | |
AND: | Respondent |
DATE OF ORDER: | |
WHERE MADE: |
THE COURT ORDERS THAT:
1. Having regard to the reasons for judgment published today, the parties are directed within seven days to propose draft orders for the disposition of the appeal and cross-appeal by lodging the draft orders with the Associate to the presiding judge, and in default of agreement, the parties are directed within a further seven days to make and file written submissions as to the forms of order.
2. Within the period of 14 days described in Order 1, the parties are to make and file written submissions as to costs, should the parties not be otherwise able to agree the terms of an order as to costs.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
QUEENSLAND DISTRICT REGISTRY | |
GENERAL DIVISION | QUD 337 of 2010 |
ON APPEAL FROM THE ADMINISTRATIVE APPEALS TRIBUNAL |
BETWEEN: | UNIT TREND SERVICES PTY LTD ACN 010 382 242 Applicant
|
AND: | COMMISSIONER OF TAXATION Respondent
|
JUDGES: | DOWSETT, BENNETT AND GREENWOOD JJ |
DATE: | 17 AUGUST 2012 |
PLACE: | BRISBANE |
REASONS FOR JUDGMENT
DOWSETT J
1 I have read the reasons prepared by Bennett and Greenwood JJ. In light of their Honours’ detailed identification of the evidence and issues, I need not deal at length with those matters.
BACKGROUND
2 By contract dated 14 December 1998, Simnat Pty Ltd (“Simnat”) agreed to purchase certain land at Surfers Paradise (the “original block”), which contract was settled on 20 April 1999. Simnat subsequently obtained approval for a development which included the construction, on the original block, of three residential towers (“Tower 1”), (“Tower 2”) and (“Tower 3”). On 31 July 2001 Simnat entered into a construction contract for Tower 1. By December 2002 it was completed. On 13 December 2002 a strata plan was registered for each of 183 units in Tower 1. Simnat sold units in Tower 1 “off the plan”. Pursuant to Div 75 of the A New Tax System (Goods and Services Tax) 1999 (Cth) (the “GST Act”) it applied the “margin scheme” to those supplies. I shall explain the margin scheme at a later stage. At the time of registration of the strata plan, the original block was subdivided so that the land on which each of Tower 2 and Tower 3 was being, or was to be constructed, was subdivided into separate blocks with separate titles.
3 On 1 July 2002, Simnat entered into a construction contract for Tower 2. On 14 April 2004 Simnat sold Tower 2 (still incomplete) to Blesford Pty Ltd (“Blesford”) at a price to be fixed by an independent valuer. It was eventually fixed at $149,800,000.00. The parties agreed that, for the purposes of s 38-325 of the GST Act, the sale was of a going concern. The sale was therefore “GST free”. As Simnat and Blesford were members of a GST group for the purposes of Pt 48 of the GST Act, the supply was also, pursuant to s 48-40(2), to be treated as if it were “not a taxable supply”. I shall shortly explain these statutory concepts. Simnat had, prior to the sale, entered into contracts for the sale of some of the units in Tower 2. Simnat assigned to Blesford all of its rights under such contracts and under the construction contract. The contract for the sale of Tower 2 by Simnat to Blesford was settled on 7 May 2004. Thereafter, Blesford sold the remaining units. Blesford completed all contracts of sale which it had entered into and those entered into by Simnat. Pursuant to s 75-5 of the GST Act, it chose to apply the margin scheme to those supplies.
4 On 29 January 2003 Simnat entered into a construction contract for Tower 3 and commenced to sell units in that building. By contract dated 15 April 2004 it sold Tower 3 to Mooreville Investments Pty Ltd (“Mooreville”). The purchase price was to be determined by an independent valuer. It was eventually fixed at $109,500,000.00. Again, it was agreed that the sale was of a going concern. As Mooreville was a member of the same GST group as Simnat and Blesford, it was also a sale within a GST group and therefore treated as not being a taxable supply. Simnat assigned to Mooreville all of its rights under the construction contract and the contracts for sale of units. Settlement of the contract for sale to Mooreville was delayed, but Mooreville eventually obtained title on 23 November 2004. It then began to sell units. Commencing on 8 December 2004 Mooreville settled the contracts for sale entered into by it and Simnat. Mooreville chose to apply the margin scheme to such supplies.
THE GST SCHEME
5 Section 9-40 of the GST Act imposes Goods and Services Tax (the “GST”) on any taxable supply. Pursuant to s 9-10 a supply is “any form of supply whatsoever”. Section 9-5 defines a taxable supply in this form:
You make a taxable supply if:
(a) you make the supply for consideration; and
(b) the supply is made in the course or furtherance of an enterprise that you carry on; and
(c) the supply is connected with Australia; and
(d) you are registered or required to be registered.
However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.
6 One category of GST-free supply is the supply of a “going concern”. Pursuant to s 38-325 the supply of a going concern is GST-free if:
(a) the supply is for consideration; and
(b) the recipient is registered or required to be registered; and
(c) the supplier and the recipient have agreed in writing that the supply is of a going concern.
7 Pursuant to s 9-30(2) a supply is input taxed if:
(a) it is input taxed under Division 40 or under a provision of another Act; or
(b) it is a supply of a right to receive a supply that would be input taxed under paragraph (a).
8 The concepts of GST-free supply and input taxed supply are only marginally relevant for present purposes.
9 GST is generally levied on the consideration for a supply. In many, perhaps most cases, the supplier will have acquired goods and services for use in producing the subject of its ultimate supply. Such supplies to the ultimate supplier will usually have been taxable supplies on which GST has been paid. In order to avoid taxation upon taxation throughout the supply chain, Div 11 of the GST Act establishes the concept of “creditable acquisition”. In effect the GST payable on the ultimate supply will be reduced by the amounts of GST paid on earlier supplies in the supply chain. Such amounts are called “input tax credits”. There are exceptions to this simplified description, one of which concerns the supply of interests in land.
GST GROUPS
10 Division 48 of the GST Act allows companies within a group to be approved as a “GST group”. In such a group one member of the group (the representative member”) “deals with all the GST liabilities and entitlements” of group members, subject to certain exceptions. Further, in most cases intra-group transactions are excluded from GST liability (see s 48-40(2)). The applicant (“Unit Trend”) is the company nominated as the representative member of a GST group which includes at least Unit Trend, Simnat, Blesford and Mooreville. Unit Trend therefore bears the GST obligations which would otherwise be incurred by individual members. It is also entitled to the benefit of any creditable acquisitions to which other group members may be entitled. At all relevant times since May 2004, Unit Trend, as the representative member, has reported GST payable on sales in Tower 2 and Tower 3, applying the margin scheme, and based on the consideration paid to Simnat in each case for acquisition of the relevant land and building under construction.
THE MARGIN SCHEME
11 In dispute between Unit Trend and the respondent (the “Commissioner”) is the basis for calculation of the margin upon which the GST on the supply of the units is to be calculated. For the reasons outlined by Bennett and Greenwood JJ, the GST Act makes special provision for the calculation of GST liability in the case of the supply of freehold interests, stratum units and long term leases. It is called the “margin scheme”. Division 75 permits a choice as to whether the margin scheme is to apply to a supply. When the margin scheme applies, GST is calculated on the “margin” rather than on the consideration for the supply. Broadly speaking, the margin is the difference between consideration for the relevant taxable supply and the cost of acquisition of the land (or a relevant part thereof, or interest therein) or, in some cases, between the consideration and a relevant valuation. Such acquisition is not a creditable acquisition and does not attract input tax credits. However other supplies received in the course of making the ultimate taxable supply, will generally be creditable acquisitions yielding input tax credits.
THE 2005 ACT
12 During the presently relevant period, the provisions concerning the margin scheme changed in ways which affect Unit Trend’s liability to GST on the sales of units in Tower 2 and Tower 3. The changes were effected by the Tax Laws Amendment (2005 Measures No 2) Act 2005 (Cth) (the “2005 Act”). Hereafter, I shall refer to provisions in Div 75, as they were in force prior to the commencement of the 2005 Act, as “pre-amendment” and to provisions, as amended by that Act, as “as amended”. It may assist if I explain the relevant amendments rather than set out the original provisions and the amending provisions. Broadly speaking the amendments were as follows:
Section 75-5(1) (pre-amendment), provided that the supplier might choose whether to apply the margin scheme. Pursuant to s 75-(1) (as amended) the question is to be agreed between the supplier and the recipient.
Section 75-10(1) (pre-amendment) provided that where the margin scheme applied, the GST was to be calculated by reference to the “margin”. Prima facie, the margin, as defined in s 75-10(2) (pre-amendment), was “the amount by which the consideration for the supply exceeds the consideration for your acquisition of the interest, unit or lease in question.” However, s 75-10(3) (pre-amendment) prescribed that in certain circumstances (set out in a table), the margin was to be the difference between the consideration for the relevant taxable supply and a valuation at a date fixed in accordance with the table. None of the circumstances is relevant for present purpose.
It is arguable that the engagement of subs 75-10(3) (pre-amendment) and as amended, was, and is dependent upon an appropriate valuation having been “made”. Pursuant to s 75-10(3) (pre-amendment), such valuation had also to comply “with any requirements determined in writing by the Commissioner for making valuations for the purposes of this Division”.
The 2005 Act amended s 75-10(2), making it “(s)ubject to subsection (3) and section 75-11”. It also amended s 75-10(3) so that it now refers to an “approved valuation” having been made. The 2005 Act deleted reference in that subsection to ministerial determination.
Section 75-11(2), inserted by the 2005 Act, provides:
If:
(a) you acquired the interest, unit or lease in question at a time when both you and the entity from whom you acquired it were members of the same GST group; and
(b) subsection (1) does not apply;
the margin for the supply you make is the amount by which the consideration for the supply exceeds an approved valuation of the interest, unit or lease as at 1 July 2000.
Prima facie, s 75-11(2) applies to the acquisitions by Blesford and Mooreville from Simnat.
Section 75-11(7) provides:
If:
(a) you acquired the interest, unit or lease in question from an entity who was your associate at the time of the acquisition; and
(b) none of the other subsections of this section apply;
the margin for the supply you make is the amount by which the consideration for the supply exceeds:
(c) if your acquisition was made before 1 July 2000 - an approved valuation of the interest, unit or lease as at 1 July 2000; or
(d) if your acquisition was made on or after 1 July 2000 – the GST inclusive market value of the interest, unit or lease at the time of the acquisition.
The amendments to s 75-5(1) apply to all contracts made on or after 29 June 2005. The amendments to s 75-10 and the new s 75-11 apply in relation to all supplies made on or after 17 March 2005.
Section 75-35 was inserted by the 2005 Act. It provides as follows:
(1) The Commissioner may, by legislative instrument, determine in writing requirements for making valuations for the purposes of this Division;
(2) A valuation made in accordance with those requirements is an approved valuation.
It is accepted that 75-35 commenced on 17 March 2005. However it must be read in conjunction with item 21 in Schedule 6 to the 2005 Act which provides:
A determination by the Commissioner, for the purposes of paragraph 75-10(3)(b) of the [GST Act] that was in force immediately before the commencement of this Schedule:
(a) continues in force on that commencement as if it had been made under section 75-35 of that Act as amended by this Act; and
(b) may be revoked or amended by the Commissioner in the same way as a determination under section 75-35.
THE MATTERS IN DISPUTE
13 This is an appeal from a decision of the Administrative Appeals Tribunal (the “AAT”). The first matter in dispute concerns Div 75. Unit Trend has returned its GST liability for supply of units in Tower 2 and Tower 3, claiming to be entitled to calculate the margin using the prices paid by Blesford and Mooreville for their respective acquisitions from Simnat. The Commissioner initially asserted that the margin scheme did not apply to the relevant supplies and re-assessed Unit Trend’s GST liability for the period from May 2004 to May 2007 in an amount exceeding $21 million. However the dispute is now as to the figure to be deducted from the consideration for each supply in order to determine the margin. The Commissioner also made a declaration pursuant to s 165-40(a) of the GST Act, negating GST benefits in excess of $21 million. Later, he imposed penalties. The validity of the declaration and the amount of the penalties are also in dispute.
CALCULATION OF THE MARGIN
14 The parties disagree as to calculation of the correct figure to be deducted from the amount of consideration for each sale. The Commissioner submits that it must be a valuation which complies with s 75-11(2), and that Unit Trend must obtain appropriate valuations or accept his assessment of its GST liability.
15 Unit Trend submits that:
for the period from 17 March 2005 until 1 December 2005, there was no legislative instrument made pursuant to s 75-35 which set out the requirements for making a valuation “in the circumstances of the present case”;
in those circumstances, the combined effect of ss 75-11(2) and 75-11(7) is that s 75-11(7) applies so that the relevant margin for each supply by Blesford or Mooreville is the difference between the sale price for the unit in question and a proportion of the “appropriate GST inclusive market value” of the relevant land at the date of acquisition by Blesford or Mooreville from Simnat;
alternatively, if there was an applicable legislative instrument, then:
no GST liability arises because no approved valuation has been created; or
the margin is that prescribed by s 75-11(7); or
if s 75-11(7) does not apply, then s 75-10(2) applies.
Relevant determinations
16 The Commissioner identifies three determinations as applying relevantly for present purposes, namely:
MSV 2000/2 dated 23 June 2000, commencing on 1 July 2000;
MSV 2005/1 dated 11 March 2005, commencing on 16 March 2005; and
MSV 2005/3 dated 7 September 2005, commencing on 1 December 2005.
MSV 2000/2
17 Unit Trend submits that MSV 2000/2 applies only to property acquired before 1 July 2000. This submission is apparently based upon para 3 of the determination which provides:
This determination will apply where you acquired the freehold interest in land, stratum unit or long-term lease before 1 July 2000 and you:
(a) make a taxable supply of real property by:
(i) selling a freehold interest in land; or
(ii) selling a stratum unit; or
(iii) granting or selling a long-term lease; and
(b) you choose to apply the margin scheme in working out the amount of GST on the supply for partly completed premises as at the valuation date.
18 The Commissioner submits that Unit Trend’s submission misconstrues the provisions of s 75-10(3) (pre-amendment), MSV 2000/2, s 75-35 and item 21 of Sch 6. Section 75-10(3) (pre-amendment) required a valuation which “complies with any requirements determined in writing by the Commissioner for making valuations for the purposes of this Division …”. Clearly, such a determination was to prescribe the requirements for “making” valuations. Paragraph 4 of MSV 2000/2 identifies two methods of valuation and then describes each. At the time at which it was made, the only valuations contemplated in Div 75 were those identified in s 75-10(3) (pre-amendment), including the table. Fairly clearly, the table distinguishes between events occurring before and after 1 July 2000, the date upon which the GST Act commenced. In other words s 75-10(3) (pre-amendment) and as amended was, and is concerned with transactions or circumstances which, in some sense, straddle that point in time.
19 In the table, only item 2A deals with acquisitions on or after 1 July 2000. Item 2A was introduced by the Taxation Laws Amendment Act (No 8) 2000 (Cth) (the “2000 Act”). The bill for that Act was introduced into Parliament in October 2000. The Act was assented to on 21 December 2000. That Act also inserted s 38-445(1A) and s 38-450. Sections 38-445(1A), 38-450 and the amendment to s 75-10(3) took effect from 1 July 2000. Section 38-445 had previously provided that a supply by government of unimproved land was GST-free. Section 38-445(1A) extended the same status to government supply of land where it had previously been supplied by way of lease, without improvement, and on condition that, upon satisfaction of the terms of the lease, the lessee would be entitled to a supply of freehold title or a long-term lease. Thus, the effect was to treat improved land as if it were unimproved. However the earlier supply of unimproved land must have occurred before 1 July 2000. Further, it must have been by way of a lease which, after that date, would have been a GST-free supply pursuant to s 38-450. Thus item 2A is also concerned with events occurring prior to 1 July 2000. Whereas s 38-445 applies to the supply of freehold interests and long-term leases, s 38-450 applies only to leases of unimproved land, such leases not being long-term leases.
20 Clearly, when MSV 2000/2 was made on 23 June 2000, the only valuations to which it was to apply were of interests in land acquired prior to 1 July 2000. Paragraph 3 simply identifies the valuations (specified in s 75-10(3), including the table) to which the determination was to apply. The purpose of item 21 was to extend the operation of determinations previously made pursuant to s 75-10(3) (pre-amendment) so that they applied to valuations required pursuant to Div 75 (as amended). The Commissioner was authorized to make determinations concerning the making of such valuations. Item 21 effectively deemed all previous determinations to be determinations so made. Item 21 would be meaningless if a determination made for the sole purpose specified in Div 75 (pre-amendment) were not to apply for all purposes contemplated by that division (as amended).
21 It follows that MSV 2000/2 applies for the purposes of s 75-11(2) in the case of any supply made on or after 17 March 2005 and before its revocation.
MSV 2005/1
22 MSV 2005/1 was made on 11 March 2005 and commenced on 16 March 2005. According to para 3, it “specifies an additional valuation method for the purposes of para 75-10(3)(b) of the GST Act”. It expressly provides that MSV 2000/2 is “not altered or withdrawn”. In para (5), it states that:
A valuation complies with the requirements for making valuations for the purposes of Division 75 of the GST Act if it is made in accordance with the following method … .
23 Unit Trend submits that MSV 2005/1 does not presently apply because, “We are not concerned with a valuation for the purposes of paragraph 75-10(3)(b) of the GST Act”. The determination took effect just prior to s 75-35 taking effect on 17 March 2005. Thus it was necessarily made pursuant to the authority conferred by s 75-10(3)(b) (pre-amendment). Given the date upon which it was made, one might infer that it was made in anticipation of the wider operation conferred by s 75-35 and item 21. That is, perhaps, the reason for the reference in para 5 to the “purposes of Div 75”. The plural reference may reflect the numerous requirements for valuations in Div 75 (as amended) as opposed to the single requirement in Div 75 (pre-amendment). More importantly, the reference to Div 75 would be otiose if the determination were to apply only for the purposes of s 75-10(3)(b), as such application had already been provided for in para 3.
24 In summary MSV 2005/1, made pursuant to s 75-10(3)(b) (pre-amendment), was continued in force by item 21 as a determination pursuant to s 75-35 for the purposes of Div 75 (as amended) in connection with supplies made on or after 17 March 2005.
MSV 2005/3
25 Unit Trend accepts that MSV 2005/3 applies, but only to supplies made on or after 1 December 2005. I do not understand the Commissioner to suggest otherwise.
Absence of a valuation
26 Assuming the existence of appropriate determinations, Unit Trend nevertheless submits that in the absence of an appropriate valuation as required by s 75-11(2), the relevant margin is that specified in s 75-10(2) or that specified in s 75-11(7). It is difficult to see why that should be so. Clearly, the method of calculating the margin prescribed in s 75-10(2) is displaced in the circumstances specified in s 75-11(2). Unit Trend’s submission may owe something to the somewhat curious wording of s 75-10(3)(b) (pre-amendment) and s 75-10(3) (as amended), to which I have referred. That section in both forms may have contemplated or contemplate the existence of an appropriate valuation as a condition precedent to its operation. Such a construction is unlikely but possible. However no such argument can be mounted with respect to s 75-11(2). If s 75-11(2) applies, GST can only be calculated on the margin as there defined. Neither s 75-10(2) nor s 75-11(7) is engaged in the present circumstances.
27 Unit Trend seems to assert that if the Commissioner wants valuations, he should get them, and that until he does, no GST is payable. The Commissioner responds to this rather adventurous submission by asserting that pursuant to Div 9, a taxable supply is liable to GST calculated pursuant to s 9-70 and is payable in any circumstances, unless the taxpayer demonstrates that some other amount is payable. However s 9-99 provides that special rules “relating to the amount of GST on taxable supplies” apply to the supplies dealt with in various divisions of the GST Act, including Div 75. Division 75 prescribes that for present purposes, GST is to be calculated on the margin rather than on the consideration for the supply. The Commissioner must therefore advance some basis for displacing the operation of Div 75 in order simply to rely on the general liability to pay GST calculated pursuant to Div 9.
28 There are at least three possible approaches. The first is that advanced by the Commissioner: that the election to apply the margin scheme necessarily implies acceptance of the obligation to obtain an appropriate valuation, and that failure to do so effectively negates the election, so that GST is payable pursuant to Div 9. The second possibility is that the GST Act creates an obligation to provide a relevant valuation as part of the self-assessment scheme established by Div 31. That argument may, to some extent, depend upon the form of return prescribed pursuant to s 31-15. However it seems that the fundamental aspect of the return is the relevant “net amount”. That term is defined in s 17-5 as the difference between the GST payable and available input tax credits. Under the margin scheme, the amount of GST payable is calculated by reference to the margin. I infer that discharge of the obligation to give a return, which identifies the net amount, necessarily involves identification of the margin in order to calculate the GST payable, the first step in calculating the net amount. Neither the giving of a return, nor the making of an assessment by the Commissioner is a condition precedent to liability or payment. The third possible argument is that Unit Trend has simply failed to prove that the relevant assessments are excessive.
29 In any event, as I understand it, the Commissioner does not resile from the position adopted in the Administrative Appeals Tribunal, that Unit Trend should be given a further opportunity to provide appropriate valuations.
Outcome of appeal concerning Div 75
30 It follows that the appeal, so far as it concerns Div 75, should be dismissed. The cross-appeal, so far as it concerns MSV 2005/1, should be upheld, but otherwise dismissed.
DIVISION 165
31 Division 165 provides for the avoidance of schemes which reduce the amount of GST payable on taxable supplies. Pursuant to s 165-40, the Commissioner may effectively negate such a scheme by declaring an amount to be the relevant taxpayer’s net amount for a particular period. Pursuant to s 165-55:
For the purposes of making a declaration under this subdivision, the Commissioner may:
(a) treat a particular event that actually happened as not having happened; and
(b) treat a particular event that did not actually happen as having happened and, if appropriate, treat the event as:
(i) having happened at a particular time; and
(ii) having involved particular action by a particular entity; and
(c) treat a particular event that actually happened as:
(i) having happened at a time different from the time it actually happened; or
(ii) having involved particular action by a particular entity (whether or not the event actually involved any action by that entity).
32 Division 165 operates where the provisions of s 165-5(1) are satisfied. Relevantly for present purposes that section provides:
(1) This Division operates if:
(a) an entity (the avoider) gets or got a GST benefit from a scheme; and
(b) the GST benefit is not attributable to the making, by any entity, of a choice, election, application or agreement that is expressly provided for by the GST law …; and
(c) taking account of the matters described in section 165-15, it is reasonable to conclude that either:
(i) an entity that (whether alone or with others) entered into or carried out the scheme, or part of the scheme, did so with the sole or dominant purpose of that entity or another entity getting a GST benefit from the scheme; or
(ii) the principal effect of the scheme, or of part of the scheme, is that the avoider gets the GST benefit from the scheme directly or indirectly; and
(d) the scheme:
(i) is a scheme that has been or is entered into on or after 2 December 1998; or
(ii) is a scheme that has been or is carried out or commenced on or after that date (other than a scheme that was entered into before that date).
33 The GST law goes somewhat beyond the GST Act, but the distinction is not presently relevant. Section 165-10 defines the terms “GST benefit” and “scheme”. Pursuant to subs (2):
A scheme is:
(a) any arrangement, agreement, understanding, promise or undertaking:
(i) whether it is express or implied; and
(ii) whether or not it is, or is intended to be, enforceable by legal proceedings; or
(b) any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise.
34 Relevantly, pursuant to s 165-10(1), an entity gets a GST benefit from a scheme if:
(a) an amount that is payable by the entity under this Act apart from this Division is, or could reasonably be expected to be, smaller than it would be apart from the scheme or a part of the scheme; …
35 Subsection 165-10(3) provides:
An entity can get a GST benefit from a scheme even if the entity or entities that entered into or carried out the scheme, or a part of the scheme, could not have engaged economically in any other activities:
(a) of the kind to which this Act applies; and
(b) that would produce an effect equivalent (except in terms of this Act) to the effect of the scheme or part of the scheme;
other than the activities involved in entering into or carrying out the scheme or part of the scheme.
36 The Commissioner has made a determination pursuant to s 165-40, negating a GST benefit said to have been derived by Unit Trend from a scheme. The AAT identified the scheme as alleged by the Commissioner as follows:
[Another company] received advice from a professional adviser which formed the basis of the scheme. The scheme involved:
(a) a group of companies that engage in property development (at least including [Simnat] and [Blesford or Mooreville];
(b) [Simnat] owns or buys land proposed for development, and undertakes the development to a point where the development has substantially progressed, and the overall value of the development is considerably higher than the price [Simnat] paid for the land;
(c) [Simnat] sells the partially completed development to [Blesford or Mooreville] at market value. The timing of the sale is to occur at a time when the market value is significantly higher than the price [Simnat] paid for the land;
(d) the sale by [Simnat] to [Blesford or Mooreville] is to be free of GST (either because it is the sale of a going concern, or because [Simnat] and [Blesford or Mooreville] are within a registered GST group under Division 48);
(e) [Blesford or Mooreville] completes the development, and sells to end buyers. Any sales made by [Simnat] to end buyers would be honoured and completed by [Blesford or Mooreville];
(f) upon transfer to end buyers, [Blesford or Mooreville] would choose to apply the margin scheme in respect of its liability for GST (calculated based upon consideration [Blesford or Mooreville] provided to [Simnat]).
Alternatively, the scheme involved the transferring by [Simnat] of Tower 2 and 3 to [Blesford] and [Mooreville] respectively in a manner which did not attract GST and the making of the transfers for a consideration which reduced the margin which would otherwise have applied had [Simnat] completed the sales or, in a broader sense, the transferring by [Simnat] of Towers 2 and 3 to [Blesford] and [Mooreville] respectively in a manner which did not attract GST; the making of the transfers for a consideration which reduced the margin which would otherwise have applied had [Simnat] completed the sales; and choosing to apply the margin scheme in respect of the subsequent supplies by [Blesford] and [Mooreville] to third party purchasers.
37 Unit Trend did not dispute that the Commissioner had identified a scheme for the purposes of Div 165. The AAT concluded that Unit Trend had derived a GST benefit from the scheme in connection with supplies made prior to 17 March 2005 by Blesford or Mooreville, pursuant to contracts entered into by Simnat. The GST benefit was, in effect, the difference between the GST payable, calculating the margin by reference to the acquisition price paid by Simnat, and the GST payable, calculating the margin by reference to the respective purchase prices paid by Blesford and Mooreville to Simnat. Unit Trend argued that by virtue of s 165-5(b), Div 165 did not operate in connection with those supplies because the GST benefit was attributable to the making by a relevant entity of a choice, election, application or agreement (hereafter a “choice”) expressly provided for by the GST law. The AAT rejected that submission. The applicant appeals against such rejection. Unit Trend’s argument effectively appears in para 11 of its outline of submissions as follows:
A liability for GST would have arisen on the intra-group sales but for Blesford’s and Mooreville’s either joining the group, or agreeing with Simnat that the intra-group sales should be of going concerns. And but for those agreements and the agreements to apply the margin scheme on the end sales, the applicant would have paid full GST on both the transfers from Simnat and on the end sales. This is what the [Commissioner] and the [AAT] ignored. It is only because both of those agreements and choices provided for by the Act that the applicant is liable (but for Div 165) for less tax than if Blesford and Mooreville had not been interposed, that is to say, that the GST benefit exists.
38 Clearly, the dispute turns upon the meaning of the word “attributable” in s 165-5(1)(b). In Federal Commissioner of Taxation v Sun Alliance Investments Pty Ltd (in liq) (2005) 225 CLR 488, the High Court considered a provision which enquired as to whether an amount “could reasonably be taken to be attributable to profits that were derived by the company …” before a certain date. In that context, the Court adopted, at [77], the following approach in construing the word “attributable”:
It remains then to engage in that process of attribution required by para (b) of s 160ZK(5) in respect of the distributions made by Phoenix and SAIL. In doing so, several points should be noted. The first is that para (b) presents a question of characterisation of an amount which is the whole or a part of the distribution made by a company to the holder of the RDA share, as identified in para (a). Secondly, para (b) presents an inquiry as to the existence of a sufficient link between that whole or part of the distribution and profits derived by the company before a specified event (acquisition of the RDA share). Thirdly, that link may be described in terms of necessary causation but, as with all questions of causality, the starting point is the identification of the purpose (here the legislative purpose) to which the question is directed … . Fourthly, here, the legislative purpose of s 160ZK(5) is to ensure that a capital loss not be claimed where the result of the course of action described in the sub-section is that there has been no economic loss to the taxpayer. Finally, the criterion of linkage in para (b), an attribution that is reasonable, is to be read and applied accordingly.
39 In seeking to identify the purpose for which the word “attributable” is to be construed, it is necessary to consider the purpose of Div 165 as a whole. That task must start with s 165-1 which purports to state the object of that Division. Reference to that section for the purpose of identifying such object or purpose is authorized by s 182-10(2)(a). Section 165-1 provides:
The object of this Division is to deter schemes to give entities benefits by reducing GST, increasing refunds or altering the timing of payment of GST or refunds.
If the dominant purpose or principal effect of a scheme is to give an entity such a benefit, the Commissioner may negate the benefit an entity gets from the scheme by declaring how much GST or refund would have been payable, and when it would have been payable, apart from the scheme.
This Division is aimed at artificial or contrived schemes. It is not, for example, intended to apply to:
• an exporter electing to have monthly tax periods in order to bring forward the entitlement to input tax credits; or
• a supplier of child care applying to be approved under the A New Tax System (Family Assistance) (Administration) Act 1999 (this would make the supplies of child care GST-free); or
• a supplier choosing under section 9-25 of the A New Tax System (Wine Equalisation Tax) Act 1999 to use the average wholesale price method for working out the taxable value of retail sales of grape wine; or
• a bank having its car fleet serviced earlier than usual, and before 1 July 2000, so that the servicing does not, at least initially, bear the GST.
40 Two aspects demand immediate comment. First, the section identifies deterrence of certain schemes as the object of Div 165. However schemes cannot be deterred. The deterrent must be aimed at persons, natural or corporate, presumably discouraging them from entering into schemes. Further, although the object is said to be deterrence, the real object is protection of the revenue. Secondly, use of the words “artificial or contrived” is a rhetorical flourish. The words are not used in the operative provisions of Div 165.
41 As Bennett and Greenwood JJ demonstrate, there was concern that Div 165, as originally enacted, might catch persons who simply chose to make a decision contemplated by the GST law, having regard to his or her own best interests. This risk arises from the very broad definition of the word “scheme”. The third paragraph in s 165-1 deals with that concern. It asserts that the Division is not intended to apply to certain conduct, of which examples are given.
42 Section 165-5 defines the circumstances in which the Division “operates”. If its requirements are satisfied, the Division is engaged, and the Commissioner may act, effectively setting aside the scheme. The Division will only be engaged if an entity has “got” a GST benefit from a scheme. Section 165-5(1)(b) seems to assume that notwithstanding the fact that a GST benefit has been “got” from a scheme, that benefit may be attributable to a choice expressly provided for in the GST Act. One might have thought that s 165-1 indicates an intention to exempt choices which stand alone and therefore would not generally be thought to constitute a scheme. However s 165-5 goes further, dealing with circumstances in which there is a discernible scheme which has produced a GST benefit. The word “attributable” seems to involve a decision as to whether the relevant benefit is attributable to the scheme under consideration or to “a choice”, such choice presumably being one aspect of the scheme.
43 The Oxford English Dictionary defines the word “attributable” to mean “capable of being attributed or ascribed, esp. as owing to, produced by”. It defines the verb “attribute” as “to ascribe, impute, or refer as an effect to the cause; to reckon as a consequence of” (italics in original source). For present purposes, then, the question is whether or not the reduction in Unit Trend’s GST liability, effectively as the result of the intermediate sales by Simnat to Blesford and Mooreville, was attributable to the identified scheme or to a choice expressly provided for in the GST law.
44 In its written submissions, Unit Trend points to a number of choices made in connection with the scheme, namely:
the choice by Blesford and Mooreville to join the GST group;
the choices to transfer the buildings under construction as going concerns; and
agreements by Blesford and Mooreville with buyers that the margin scheme was to apply.
45 The third choice may not be correctly expressed. Many of the contracts of sale seem to have been completed prior to the commencement of the 2005 Act, so that it was for the supplier to elect whether to apply the margin scheme. Perhaps commercial considerations dictated that the purchasers agree. The choice to transfer the partly built towers as going concerns also seems to be of little significance, given that the transfers were intra-group sales and therefore taken not to be taxable supplies.
46 In any event, Unit Trend’s submission seems to be that the GST benefit should be seen as the product of a number of choices expressly provided for by the GST law, and that the benefit is therefore attributable to them collectively. I doubt whether s 165-5(1)(b) should be read as authorizing such an approach. The section rather seems to contemplate a direct link between the benefit and the relevant choice. Of course, s 23 of the Acts Interpretation Act 1901 (Cth) (the “Interpretation Act”) provides that in any act “words in the singular number include the plural and words in the plural number include the singular”. However, as s 2(2) of the Interpretation Act provides, that presumption is subject to any contrary intention in another act.
47 If I am correct in inferring that the inquiry posed by s 165-5(1)(b) is as to whether a GST benefit is attributable to a relevant scheme or to a relevant choice, it is most unlikely that Parliament intended that an outcome attributable to numerous choices would be excluded from the general operation of Div 165. After all, schemes will frequently involve multiple choices. Where one benefit is attributable to the interaction of numerous choices, it would be more accurate to attribute such benefit to that interaction, rather than to individual choices, taken discretely. The position may be otherwise where the scheme yields discrete benefits, each of which is attributable to a different, discrete choice.
48 In any event, in the present case, the scheme which produced the benefit included the intermediate sales by Simnat to Blesford and Mooreville. Such sales lay at the heart of the scheme, even if the various choices were also necessary integers of it. In my view, the GST benefit was attributable to the events of which such sales were necessary parts, in other words, the scheme. In those circumstances, the benefit was attributable to the scheme, and not to any particular choice expressly provided for by the GST law.
Outcome of appeal concerning Div 165
49 The appeal should be dismissed.
PENALTY
50 The only question of penalty which is presently relevant concerns the penalty addressed in para 172 of the AAT’s reasons. It arose out of the scheme shortfall created by the Commissioner’s declaration pursuant to s 165-40, as it applied to supplies made by Blesford and Mooreville prior to 17 March 2005, and pursuant to contracts entered into by Simnat. The AAT found that the penalty had been properly imposed. However Unit Trend had applied to the Commissioner for remittal of the penalties pursuant to s 297-20 of Sch 1 to the Taxation Administration Act 1953 (Cth). The Commissioner had refused to remit the penalty, and Unit Trend had asked the AAT to review that decision. The AAT did not deal with that matter. The parties agree that it should be remitted to the AAT for further consideration. I would allow Unit Trend’s appeal in that respect.
ORDERS
51 In view of the complexity of the orders made below, I would order that, within seven days, the parties bring in draft orders disposing of the appeal and cross-appeal in accordance with these reasons. In default of agreement the parties should, within a further seven days, make written submissions as to forms of order. The parties should also, within that 14 day period, make written submissions as to costs, assuming that the question cannot be resolved by consent.
I certify that the preceding fifty-one (51) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Dowsett. |
Associate:
IN THE FEDERAL COURT OF AUSTRALIA | |
QUEENSLAND DISTRICT REGISTRY | |
GENERAL DIVISION | QUD 337 of 2010 |
ON APPEAL FROM THE ADMINISTRATIVE APPEALS TRIBUNAL |
BETWEEN: | UNIT TREND SERVICES PTY LTD ACN 010 382 242 Applicant
|
AND: | COMMISSIONER OF TAXATION Respondent
|
JUDGES: | DOWSETT, BENNETT AND GREENWOOD JJ |
DATE: | 17 AUGUST |
PLACE: | BRISBANE |
REASONS FOR JUDGMENT
BENNETT AND GREENWOOD JJ
52 These proceedings involve an appeal on questions of law (an application under s 44 of the Administrative Appeals Tribunal Act 1975 (Cth)) heard before the Full Court, from a decision of the Administrative Appeals Tribunal (the “Tribunal”) (constituted by Deputy President Hack SC and Senior Member O’Loughlin), in part affirming and in part setting aside objection decisions of the Commissioner of Taxation (the “Commissioner”) concerning the applicant’s (“Unit Trend”) objection to assessments (and amended assessments) made on 29 February 2008 of Unit Trend’s net amount of GST payable under a “GST law” as that term is defined by s 195-1 of the A New Tax System (Goods and Services Tax) Act 1999 (Cth) (the “GST Act”) on sales to the public of units in two residential towers on the Gold Coast.
53 The Commissioner, by the above assessments, assessed Unit Trend’s net amount of GST as approximately $21m.
54 On 29 February 2008, the Commissioner also issued a declaration to Unit Trend under Division 165 of the GST Act which confers power on the Commissioner to set aside a GST benefit obtained by an entity from a scheme, having regard to the provisions of that Division and in particular subdivision 165-A. The declaration was issued by the Commissioner in reliance upon s 165-40(a) of the GST Act.
55 On 13 March 2008, the Commissioner issued a Notice of Assessment of penalties to Unit Trend in an amount of $5,405,367.00 based upon GST shortfalls arising from the assessments and amended assessments.
56 Before explaining the content of the Tribunal’s decision, however, the sequence of transactions at the centre of the assessments needs to be described based upon the findings of the Tribunal and matters admitted by the Commissioner (subject to the discharge of the taxpayer’s onus). Throughout these reasons references will be made to the provisions of the GST Act without always adding the description, “the GST Act”.
The transactions
57 Unit Trend is the representative member of a GST group of companies approved by the Commissioner for that purpose under s 48-5 of the GST Act. The group includes Simnat Pty Ltd (“Simnat”); Blesford Pty Ltd (“Blesford”); Mooreville Investments Pty Ltd (“Mooreville”); and Rapcivic Contractors Pty Ltd (“Rapcivic”). Blesford and Mooreville became members of the GST group (by reason of applications made to the Commissioner) with effect from 1 March 2004 and 1 July 2004 respectively. Simnat, Blesford and Mooreville are all wholly owned subsidiaries of Raptis Group Limited (“Raptis”). Mr Jim Raptis is a director of Unit Trend and all of the above companies. He is the majority beneficial shareholder in Raptis.
58 In late 1997, Mr Raptis identified land in Surfers Paradise that he considered worthy of acquiring for development by the Raptis group of companies. On 14 December 1998, Simnat entered into a contract to purchase the land for $30m. The land became known as the Chevron development site (the “site”). The contract settled on 20 April 1999 and Simnat became registered proprietor of the site.
59 Simnat obtained development approval from the Gold Coast City Council to construct a three tower high-rise development (the “Chevron Towers”) on the site. When complete, the Chevron Towers development would consist of 60 speciality shops, a supermarket, office space, a tavern, car park facilities and three residential towers between 39 and 50 storeys each with a total of 575 units.
60 On 31 July 2001, Simnat appointed Rapcivic to construct Tower I on the site. Construction of Tower 1 was completed by December 2002. Simnat sold units in Tower I to the public. The margin scheme under the GST Act was applied to those sales. Business activity statements (“BAS”) were lodged for those sales applying the margin scheme.
61 On 13 December 2002, a strata plan was registered for 183 units (lots) in Tower I. A Community Titles Scheme was also established under the relevant Queensland Act. Simnat became the registered owner of each of the lots in the strata plan. Once registered, Simnat proceeded to settle contracts with third party purchasers. Registration of a survey plan had created a separate title for the land on which Tower I was constructed and also separate allotments for Tower II (Lot 902) and Tower III (Lot 903). Registration of the survey plan with separate titles for Lots 902 and 903 meant that the development projects for Towers II and III were capable of separate sale.
Tower II
62 By contract dated 1 July 2002, Simnat engaged Rapcivic to construct Tower II. The development was undertaken using certain debt facility arrangements. By contract dated 14 April 2004, Simnat sold Tower II to Blesford. By clause 17, the purchase price was to be determined by an independent valuer. The proposed settlement date was 20 April 2004. Tower II was valued as at 22 April 2004 at $149,800,000 and that sum became the purchase price. By clause 3.1 of the contract, the parties agreed that the sale of Tower II was the supply by Simnat of a “going concern” and that all things necessary for the continued operation of a relevant enterprise were to be supplied to Blesford under the contract.
63 By force of those arrangements, Simnat contended that it had engaged in a supply of a going concern to Blesford within s 38-325 of the GST Act and thus the supply to Blesford was GST-free. Before the Tribunal, the Commissioner accepted that position.
64 By clause 6 of the contract, Simnat assigned to Blesford all of its rights under the contracts it had entered into with third parties for the purchase of units upon completion.
65 On 7 May 2004, the contract for the sale of Tower II from Simnat to Blesford settled and Blesford, on 10 May 2004, became the registered proprietor of Lot 902 (and related Lot 5). Once Tower II was transferred to Blesford, Blesford continued marketing units in Tower II and it commenced to make off the plan sales of units to the public. When Tower II was completed to the relevant stage, Blesford settled those contracts. It also settled the contracts Simnat had previously entered into which had been assigned to Blesford. The same standard form contracts were used both before and after the transfer of Tower II to Blesford (and Tower III) to Mooreville. At [12], the Tribunal notes that Simnat was the nominated vendor of 230 of the 289 units in Tower II. Blesford was the nominated vendor of the remaining 59 units.
66 Blesford applied the margin scheme to unit sales to end purchasers and BAS returns were lodged reporting the GST payable on those sales on the basis of the application of the margin scheme. In determining the margin upon which GST would be calculated, for the purposes of Division 75 of the GST Act, Blesford adopted the price it paid to Simnat for Tower II ($149.8m) and determined the margin between that price and the value of the end sales (applying an apportionment of the acquisition price to each unit).
Tower III
67 By contract dated 29 January 2003, Simnat engaged Rapcivic to construct Tower III. By contract dated 15 April 2004, Simnat sold Tower III to Mooreville. The purchase price was to be determined by an independent valuer. The proposed settlement date was 22 April 2004. Tower III was valued at $109,500,000 and that value became the purchase price. Simnat and Mooreville agreed that the sale was the supply of a going concern. The Commissioner accepts that Simnat made a supply of a going concern to Mooreville for the purposes of s 38-325 of the GST Act.
68 By clause 6 of the contract, Simnat assigned to Mooreville all of its rights under the contracts it had entered into with third parties for the purchase of completed units.
69 Suncorp Metway was the first ranked secured financier for Tower III. Although Simnat sought Suncorp Metway’s approval for the transfer to Mooreville, approximately six months elapsed before approval was given on 23 November 2004. On that date, Tower III was transferred to Mooreville. On 23 November 2004, Mooreville became registered proprietor of the units in Tower III. Mooreville then began to make off the plan sales of units to the public. At [12], the Tribunal notes that Simnat was the nominated vendor in 142 of the 241 contracts for apartments sold in Tower III. Mooreville was the nominated vendor in the remaining 99 contracts for units in Tower III.
70 Settlement of those sales commenced from 8 December 2004.
71 Mooreville applied the margin scheme to unit sales to end buyers. BAS returns were lodged reporting the GST payable on those sales, on that basis. Like Blesford, Mooreville in determining the margin for the purposes of Division 75 of the GST Act, used the price it paid to Simnat for Tower III as the consideration for the acquisition of the interest ultimately the subject of the sale to end purchasers.
The BAS returns and the steps taken by the Commissioner arising out of an audit
72 Unit Trend as the group representative entity reported GST payable on sales of units in Towers II and III in BAS returns commencing from May 2004 and monthly thereafter. In all of these BAS returns, Unit Trend chose to apply the margin scheme on the footing of the acquisition price Blesford and Mooreville had paid to Simnat as the relevant consideration in determining the margin upon which GST would be determined.
73 As a result of an audit by the Commissioner of Unit Trend’s BAS returns, the Commissioner issued assessments on 7 December 2006 of the GST net amount payable by Unit Trend for the months of December 2004 and January 2005 together with an assessment of shortfall penalty. Unit Trend lodged an objection and the resolution of that matter is held over pending the resolution of these proceedings.
74 On 29 February 2008, the Commissioner issued assessments and amended assessments of the GST net amount payable by Unit Trend for the periods between May 2004 and May 2007 of approximately $21m (s 105-25 of Schedule 1 of the Taxation Administration Act 1953 (Cth)). On the same day, the Commissioner made an anti-avoidance declaration under s 165-40(a) of the GST Act “negating” the GST benefit Unit Trend had obtained by applying the margin scheme to sales of the units to end purchasers on the footing of a margin determined on the basis of the difference between the acquisition price paid by Blesford and Mooreville and the value of the end purchases. In making the declaration, the Commissioner contended that Unit Trend (an avoider) had obtained a GST benefit from a scheme as those terms are understood for the purposes of the GST Act and that the integers of ss 165-5, 165-10 and 165-15 were otherwise made out thus enlivening the declaration power under s 165-40.
75 On 13 March 2008, the Commissioner issued an assessment of shortfall penalties of $5,405,367.00 on the basis of the taxpayer’s failure to take reasonable care in the preparation of the BAS documents. Unit Trend objected to the Commissioner’s assessments of the GST net amount payable for the relevant period, the making of the declaration and the issuing of the penalty assessment. On 21 October 2009, the Commissioner made a decision on each of those objections. The Commissioner made relatively minor adjustments to the GST net amounts but generally maintained the contention in relation to the application of Division 165 and the position adopted in relation to shortfall penalties.
The margin scheme
76 The concession by the Commissioner that the supply by Simnat to Blesford and Mooreville were supplies of a going concern under s 38-325 and that no objection arose under s 48-40(2) of the GST Act, resulted in an acceptance by the Commissioner that the sales by Simnat of Lot 902 (the Tower II development) to Blesford and Lot 903 (the Tower III development) to Mooreville were GST-free. Because the supply of Towers II and III by Simnat were both GST-free, Blesford and Mooreville as acquirers would not be entitled under the general scheme of the GST Act to any input tax credits on the acquisition of the land and Tower development projects. One feature of the general regime in such a case is that each developer would then be required to pay GST on the entire value of the developed property as supplied to the ultimate purchasers through settlement of each unit contract.
77 Another recognised feature of the GST regime however is that it only taxes value added after 30 June 2000, the regime having commenced on 1 July 2000. The margin scheme contained in Division 75 of Chapter 4 of the GST Act provides for special rules designed to ameliorate what might otherwise be the unfair operation of the GST Act on some forms of business activity: Sterling Guardian Pty Ltd v Commissioner of Taxation (2006) 149 FCR 255; Brady King Pty Ltd v Commissioner of Taxation [2008] FCAFC 118.
78 Blesford and Mooreville, through Unit Trend, elected to invoke the application of these special rules under Division 75 in the supply of stratum units to end purchasers. Division 75 of the GST Act however was amended during the currency of each Tower project by the Tax Laws Amendment (2005 Measures No. 2) Act 2005 (Cth), No. 78 of 2005, (the “2005 Amendment Act”) which, as to the amendments to s 75-10 and s 75-11, commenced operation retrospectively from 17 March 2005, notwithstanding that the 2005 Amendment Act generally (and s 75-5(1) specifically) commenced operation on 29 June 2005.
79 It followed for the Tribunal that each taxable supply of a unit by Blesford and Mooreville (or by Simnat) consisting of settlement prior to 17 March 2005 was governed by Division 75 as it stood prior to the commencement of the 2005 Amendment Act and settlements on or after 17 March 2005 were governed by Division 75 as amended. It was common ground between the parties that the event constituting a supply is settlement of the contract rather than entry into the contract: Commissioner of Taxation v Reliance Carpet Co Pty Ltd (2008) 236 CLR 342).
80 As to the settlements pre and post 17 March 2005, the Commissioner at para 26 of his Statement of Facts, Issues and Contentions (“SFIC”) (AB, p 1662 ff) says that between 24 May 2004 and 17 March 2005, Blesford settled unit contracts for 244 of the 289 units in Tower II, and the remaining 45 contracts were settled after 17 March 2005. As to Tower III, the Commissioner at para 44 of his SFIC says that between 8 December 2004 and 17 March 2005, Mooreville settled unit contracts for 156 of the 241 units in Tower III.
The Tribunal’s decision
81 Prior to the 2005 Amendment Act, ss 75-1, 75-5, 75-10(1) and (2) and 75-15 were in these terms:
75-1 What this Division is about
This Division allows you to use a margin scheme to bring within the GST system your taxable supplies of freehold interests in land, of stratum units and of long-term leases.
…
75-5 Choosing to apply the margin scheme
(1) If you make a *taxable supply of *real property by:
(a) selling a freehold interest in land; or
(b) selling a *stratum unit; or
(c) granting or selling a *long-term lease;
you may choose to apply the *margin scheme in working out the amount of GST on the supply.
(2) However, you cannot choose to apply the *margin scheme if you acquired the freehold interest, *stratum unit or *long-term lease through a *taxable supply on which the GST was worked out without applying the margin scheme.
…
75-10 The amount of GST on taxable supplies
(1) If a *taxable supply of *real property is under the *margin scheme, the amount of GST on the supply is 1/11 of the *margin for the supply.
(2) The margin for the supply is the amount by which the *consideration for the supply exceeds the consideration for your acquisition of the interest, unit or lease in question.
(3) …
…
75-15 Subdivided land
For the purposes of section 75-10, if the freehold interest, *stratum unit or *long-term lease you supply relates only to part of land or premises that you acquired, the *consideration for your acquisition of that part is the corresponding proportion of the consideration for the land or premises that you acquired.
82 In particular, s 75-10(2) contemplates that the margin for the relevant supply (the supplier having chosen under s 75-5 to apply the margin scheme) is the amount by which the consideration for the supply exceeds the consideration for the supplier’s acquisition of the relevant interest.
83 At [26], the Tribunal notes Unit Trend’s contention that for settlements up to 16 March 2005, Unit Trend was entitled to apply the margin scheme and for the purposes of s 75-10(2), the consideration for its acquisition of the relevant interest was the price paid by Blesford and Mooreville to Simnat. The Commissioner contended that the margin scheme could not apply as the reference in s 75-5(1) to “you [making] a taxable supply of real property” should be understood as importing a group single entity rule so that once a member of a group makes an acquisition (Simnat in this case at $30m), the phrase “the consideration for your acquisition of the interest … in question” must be taken to be $30m not $148.9m in the case of Blesford or $109.5m in the case of Mooreville. At [32], the Tribunal rejected that contention and at [33], the Tribunal said this:
The result is that, subject to the operation of Div 165 (dealt with below), we conclude that in the case of supplies made up to 16 March 2005, the appropriate consideration was a proportionate amount of the sale price between Simnat and Blesford and between Simnat and Mooreville.
84 Neither party appeals from this aspect of the Tribunal’s decision.
85 At [34], the Tribunal dismissed Unit Trend’s contention that the relevant transfers upon which GST treatment turns includes the transfers from Simnat to Blesford and Mooreville both of which occurred prior to 17 March 2005. At [34], the Tribunal said this:
We should deal first with one argument for Unit Trend. It identifies the transfers from Simnat to Blesford and to Mooreville, which occurred prior to 17 March 2005, as the transfers to be considered. We do not agree. The issue is the liability to GST on the transfers from Blesford and Mooreville to end purchasers in respect of contracts settled on or after 17 March 2005.
86 By the 2005 Amendment Act, the provisions of Division 75, relevantly, were amended to take the following form:
75-1 What this Division is about
This Division allows you to use a margin scheme to bring within the GST system your taxable supplies of freehold interests in land, of stratum units and of long-term leases.
…
75-5 Applying the margin scheme
(1) The *margin scheme applies in working out the amount of GST on a *taxable supply of *real property that you make by:
(a) selling a freehold interest in land; or
(b) selling a *stratum unit; or
(c) granting or selling a *long-term lease;
if you and the *recipient of the supply have agreed in writing that the margin scheme is to apply.
(1A) The agreement must be made:
(a) on or before the making of the supply; or
(b) within such further period as the Commissioner allows.
Note: Refusing to allow, or allowing, a further period within which to make an agreement is a reviewable GST decision (see Division 7 of Part VI of the Taxation Administration Act 1953).
…
75-10 The amount of GST on taxable supplies
(1) If a *taxable supply of *real property is under the *margin scheme, the amount of GST on the supply is 1/11 of the *margin for the supply.
(2) Subject to subsection (3) and section 75-11, the margin for the supply is the amount by which the *consideration for the supply exceeds the consideration for your acquisition of the interest, unit or lease in question.
(3) Subject to section 75-11, if:
…
75-11 Margins for supplies of real property in particular circumstances
Margin for supply of real property acquired from fellow member of GST group
(1) If:
(a) you acquired the interest, unit or lease in question at a time when both you and the entity from whom you acquired it were *members of the same *GST group; and
(b) on or after 1 July 2000, there has been a supply (an earlier supply) of the interest, unit or lease that occurred at a time when the supplier was not a member of the GST group; and
(ba) the *recipient was at that time, or subsequently became, a member of the GST group;
the margin for the supply you make is the amount by which the *consideration for the supply exceeds:
(c) the consideration for the last such earlier supply, if the supplier and the recipient were not *associates at that time; or
(d) the *GST inclusive market value of the interest, unit or lease at that time, if the 2 entities were associates at that time.
(2) If:
(a) you acquired the interest, unit or lease in question at a time when both you and the entity from whom you acquired it were *members of the same *GST group; and
(b) subsection (1) does not apply;
the margin for the supply you make is the amount by which the *consideration for the supply exceeds an *approved valuation of the interest, unit or lease as at 1 July 2000.
…
Margin for supply of real property acquired from associate
(7) If:
(a) you acquired the interest, unit or lease in question from an entity who was your *associate at the time of the acquisition; and
(b) none of the other subsections of this section apply;
the margin for the supply you make is the amount by which the *consideration for the supply exceeds:
(c) if your acquisition was made before 1 July 2000 – an *approved valuation of the interest, unit or lease as at 1 July 2000; or
(d) if your acquisition was made on or after 1 July 2000 – the *GST inclusive market value of the interest, unit or lease at the time of the acquisition.
…
75-15 Subdivided land
For the purposes of sections 75-10 to 75-14, if the freehold interest, *stratum unit or *long-term lease you supply relates only to part of land or premises that you acquired, the *consideration for your acquisition of that part is the corresponding proportion of the consideration for the land or premises that you acquired.
87 On or after 17 March 2005, the margin scheme “applies” by s 75-5(1) if the supplier and the recipient have agreed in writing that the margin scheme is to apply to the supply. Section 75-10(2) is made subject to s 75-10(3) which is subject to s 75-11. At [35] and [36] the Tribunal notes Unit Trend’s contention as to settlements between 17 March 2005 and 1 December 2005 to the effect that s 75-11(2) applies in determining the margin by reference to the amount by which the consideration for the supply of each unit exceeds “an approved valuation of the interest, unit or lease as at 1 July 2000”, but that, because no legislative instrument setting out the requirements for an “approved valuation” had been made under s 75-35 (applicable to the circumstances of the case), s 75-11(2) could not operate. That being so, s 75-11(7)(b) was satisfied and thus the margin is the amount by which the consideration for the supply exceeds the “*GST inclusive market value of the interest … at the time of the acquisition”: s 75-11(7)(d).
88 Unit Trend also contended that even if an applicable instrument existed, since no approved valuation had been brought into existence, no GST liability arose or, alternatively, any GST liability was to be determined on the footing of the s 75-11(7) margin.
89 Unit Trend contended that the terms of the particular determination, said to apply, are expressed to apply where the property was acquired before 1 July 2000 and thus the determination could not apply in the circumstances of this case as Blesford and Mooreville acquired the land after 1 July 2000.
90 The Commissioner contended that s 75-11 governed all contracts settled on or after 17 March 2005. It was common ground that s 75-11(1) had no application. The Tribunal thought s 75-11(1) had no application because Simnat’s acquisition occurred before 30 June 2000 and therefore s 75-11(1)(b) was not satisfied. That being so, s 75-11(2)(b) was satisfied and since Simnat, Blesford and Mooreville were members of the same GST group at the dates of supply by Simnat to Blesford and Mooreville (that is, the settlement dates of 7 May 2004 and 23 November 2004 respectively), s 75-11(2)(a) was satisfied. Thus, s 75-11(2) applied so that the margin for the supply of units to end purchasers for contracts settled on or after 17 March 2005, was the amount by which the consideration for the supply of a unit exceeded “an *approved valuation of the interest, unit or lease as at 1 July 2000”.
91 At [37] and [38], the Tribunal found that applicable legislative instruments had been brought into existence for relevant periods governing valuation determinations for the purposes of the margin scheme which by force of ss 75-11 and 75-35 applied so as to determine the manner in which approved valuations were to be produced: [38]; determinations MSV2000/2; MSV2005/1; MSV2005/2 and MSV2005/3.
92 As to the valuation methodologies, the Tribunal at [41] notes that MSV2000/2 provides for the valuation of a partly completed interest by one of two methods. One method (said by the Tribunal to have been adopted by Unit Trend) is the valuation of the interest by a professional valuer taking account of the market value of the completed premises, the cost to complete and the profit margin and holding costs attributable to the period on or after the valuation date. At [42], the Tribunal notes that the parties did not rely on MSV2005/1 or MSV2005/2. At [43], the Tribunal notes that MSV2005/3 altered the requirements for an approved valuation.
93 Unit Trend relied on a valuation of Tower II as at 30 June 2000 of $29m and a valuation of Tower III as at 30 June 2000 of $19.1m (neither valuation was a valuation as at 1 July 2000). Before the Tribunal, Unit Trend conceded that the valuation for Tower III did not discharge the obligation cast upon the taxpayer to provide an “approved valuation”. It sought a remittal opportunity to provide a valuation to the Commissioner that discharged that obligation.
94 As to Tower II, the Tribunal was unable to be satisfied that the valuer had given consideration to the requirement in the determination instrument to take into account the profit margin and holding costs attributable to the period on or after the valuation date and thus the Tribunal could not be satisfied that the valuation for Tower II complied with the requirements of MSV2000/2 (A New Tax System (Goods and Services Tax) Margin Scheme Valuation Requirements Determination (No. 2) 2000).
95 At [51], the Tribunal said this:
Thus, in our view, the valuation of Tower II cannot be regarded as valid for present purposes. Unit Trend accepts that no valuation of Tower III has been provided with the result that there is no approved valuation of either Tower for the purposes of supplies on or after 17 March 2005.
[emphasis added]
96 The Commissioner contended before the Tribunal that absent an approved valuation, Unit Trend was not entitled to the concessional benefit derived from the application of the margin scheme for supplies (settlements) made on or after 17 March 2005 because the general rule in s 75-10(2) of striking the margin as the excess of the supply consideration to end purchasers over the proportionate acquisition consideration of the relevant interest by either Blesford or Mooreville, was expressly subject to s 75-11 and, in particular, s 75-11(2) which speaks of an approved valuation.
97 The Tribunal also noted that the Commissioner relied upon amendments made in 2008 to s 75-11 to introduce what was described by the Commissioner as a “default position” when an approved valuation was not supplied. The Commissioner contended that the later amendment should be taken into account in construing the provisions of the Act as they stood before the amendment which tended to suggest that where no approved valuation was produced by the taxpayer, the margin scheme did not apply.
98 At [54], the Tribunal observed that it did not need to determine these questions on the footing that:
… the Commissioner has accepted that, if we reach the conclusion that the valuation is not an approved valuation, Unit Trend ought to be given an opportunity to provide an approved valuation within a further period of time.
99 At [55], the Tribunal said this:
The result of this is that we have come to the view that, in relation to sales that settled up to and including 16 March 2005, Unit Trend was entitled, subject to the operation of Div 165, to apply the margin scheme on the basis that the consideration for the acquisition was the sale price between Simnat and Blesford and Mooreville. In relation to sales settled on and after 17 March 2005, the calculation of the margin needs to be based on an acceptable valuation [which should be a reference to “an approved valuation”]. There is no acceptable valuation for either Tower II or Tower III. Given the parties’ agreement that the matters be reconsidered upon provision of acceptable valuations we would give effect to the parties’ agreement and remit the matter to the Commissioner for further consideration of valuations to be provided by Unit Trend.
[emphasis added]
100 At [20], the Tribunal drew a distinction, due to the operation of the 2005 Amendment Act, between supplies (settlements) made before and after 17 March 2005. The Tribunal also emphasised at [20] a distinction between supplies made pursuant to contracts with end purchasers entered into by Simnat and supplies made pursuant to contracts with end purchasers entered into by either Blesford or Mooreville. At [33], the Tribunal concluded that in the case of settlements made up to and including 16 March 2005, the appropriate consideration was a proportionate amount of the acquisition price between Simnat and Blesford and Simnat and Mooreville. That same finding is repeated at [55]. As to the application of the margin scheme and the determination of the amount of the margin for settlements up to and including 16 March 2005, no distinction is made by the Tribunal as between contracts entered into by Simnat on the one hand and Blesford or Mooreville on the other. The distinction was regarded by the Tribunal as important in the context of the Division 165 declaration (discussed later in these reasons).
101 We have mentioned these matters at [81] to [100] in order to give content to grounds (c) and (d) of Unit Trend’s appeal which are directed to the application of the margin scheme and the method of determining the amount of the margin, and which are in these terms:
(c) The Tribunal ought to have found that there was no margin scheme valuation determination in force, for the purposes of subsection 75-11(2) of the GST Act, which applied to the supplies by [Blesford] or [Mooreville], given that neither of those companies acquired the land before 1 July 2000
(d) Thus, the Tribunal erred in finding that subsection 75-11(2) of the GST Act applied to the supplies by those companies under the margin scheme. Rather, as that provision did not apply (given the lack of the means of so applying it, to wit, an applicable margin scheme valuation determination), one or the other of s 75-10 and subsection 75-11(7) applied.
102 The questions of law raised by these grounds are these:
(c) Was there a margin scheme valuation determination which applied, for the purposes of subsection 75-11(2) of the GST Act, to a supply of a strata title unit (unit) by [Blesford] or [Mooreville]?
(d) [Blesford] and [Mooreville] had acquired the units from a fellow member of the GST group, and as acquisitions of going concerns, but did not hold valuations which complied with any margin scheme valuation determination. Which, if any, of the provisions of sections 75-10 and 75-11 of the GST Act applied where, on or after 17 March 2005, [Blesford] and [Mooreville] supplied the units and purported to do so under the margin scheme?
103 These questions and the grounds of contended error in support of them address that part of the Tribunal’s decision setting aside the Commissioner’s objection decision relating to supplies made on or after 17 March 2005 and a remittal of the matter to the Commissioner for reconsideration having regard to any valuations of the freehold interest in Tower II and Tower III as at 1 July 2000 according to the steps and directions set out at para 3 of the Tribunal’s decision of 21 July 2010.
104 The question of Unit Trend’s entitlement to apply the margin scheme to sales to end purchasers settled before or after 17 March 2005 was determined by the Tribunal before considering whether Division 165 was engaged so as to enable the Commissioner to negate any GST benefit obtained by Unit Trend, in the circumstances of the case.
105 Grounds (a) and (b) of the appeal address the making of the Division 165 Declaration and whether the penalty assessed by the Commissioner ought to be reduced and remitted.
The Tribunal’s decision concerning the Division 165 Declaration and penalty
106 Division 165 addresses “anti-avoidance” measures. The object of the Division according to s 165-1 is to:
… deter schemes to give entities benefits by reducing GST … If the dominant purpose or principal effect of a scheme is to give an entity such a benefit, the Commissioner may negate the benefit an entity gets from the scheme by declaring how much GST or refund would have been payable, and when it would have been payable, apart from the scheme. This Division is aimed at artificial or contrived schemes ...
107 Section 165-5 is, relevantly, in these terms:
165-5 When does this Division operate?
General rule
(1) This Division operates if:
(a) an entity (the avoider) gets or got a *GST benefit from a *scheme; and
(b) the GST benefit is not attributable to the making, by any entity, of a choice, election, application or agreement that is expressly provided for by the *GST law, the *wine tax law or the *luxury car tax law; and
(c) taking account of the matters described in section 165-15, it is reasonable to conclude that either:
(i) an entity that (whether alone or with others) entered into or carried out the scheme, or part of the scheme, did so with the sole or dominant purpose of that entity or another entity getting a *GST benefit from the scheme; or
(ii) the principal effect of the scheme, or of part of the scheme, is that the avoider gets the GST benefit from the scheme directly or indirectly; and
(d) the scheme:
(i) is a scheme that has been or is entered into on or after 2 December 1998; or
(ii) is a scheme that has been or is carried out or commenced on or after that day (other than a scheme that was entered into before that day).
…
108 It follows that the integers that render Division 165 operational are the identification of a scheme, from which an entity (described as the avoider) obtains a GST benefit, in circumstances where that benefit is not attributable to any entity having made a choice, election, application or agreement, that is expressly provided for by the GST law and, taking into account the matters described in s 165-15, it is reasonable to conclude either that an entity, whether alone or with others, entered into or carried out the scheme (or part of the scheme) with the sole or dominant purpose of that entity or another entity getting a GST benefit from the scheme, or the principal effect of the scheme (or part of it) is that the avoider gets the GST benefit from the scheme directly or indirectly.
109 There is no issue that s 165-5(1)(d) was satisfied.
Section 165-5(1)(a): The scheme
110 Before the Tribunal, the Commissioner identified two versions of the contended scheme. At [85] of the Tribunal’s reasons, the Tribunal said this:
The Commissioner formulated the relevant scheme in alternate ways in his Statement of Facts, Issues and Contentions and in his written submissions:
[Raptis] received advice from a professional adviser which formed the basis of a scheme. The scheme involved:
(a) a group of companies that engage in property development (at least including companies A and B [which for present purposes contemplate company A as Simnat and company B as either Blesford (Tower II) or Mooreville (Tower III)];
(b) company A [Simnat] owns or buys land proposed for development, and undertakes the development to a point where the development has substantially progressed, and the overall value of the development is considerably higher than the price [Simnat] paid for the land;
(c) [Simnat] sells the partially completed development to company B [Blesford or Mooreville] at market value. The timing of the sale is to occur at a time when the market value is significantly higher than the price [Simnat] paid for the land;
(d) the sale by [Simnat] to [Blesford or Mooreville] is to be free of GST (either because it is the sale of a going concern, or because [Simnat] and [Blesford or Mooreville] are within a registered GST group under Division 48);
(e) [Blesford or Mooreville] completes the development, and sells to end buyers. Any sales made by [Simnat] to end buyers would be honoured and completed by [Blesford or Mooreville];
(f) upon transfer to end buyers, [Blesford or Mooreville] would choose to apply the margin scheme in respect of its liability for GST (calculated based upon consideration [Blesford or Mooreville] provided to [Simnat]).
111 The second (or alternate version) simply seems to aggregate the six steps otherwise outlined in version one of the scheme at paras (a) to (f) above and is put in these terms at [85] of the Tribunal’s reasons:
Alternatively, the scheme involved the transferring by Simnat of Towers II and III to Blesford and Mooreville respectively in a manner which did not attract GST and the making of the transfers for a consideration which reduced the margin which would otherwise have applied had Simnat completed the sales, or, in a broader sense, the transferring by Simnat of Towers II and III to Blesford and Mooreville respectively in a manner which did not attract GST; the making of the transfers for a consideration which reduced the margin which would otherwise have applied had Simnat completed the sales; and choosing to apply the margin scheme in respect of the subsequent supplies by Blesford and Mooreville to third party purchasers.
112 On either version, the integrated steps or arrangements comprising that scheme seem to be these: step 1, a GST-free transfer by Simnat of Towers II and III to Blesford and Mooreville (either because of the application of the subdivision 38-J going concern provisions or the Division 48 provisions governing transfers within a GST group); step 2, a GST-free supply by Simnat of Towers II and III to Blesford and Mooreville at a supply price which gave rise to a margin between Blesford and Mooreville’s re-supply price for each completed unit to end purchasers and the proportionate acquisition price paid by those companies for each unit, less than the margin that would have prevailed had Simnat completed each unit sale to an end purchaser; and, step 3, Blesford and Mooreville choosing to apply the margin scheme to supplies by them of units to third party purchasers.
113 A scheme is defined in s 165-10(2) in these terms:
What is a scheme
(2) A scheme is:
(a) any arrangement, agreement, understanding, promise or undertaking:
(i) whether it is express or implied; and
(ii) whether or not it is, or is intended to be, enforceable by legal proceedings; or
(b) any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise.
114 At [89], the Tribunal notes that Unit Trend accepted that the arrangements identified by the Commissioner as constituting the scheme fell within the definition of a scheme in s 165-10(2) of the GST Act.
Section 165-5(1)(a): GST benefit
115 The Tribunal commencing at [90] then considered whether Unit Trend had obtained a GST benefit from the scheme for the purposes of s 165-5(1)(a). As to that question, s 165-10(1) is, relevantly, in the following terms:
165-10 When does an entity get a GST benefit from a scheme?
(1) An entity gets a GST benefit from a *scheme if:
(a) an amount that is payable by the entity under this Act apart from this Division is, or could reasonably be expected to be, smaller than it would be apart from the scheme or a part of the scheme; or
116 The Commissioner contended that the amount payable by Unit Trend under the GST Act is, or could reasonably be expected to be, smaller (by reason of the diminished margin as between Blesford, Mooreville and end purchasers) than it would be absent the scheme (where the margin would be the Simnat/end purchaser margin) by approximately $21m in relation to all sales by Blesford and Mooreville to end purchasers (but a lesser unquantified sum in relation to settlements up to and including 16 March 2005). The Commissioner contended that such a result arises by putting the arrangements comprising the scheme to one side and assessing the GST liability that would have arisen but for Blesford and Mooreville being interposed: [92].
117 Unit Trend contended that no GST benefit arose because the reason why each Tower development had to be isolated from the other through separate independent entities was in order to protect the assets and profits of one from claims made by purchasers of units in the other. Therefore, a comparison had to be made, it was said, between the amount payable under the scheme and an amount that would have been payable had another asset protection arrangement been put in place rather than the particular steps in the particular scheme. That hypothetical asset protection arrangement would have exhibited, it was said, the features of a transfer of the land to new independent entities, exhibited very similar features to the existing transaction in terms of structure and would have resulted in an amount payable under the GST Act of the same amount payable under the actual scheme.
118 The Tribunal at [93] to [95] by applying to s 165-10(1)(a) the principles derived from the authorities concerning s 177C(1)(b) of the Income Tax Assessment Act 1936 (Cth) (the “1936 Act”), (Federal Commissioner of Taxation v Peabody (1994) 181 CLR 359 at 385; Federal Commissioner of Taxation v Lenzo (2008) 167 FCR 255 at [128]), concluded that an inquiry into what could (or might), with sufficient reliability, be expected to have taken place was necessary. Thus, it was necessary to consider what activity the taxpayer would have undertaken absent the scheme. The Tribunal accepted, in principle, that a taxpayer could satisfy the onus of showing that he or she had not obtained a tax benefit from a scheme if the taxpayer could show he or she would have undertaken, or might reasonably be expected to have undertaken, a particular activity in lieu of the scheme and that activity would or might reasonably be expected to have resulted in the same amount of GST payable under the Act, as that payable with the scheme in place.
119 At [97], the Tribunal made this finding arising out of that inquiry:
… [Unit Trend’s] formulation of an alternate [sic] hypothesis ignores the phrase “apart from the scheme or a part of the scheme” [in s 165-10(1)(a)]. Apart from the scheme, Simnat would have continued to be the vendor of all apartments, would have conveyed the apartments to third party purchasers on settlement, and would have paid GST on the basis, at best, of a valuation of the towers as at 1 July 2000.
[emphasis added]
120 Section 165-10(3) is in these terms:
GST benefit can arise even if no economic alternative
(3) An entity can get a *GST benefit from a *scheme even if the entity or entities that entered into or carried out the scheme, or a part of the scheme, could not have engaged economically in any activities:
(a) of the kind to which this Act applies; and
(b) that would produce an effect equivalent (except in terms of this Act) to the effect of the scheme or part of the scheme;
other than the activities involved in entering into or carrying out the scheme or part of the scheme.
121 Section 165-10(3) makes clear that an entity can “get a *GST benefit” from a scheme even though the entity enters into or carries out the particular scheme (or a part of it) in circumstances where, put simply, it had no economic alternative available to enter into or carry out like activities that would produce an equivalent effect to that produced by the scheme (or the relevant part of the scheme). It is no answer, in other words, for the entity to say that it had to enter into the scheme and therefore it cannot be said to have obtained a GST benefit. At [99], the Tribunal concluded that s 165-10(3) answered Unit Trend’s contention that no GST benefit arose as any other arrangements delivering asset protection outcomes would necessarily have exhibited the features of the scheme with the same GST consequences as the scheme.
122 At [100], the Tribunal found that a postulation that Simnat, absent the scheme, would have continued, for Towers II and III, the pre-existing arrangements exhibited in relation to Tower I, was a sufficiently reliable prediction of future events, so as to be a reasonable prediction. At [101], the Tribunal found as follows:
… the Commissioner’s alternate [sic] postulate … is not inconsistent with the requirement that there needs to be a hypothesis as to what would have occurred but for the scheme and that that hypothesis is sufficiently reliable to be regarded as reasonable. It is also consistent with the terms of s 165-10(3).
123 At [102], the Tribunal found as follows:
On the basis of the alternative postulate, that is, had the pre-existing arrangements been continued, the margin on Simnat’s supplies prior to 17 March 2005 would have been calculated by reference to a valuation of the property as at 1 July 2000. The margin calculated in that way, and thus the GST payable, is plainly much greater than that calculated by reference to the consideration for the acquisitions by Blesford and Mooreville. There is then a GST benefit in the case of supplies prior to 17 March 2005.
124 Thus, the Tribunal concluded that absent the scheme Simnat would have continued to be the vendor and would have effected all settlements made up to and including 16 March 2005, in which event s 75-10(3) would have applied (rather than s 75-10(2)) in determining the margin, and the margin would have been the amount by which Simnat’s supply price exceeded an approved valuation of Simnat’s interest as at 1 July 2000: s 75-10(3)(a) and (b) and Item 1 of the Table in that subsection.
125 At [102], the Tribunal concluded that Simnat’s supply price to an end purchaser for a unit settled up to 16 March 2005, reflecting the completed proportionate improvement value of the land (by reason of each Tower project) must necessarily have been greater than the value of Simnat’s interest in the land calculated as at 1 July 2000. Thus, the margin between the supply price and the value at 1 July 2000 would have been “much greater” than the margin between the supply price (up to 16 March 2005) and Blesford and Mooreville’s proportionate acquisition price at 7 May 2004 and 23 November 2004 respectively. Consequently, the GST payable on the margin absent the scheme would have been “much greater” than under the scheme and thus Unit Trend obtained a GST benefit from the scheme for the purposes of s 165-10(1)(a).
126 There is no error of law asserted by Unit Trend in the Tribunal’s findings at [97] and [102] that Unit Trend obtained the GST benefit, so found, from the scheme as described.
127 In considering the application of Division 165, the Tribunal said this at [57]:
We should also add, by way of a preliminary observation, that our observations about the operation of Div 165 are directed solely to supplies made prior to 17 March 2005. Whilst the question of valuation as at 1 July 2000 remains to be decided we cannot see how Div 165 would have any work to perform in relation to supplies on or after that date. In such cases Unit Trend did not get a GST benefit from the scheme because the matter falls to be decided in accordance with s 75-11 of the GST Act.
128 At [103] and [104], the Tribunal took up that preliminary observation in these remarks:
103. The consequence of the 2005 amendments is that there cannot be a GST benefit, and thus Div 165 cannot apply to supplies made on or after 17 March 2005. That is so because the effect of s 75-11(2) of the GST Act in the present case is that the method of calculating the margin, and the GST, is dependant upon the valuation as at 1 July 2000, not the acquisition price paid by the supplier. Thus it is of no consequence in the present case whether the supplier to end purchasers was Simnat or Blesford or Mooreville.
104. The result is that Div 165 cannot operate in the present case in relation to supplies on or after 17 March 2005 but there is a GST benefit in relation to sales that settled prior to that date.
129 The observations at [57], [103] and [104] seem to be that, first, with the scheme, the GST payable on settlements on or after 17 March 2005 is to be calculated in accordance with s 75-11(2) which operates to determine the margin on which GST is payable as the excess of the supply price by Blesford and Mooreville over an approved valuation (taking account of the required methodology) of the relevant interest as at 1 July 2000 (notwithstanding that Unit Trend lodged BAS returns for settlements on or after 17 March 2005 on the basis of Blesford and Mooreville’s proportionate acquisition price/unit sale price construct of the margin, rather than a 1 July 2005 approved valuation/unit supply price construct); and, secondly, absent the scheme, Simnat would have sold and settled sales of units in Towers II and III and the margin also would have been determined on the footing of an approved valuation as at 1 July 2000.
130 Therefore, Unit Trend did not obtain a GST benefit from the scheme for the purposes of s 165-10(1)(a) for settlements on or after 17 March 2005.
131 That result arose for the Tribunal for settlements on or after 17 March 2005, because absent the scheme, s 75-11(2) had no application; s 75-10(2) is subject to s 75-10(3); and, s 75-10(3) contemplates Simnat having acquired the supplier interest prior to 1 July 2000 and a margin being determined as the excess of the unit supply price over an approved valuation of the corresponding interest at 1 July 2000.
Section 165-5(1)(b): Is the GST benefit attributable (or not) to the making of a choice, election, application or agreement by [Unit Trend] that is expressly provided for by the GST law?
132 Before the Tribunal, Unit Trend contended that the GST benefit obtained by it was attributable to these events (at [105]):
(a) the choices made by Blesford and Mooreville to become members of the GST group, a choice made under s 48-5 of the GST Act;
(b) the agreement by Simnat and Blesford that the supply of Tower II was of a going concern, an agreement made under s 38-325(1)(c) of the GST Act;
(c) the agreement by Simnat and Mooreville that the supply of Tower III of a going concern, an agreement made under s 38-325(1)(c) of the GST Act;
(d) the choices made by Blesford and Mooreville to apply the margin scheme, choices made under s 75-5 of the GST Act.
133 Unit Trend contended that had an election not been made to apply the margin scheme to settlements of units in each Tower, it would have been liable under s 9-40 to pay GST on each settlement as a taxable supply for the purposes of s 9-5, of 1/11th of the sale price. However, Unit Trend contended that it chose to apply the margin scheme to all settlements with the result that the amount of GST payable on each taxable supply became 1/11th of the margin. The Tribunal noted at [106] that Unit Trend contended that the only reason it is obliged to pay a reduced amount of GST on each supply is by operation of the margin scheme, and the concessional margin scheme was only engaged by the choice or election Unit Trend made.
134 Unit Trend contended that the GST benefit it obtained was attributable to that election.
135 Unit Trend contended that in any event the test to be applied is whether or not the GST benefit is “attributable to the making … of a choice, election, application or agreement that is expressly provided for by the *GST law” and that Federal Commissioner of Taxation v Sun Alliance Investments Pty Ltd (in liq) (2005) 225 CLR 488 at [79] and [80] is authority for the proposition that the phrase “attributable to” means simply a “causative connection” and not necessarily a direct or sole causative connection.
136 The Commissioner contended that the GST benefit arose out of a combination of factors including the transfer of ownership of Towers II and III to Blesford and Mooreville and sales by those companies under the margin scheme contracts. At [107], the Tribunal noted the Commissioner’s contention that where a GST benefit “arises as a result of more than a mere election then s 165-5(1) does not apply” [emphasis added]. The Commissioner relied upon a decision of this Court in Walters v Federal Commissioner of Taxation (2007) 162 FCR 421 which concerned the construction of the phrase “attributable to” in the context of s 177C(2)(a) of the 1936 Act. However, it should be remembered that s 177C(2) was not in the same terms as s 165-5(1)(b) although notions inherent in s 177C(2)(a)(i) are very similar to those contained in s 165-5(1)(b). Section 165-5 did not contain a provision like s 177C(2)(a)(ii) until 2008, which is not part of the statutory regime applicable to the events in question in this case.
137 As to the notion of “attributable to” in the context of the GST Act and particularly Division 165, the Tribunal said this at [110]:
… We take the view that the purpose of s 165-5(1)(b) is to preserve entitlements to benefits (measured in terms of reductions in GST that would otherwise apply) as a consequence of specified legislative provisions which create those benefits. We take the view that this exclusion does not extend to benefits that have some connection with choices that are provided for where the benefit is not explained by the choice but is explained by something else – in this case the sales of Tower II and Tower II by Simnat to Blesford and Mooreville. The GST benefit here is attributable to the use of the higher amount as the consideration for the acquisition used in the calculation of the margin under the margin scheme rules. The higher amount is not the product of the election to adopt the margin scheme but is a result of the transfers of Tower II and Tower III and the consideration agreed to be paid for them. We take the view that a development group, such as Raptis, which acquires land in respect of which no input tax credits are available, will always sell the developed product under the margin scheme if the end purchasers, such as those who purchases from Raptis, would not be able to enjoy any benefit of input tax credits. Accordingly, we consider that the margin scheme would have been applied to any sales of completed apartments in the development in any event. Thus the GST benefit arises not out of any election or choice but from the effect of the transfers of Tower II and Tower III.
[emphasis added]
138 Therefore, in the Tribunal’s view, as a matter of purposive construction of s 165-5(1)(b), the GST benefit must be “explained by” the choice or election made and not by “something else” in order to exclude the operation of Division 165. The Division is not excluded from operation, in the Tribunal’s view, in circumstances where the GST benefit is explained by factors other than the relevant choice, election, application or agreement.
Section 165-5(1)(c)(i): Sole or dominant purpose test
139 Section 165-15(1) sets out 12 factors to be taken into account for the purposes of s 165-5(1)(c) in considering an entity’s purpose in entering into or carrying out the scheme (or part of the scheme) from which an avoider obtained a GST benefit, so as to determine whether the entity did so “with the sole or dominant purpose” of that entity or another entity getting a GST benefit from the scheme. At [115], the Tribunal observed that the focus of the inquiry is directed to the purpose of the persons who entered into or carried out the scheme; subjective purpose is irrelevant; the 12 factors are to be objectively assessed; and the question asked by s 165-5(1)(c)(i) is this: Is it reasonable to conclude having regard to the 12 factors and the conduct of the relevant actors that an entity entered into or carried out the scheme (or a part of it) with the necessary sole or dominant purpose?
140 At [148], the Tribunal found:
The balancing of the factors leads us to the conclusion that the dominant purpose of those who entered into and carried out the scheme was to secure the GST benefits generated by the scheme only for the GST benefits associated with supplies made pursuant to Simnat contracts. We do not reach that conclusion in relation to the supplies made pursuant to Blesford and Mooreville contracts. In those instances we are satisfied that the dominant purpose was asset protection.
[emphasis added]
Section 165-5(1)(c)(ii): The principal effect of the scheme
141 The question to be determined is whether the principal effect of the scheme as found (or a part of it) is that the avoider (the s 165-5(1)(a) entity) gets the GST benefit from the scheme directly or indirectly. At [152], the Tribunal answered that question by looking at the effect of the scheme on Blesford, Mooreville and Simnat, not Unit Trend as the representative taxpayer for the GST group. The Tribunal regarded these entities as the nearest equivalents to “the avoider”. At [161] and [162], the Tribunal made these findings:
161. The conclusion we draw in relation to the princip[al] effect of the scheme, having regard to the tests … is that, for sales of apartments where the contract for the sale was entered by Simnat, the principal effect of the scheme was the GST benefit. Division 165 applies to these sales.
162. The other conclusion that needs to be drawn is that for supplies pursuant to contracts entered into by Blesford and Mooreville it is not possible to conclude that the principal effect of the scheme was to secure the GST benefit and accordingly Division 165 does not apply.
Shortfall Penalty
142 At [164], the Tribunal notes that the Commissioner assessed penalties of $5,405,367.00 in respect of shortfalls arising out of the assessments and amended assessments. The Tribunal also notes at [164] that the penalties were assessed on two alternative bases namely:
(a) pursuant to s 284-75 of Schedule 1 to the [Taxation Administration Act 1953 (Cth)] at the rate of 25% of the GST shortfall amount (“the GST shortfall penalty”) based on a failure to take reasonable care to comply with a taxation law (see s 284-90);
(b) pursuant to s 284-145 of Schedule 1 to the Administration Act at the rate of 25% of the “scheme shortfall amount” (see ss 284-150(1) and (2), s 284-155 and 284-160(a)(ii)).
143 Although the penalty amounts were reduced after objection to take into account a reduction in the GST shortfall amount, penalties at 25% of the shortfall amount were maintained. At [166], the Tribunal acts on the footing that “it is necessary for those responsible for the [misleading or false] statement that led to the shortfall to have failed to have taken reasonable care”. At [169], the Tribunal sets out some observations of Hill J in MLC Limited v Commissioner of Taxation (2002) 126 FCR 37 concerning positions adopted by the taxpayer in that case in “good faith” after “taking advice” concerning a particular view which was “highly arguable”. At [170], the Tribunal quoted a series of propositions describing the content of the reasonable care test drawn from paras 1.67 to 1.77 of the Explanatory Memorandum to A New Tax System (Tax Administration) Bill (No. 2) 2000. Having done so, the Tribunal said this at [171], [172] and [173]:
171. The position with penalties is moot for the supplies post 17 March 2005 given our conclusion that these matters ought to be remitted to the Commissioner to allow Unit Trend to produce an approved valuation. But for that there would, in our view, have been a failure to observe the terms of the legislation, particularly when regard is had to the sophistication and resources of Unit Trend. Thus we would have been satisfied that there had been a failure to take reasonable care.
172. With respect to the pre-17 March 2005 supplies, there was a scheme shortfall amount for those sales contracted for by Simnat but settled by Blesford and Mooreville. The penalty has been properly imposed to the extent of these supplies.
173. For the supplies represented by sales of apartment contracted for by Blesford and Mooreville and settled before 17 March 2005 there is no shortfall and no penalty arises.
The grounds of appeal agitated in relation to the declaration and penalty
144 As to the declaration, ground (a) of the appeal is in the following terms:
(a) the Tribunal applied the wrong test in assessing whether Division 165 might apply to the alleged GST benefit, by applying a gloss to the words used by Parliament. The Tribunal erred in saying that the exclusion did not extend to benefits that have some connection with choices that are provided for, in the GST Act, where the benefit is not explained by the choice, but is explained by something else. The Tribunal should instead have found that the alleged GST benefit in this case was attributable to the making of certain elections and choices referred to below, in the sense that there was a causative connection between the making of those elections and choices and the GST benefit, whether or not that was the sole causative connection or the primary causative connection. The elections, choices or agreements in question are those referred to in the reasons of the Tribunal at paragraph 105.
[emphasis added]
145 The question of law said to arise going to that ground is this:
(a) Section 165-5(1)(b) of the GST Act provides that Division 165, which is to do with anti-avoidance, operates if, relevantly, the GST benefit is not attributable to the making, by an entity, of a choice, election, application or agreement that is expressly provided for by the GST Act. Is it thus correct to say that that exclusion “does not extend to benefits that have some connection with choices that are provided for where the benefit is not explained by the choice, but is explained by something else”, as the Tribunal found at paragraph 110 of its reasons?
146 As to the penalty, ground (b) of the appeal is in these terms:
(b) In dealing with the question of whether the penalty ought not be imposed, or should be reduced on account of the applicant having taken reasonable care, and in dealing with the questions of whether the penalty ought to be further remitted, the Tribunal failed to set out the findings on material questions of fact and refer to the evidence or other material on which those findings were based.
147 The question of law said to arise going to that ground is this:
(b) The Tribunal failed, in respect of the period prior to the effective date of the amending laws (which commenced on 17 March 2005) to make in its written reasons findings of fact on the issue of whether the applicant and its advisers had taken reasonable care, or on the issue of whether the penalty ought to be remitted. Has the Tribunal complied with its duty under subsection 43(2) of the Administrative Appeals Tribunal Act 1975 (as explained by section 25D of the Acts Interpretation Act 1901) to give reasons for its decision to affirm the objection decision insofar as the respondent has failed to reduce or remit the penalty?
Summary of the elements of the Tribunal’s decision
148 In summary, the Tribunal decided as follows:
1. For settlements made up to and including 16 March 2005, Unit Trend was entitled to apply the margin scheme to supplies of a stratum unit and by operation of s 75-10(2) of the GST Act (prior to the operation of the 2005 Amendment Act) the margin for each supply is the amount by which the supply price to an end purchaser exceeds Blesford and Mooreville’s proportionate acquisition price as at 7 May 2004 and 23 November 2004 respectively.
2. For settlements on and after 17 March 2005, s 75-11(2) of the GST Act applied such that the margin for each supply is the amount by which the supply price exceeds an “approved valuation” of a corresponding interest as at 1 July 2000.
3. As no “approved valuation” existed for either Tower II or Tower III, the matter ought to be remitted to the Commissioner for further consideration of valuations to be provided by Unit Trend that satisfy the notion of an “approved valuation” under the relevant subordinate instruments.
4. For settlements up to 16 March 2005 however, Unit Trend obtained a GST benefit from a scheme in the way described at [63] to [74] in these reasons; that GST benefit was attributable to the sale by Simnat of Towers II and III to Blesford and Mooreville rather than a “mere” choice or “mere” election expressly provided for by a GST law. That being so, Division 165 was not excluded from operation so far as s 165-5(1)(b) is to be construed as the GST benefit must be explained by the choice or election.
5. Division 165 operates only in relation to settlements up to and including 16 March 2005 as a GST benefit arose from a scheme as earlier described in relation to such settlements but Division 165 cannot operate in relation to settlements on or after 17 March 2005 as no GST benefit arose from the scheme because the GST payable under the scheme or, alternatively, under the GST Act absent the scheme (applying the margin scheme in each case) was to be determined on the same footing, namely, a unit supply price comparison with an approved valuation of a corresponding interest as at 1 July 2000.
6. The dominant purpose of those who entered into or carried out the scheme (concerning settlements up to and including 16 March 2005) was to secure the GST benefit generated by the scheme, but only the GST benefit associated with Simnat making supplies pursuant to “Simnat contracts”. Thus, the Commissioner’s declaration negating that GST benefit was to be affirmed.
7. In relation to supplies made by Blesford and Mooreville, the dominant purpose was “asset protection”.
8. For sales of units where the contract was entered into by Simnat, the principal effect of the scheme was the obtaining of the GST benefit.
9. For sales by Blesford and Mooreville, it could not be said that the obtaining of the GST benefit was the principal effect of the scheme.
10. The Commissioner’s declaration, so far as it related to settlements on or after 17 March 2005, was to be set aside.
11. As to the penalty, the objection decision is to be set aside so far as it relates to supplies by Blesford and Mooreville up to and including 16 March 2005 under contracts made by them. Otherwise, Blesford and Mooreville entered into and carried out the scheme for the dominant purpose of asset protection and, in any event, Division 165 cannot operate in relation to sales on and after 17 March 2005.
The Commissioner’s cross appeal
149 The Commissioner cross-appeals on four grounds from that part of the Tribunal’s decision setting aside the Commissioner’s objection decision concerning supplies made on or after 17 March 2005 (including shortfall penalty), requiring the remission of the matter to the Commissioner for further consideration taking into account valuations to be submitted by Unit Trend on the basis of valuation methods contained in particular instruments. By operation of the Tribunal’s orders, Unit Trend is required to submit a valuation of the freehold interest in Tower II and Tower III in compliance with “Margin Scheme Valuation Requirements Determination (No. 2) 2000” for supplies made up to and including 30 November 2005 and “Margin Scheme Valuation Requirements Determination MSV2005/3” for supplies made on or after 1 December 2005.
150 The Commissioner says that the Tribunal failed to address his submission that “MSV2005/1” also applied to supplies made between and including 17 March 2005 and 30 November 2005 (ground (a) of the cross-appeal); and, “MSV2005/2” applied to supplies made between and including 1 July 2005 and 30 November 2005 (ground (b)).
151 By ground (c), the Commissioner says that the Tribunal ought to have found that in addition to Determination No. 2 of 2000, MSV2005/1 was a determination for the purposes of s 75-35 which specified the requirements for making valuations for the purposes of Division 75 concerning supplies made between and including 17 March 2005 and 30 November 2005.
152 By ground (d), the Commissioner contends that the Tribunal ought to have found that in addition to MSV2000/2 and MSV2005/1, MSV2005/2 was a s 75-35 determination specifying the requirements for making valuations (for Division 75) for supplies made (under contracts entered into before 1 July 2005) on and from 1 July 2005, or alternatively, between and including 1 July 2005 and 30 November 2005.
153 The Commissioner subsequently informed the Court through his solicitors that he no longer pressed the contention that MSV2005/2 is “an applicable margin scheme valuation determination for the making of an approved valuation for the purposes of subsection 75-11(2) of the GST Act”. Since the Commissioner does not press the contention concerning MSV2005/2, we proceed on the footing that the Commissioner does not press grounds (b) and (d) of the cross-appeal which address the application of MSV2005/2 and that questions (b) and (c)(iii) and (iv), which also address the operation of MSV2005/2, do not now arise for consideration.
The resolution of the issues on appeal
The Declaration under Division 165
154 Division 165 “operates” if the integers of s 165-5(1) are satisfied.
155 The first consideration is whether an entity, characterised as an avoider, gets or got a GST benefit from a scheme: s 165-5(1)(a). The Tribunal notes at [89] that Unit Trend accepted that the arrangements identified by the Commissioner constituted a scheme within the GST Act. The taxpayer adopted the same position before the Full Court. The scheme comprises the steps as described at [110] and [111] of these reasons and as so found by the Tribunal based upon the taxpayer’s acceptance of that characterisation (see [115] of these reasons). The steps in the scheme involved a GST-free transfer of Towers II and III to Blesford and Mooreville (as a going concern or transfers within a GST group); a GST-free supply by Simnat at a supply price that reduced the margin of supply to end purchasers that would have prevailed had Simnat supplied end purchasers; and Unit Trend’s choosing to apply the margin scheme to supplies by Blesford and Mooreville to end purchasers.
156 The Tribunal regarded Simnat, Blesford and Mooreville as the closest analogues of “the avoider” rather than Unit Trend. The Tribunal found that the avoider “got a GST benefit” from the scheme because, apart from the scheme, Simnat would have continued to be the vendor; it would have conveyed (settled) the units to end purchasers; and it would have paid GST, at least, on the basis of a valuation of the Towers at 1 July 2000: see [119], [122] and [123] of these reasons.
157 It followed for the Tribunal that for settlements up to 17 March 2005, the margin would have been “much greater” than under the scheme and the GST payable under the Act would have been “much greater” than the GST payable under the Act having regard to the scheme.
158 These findings of fact are not said by Unit Trend to reflect any error of law or raise a question of law. Clearly enough, on the factual question, the Tribunal was persuaded that Simnat’s conduct in relation to Tower I provided a clear analogue for the postulate of what would have occurred in relation to Towers II and III had the scheme not been entered into or carried out.
159 The question of whether the approach adopted by the Tribunal to s 165-10(1) of applying the jurisprudence deriving from a consideration by the Courts of s 177C of the 1936 Act is not a live issue in the appeal. It may however, in the absence of authority on the question, be helpful to make these brief observations. Section 165-10(1) contemplates, in determining whether an entity has obtained a GST benefit from a scheme, an analysis of what could reasonably be expected to be the position, apart from the scheme as found on the facts. That formulation of the approach to determining a GST benefit involves a hypothetical postulate, as does s 177C of the 1936 Act. In the context of s 177C of the 1936 Act, an inquiry is required, as the Tribunal noted, into what the taxpayer would or might reasonably be expected to have done had the collection of arrangements constituting the scheme not been entered into or carried out. Having regard to the similarity in the language of the two provisions, and the history of the evolution of Division 165 and its modelling as an anti-avoidance device on the content and structure of Part IVA, there seems to be no good reason not to apply to s 165-10(1), an analysis that involves an inquiry into what the taxpayer would or might reasonably be expected to have done had the scheme as defined in s 165-10(2), and, as found on the facts, not been entered into or carried out.
160 The second consideration is whether Division 165 fails to operate because the GST benefit, so found on the facts, from the scheme as found, is not attributable to the making by any entity (not just the avoider) of a choice, election, application or agreement expressly provided for by the GST law.
161 The GST benefit from the scheme was found to be the amount of the difference between GST payable on end sales to purchasers by Blesford and Mooreville, settled up to and including 16 March 2005, and GST that would have been payable by Simnat on end sales (settlements) to that date, had the scheme not been entered into or carried out by Simnat, Blesford or Mooreville. The GST benefit therefore was found, for the purposes of s 165-10(1)(a), to be an amount calculated by reference to the GST payable on particular transactions, namely, sales to end purchasers with or without the scheme. Although the measure of the amount of the GST benefit is calculated on those transactions, the elements of the scheme that gave rise to or by which the avoider “got a GST benefit from [the] scheme”, necessarily involved antecedent transactions, as found, involving an election to engage in a GST-free going concern transfer under s 38-325 by Simnat to Blesford and Mooreville (and GST-free inter-GST group transfers) at a market valuation reflecting improvements to the land (thus reducing the end sales margin), and the exercise of a choice in applying the margin scheme to sales of the units to buyers.
162 In other words, although the amount of the GST benefit is calculated on the basis of the GST payable on end purchaser transactions, with or without the scheme, it may well be artificial in construing whether the GST benefit is attributable to a choice etc, to disregard the choices or elections inherent in the antecedent transactions (expressly provided for by the GST law) that necessarily formed a part of and led to the transactions on which the GST benefit arises and is calculated.
163 Can it be said that the GST benefit as found by the Tribunal is not attributable to the making by any entity of a choice, election, application or agreement expressly provided for by the GST law?
164 The Tribunal construed s 165-5(1)(b) in a way reminiscent of the observations of Pagone J, Tax Avoidance in Australia, G.T. Pagone, Federation Press, 2010 at p 149 where the author said this of the statutory purpose in excluding, by s 165-5(1)(b), the operation of Division 165:
The purpose of the exclusion from the operation of Div 165 is to preserve the entitlement and effect of specific legislative provisions expressly providing for benefits that might otherwise be defeated by the operation of Div 165. This purpose may exclude some connections between tax benefits and choices etc where the connection may not be causative in the sense of supplying the explanation for the GST benefit.
The language of the section suggests that being partly causative of a GST benefit may not be sufficient for the exclusion to apply if it not be the cause responsible for the GST benefit.
[emphasis added]
165 At [110], the Tribunal accepted that the statutory purpose of s 165-5(1)(b) is to preserve entitlements to benefits expressly conferred that otherwise might be defeated by the operation of Division 165. For the Tribunal, giving effect to the statutory purpose meant that demonstrating “some connection” between the GST benefit and the choices etc made and provided for, is not a sufficient connection unless the GST benefit is “explained” by the choice, rather than “something else”. The Tribunal considered that the GST benefit, as found, consisting of the benefit arising on end purchaser transactions, is not explained by the choice of applying the margin scheme to those transactions, but is explained by, and is thus attributable to, the “use” of the higher intermediate amount (so as to narrow the final margin) and reduce the amount of GST payable under the margin scheme. The Tribunal considered that the emergence and use of the “higher amount” is not a function of any election or choice in applying the margin scheme to end purchaser transactions but is a result of earlier transfers coupled with the higher transfer price selected for those upstream transactions.
166 Moreover, the Tribunal considered that because no input tax credits were available to the developer, the margin scheme would have been applied in any event with the result that the choice of or election to apply the margin scheme was not causative of the GST benefit. Therefore, the application of the margin scheme did not explain, for the Tribunal, the GST benefit, as found. The GST benefit could only be explained by the antecedent transactions and the intermediate higher supply price to Blesford and Mooreville from Simnat.
167 Unit Trend contends that this approach by the Tribunal adds an impermissible gloss to the terms of s 165-5(1)(b) by importing into the subsection notions of “solely attributable”, inherent in the approach of seeking to determine whether the GST benefit is “explained” by the relevant choice etc rather than by “something else”.
168 Identifying the object of Division 165 is not a matter left to the Explanatory Memorandum (“EM”) in support of A New Tax System (Goods and Services Tax) Bill 1998 (the “GST Bill 1998”). The Parliament has recorded in the Act itself at s 165-1 a statement of “[w]hat this Division is about”. As mentioned earlier, the object of Division 165 is to deter schemes to give entities benefits by reducing GST (and other manipulations of the burden that might fall upon a taxpayer under the GST Act). The fulfilment of the object is described in this way: “If the dominant purpose or principal effect of a scheme is to give an entity such a benefit, the Commissioner may negate the benefit an entity gets from the scheme by declaring how much GST or refund would have been payable, and when it would have been payable, apart from the scheme” [emphasis added]. The focus of the Division is described as being “aimed at artificial or contrived schemes” [emphasis added].
169 The references to “dominant purpose” and “principal effect” focus upon s 165-5(1)(c) which is concerned with whether it is reasonable to conclude that particular entities entered into or carried out the scheme (or part of it) with the relevant sole or dominant purpose or whether the principal effect of the scheme (or part of it) is to confer a GST benefit from the scheme directly or indirectly on the avoider.
170 In describing the object, focus or aim of the Division, s 165-1 does not suggest that the nature of the attribution contemplated by s 165-5(1)(b) is that the choice, election, application or agreement is to be the sole or dominant cause of the GST benefit. Section 165-1 does not recite any characteristic of what might be comprised in the notion of a GST benefit being attributable (or not) to a relevant choice etc expressly provided for by the Act. The feature given emphasis in s 165-1 that renders a scheme artificial or contrived so as to enable the Commissioner to negate a GST benefit is whether the dominant purpose of entry into (or carrying out) the scheme, or the principal effect of the scheme is, put simply, to give a relevant entity a GST benefit.
171 The description of the object of the Division at s 165-1 is consistent with the explanation of the Division contained in the EM for the GST Bill 1998. For example, the EM contains these observations:
6.303 Division 165 operates to deter avoidance schemes that are designed to obtain GST benefits by taking advantage of the GST law in circumstances other than that intended by the GST law.
…
6.305 The Division allows the Commissioner to make any such scheme ineffective where it is concluded that the scheme was entered into, or carried out, for the dominant purpose of an entity obtaining a GST benefit, or the scheme had the principal effect of an entity obtaining a GST benefit.
…
6.307 The general anti-avoidance provision (‘GAP’) is a key component in maintaining the integrity of the GST base.
…
6.313 Division 165 reflects the policy underlying the income general anti-avoidance provisions found in Part IVA of the [1936 Act]. However, Division 165 has been designed to meet the needs of a transaction based tax, such as, a GST, and accordingly it has its own peculiar features.
…
6.315 Division 165 applies where an entity (referred to in this Chapter as the ‘avoider’) has obtained a GST benefit from a scheme, and it has concluded that the dominant purpose of the scheme (or part of a scheme) is to give any entity a GST benefit, or a principal effect of a scheme (or part of a scheme) is to give the avoider the GST benefit – subsection 165-5(1).
6.316 By considering the dominant purposes or principal effect of a scheme, Division 165 will cover what is commonly considered to be tax avoidance. Bona fide supplies, acquisitions and importations do not come within the ambit of the test.
…
6.319 Three requirements must be satisfied before Division 165 applies:
• there must be a scheme;
• an entity must obtain a GST benefit from the scheme;
- the concept of a GST benefit will cover reducing GST payable, increasing a refund, delaying payment of GST and bringing forward a refund of GST; and
• it is reasonable to conclude, taking into account a list of relevant factors, that:
- the sole or dominant purpose of an entity that entered into or carried out the scheme (or part of the scheme) was to obtain a GST benefit for any entity; or
- a principal effect of the scheme (or part of the scheme) was to obtain a GST benefit for the avoider.
172 The EM elaborates on the three requirements of: a scheme, a GST benefit from a scheme, and the dominant purpose or principal effect test. There is no discussion in the EM of the notion of a GST benefit not being attributable to a choice, election etc expressly provided for by the Act. The emphasis in the statements of the object and purpose of the Division seems to be those matters recited at 6.305, 6.315, 6.316 and the three particular features at 6.319. The discussion of the three requirements gives no explanation of the scope of the relationship between the GST benefit and a relevant choice or election etc.
173 That may be explained by the Supplementary Explanatory Memorandum (the “SEM”) tabled in the Senate in support of amendments to the GST Bill 1998. Section 165-5(1) was in the following terms in the GST Bill 1998:
General rule
(1) This Division operates if:
(a) an entity (the avoider) gets or got a *GST benefit from a *scheme; and
(b) taking account of the matters described in section 165-15, it is reasonable to conclude that either:
(i) an entity that (whether alone or with others) entered into or carried out the scheme, or part of the scheme, did so with the sole or dominant purpose of that entity or another entity getting a *GST benefit from the scheme; or
(ii) a principal effect of the scheme, or of part of the scheme, is that the avoider gets the GST benefit from the scheme directly or indirectly.
174 That form of s 165-5(1) did not contain a subsection in terms of s 165-5(1)(b) as ultimately enacted. The absence of such a provision from the GST Bill 1998 provoked requests for amendments to the Bill. The relevant parts of the SEM are these:
General anti-avoidance provision (Division 165)
1.117 Division 165 operates to deter avoidance schemes that are designed to obtain GST benefits by taking advantage of a GST law or the wine tax, or luxury car tax laws.
1.118 Queries have been made about the scope of the current Division 165. It has been suggested that the Division may have unintended effects and may apply to transactions not intended to defeat the GST law. In particular, it has been suggested that the exercise of an explicit option under the GST law may trigger the anti-avoidance provisions. …
1.119 Requests 79 to 82 seek amendments to Division 165 to clarify the intended operation of the Division.
[emphasis added]
1.120 Request 79 substitutes a new section 165-1 to explain what the Division is about, pointing out that it is aimed at artificial and contrived schemes. Examples are given of activities the Division is not intended to cover.
1.121 … Request 80 inserts new paragraph 165-5(1)(aa) so that the exercise of an option expressly provided for under the GST law will not fall within the scope of the anti-avoidance provisions. …
175 The concerns reflected in the requests for amendment were that the exercise of an explicit option (an expressly conferred choice etc) might trigger the unintended operation of Division 165 (1.118) and thus a new s 165-5(1)(aa) ought to be adopted so that the exercise of an option expressly provided for under the GST law would not engage Division 165 (1.121).
176 Section 165-5(1)(b) was inserted into the GST Act by reason of these amendments.
177 Because s 165-5(1) contemplates the getting of a benefit from a “scheme” which term engages “an arrangement” (s 165-10(2)) which, in turn, may contemplate a number of steps (each potentially involving choices or elections expressly provided for by the GST law), the statutory intention to be derived from the language of s 165-5(1) and s 165-10(2) in the context of Div 165 as a whole is that s 165-1 does not only engage a single choice, election, application or agreement expressly provided for by the GST law (or the wine tax law or the luxury car tax law) but engages one or more such expressly provided for choices comprising the scheme (or arrangement). The notion that expressly provided for choices “comprise” the scheme may be thought to be an argumentative construction in the sense that a scheme may be comprised of some steps chosen because of (or dictated by) the particular commercial circumstances and also some choices or elections expressly provided for by the relevant law. In those circumstances of mixed choices determined in part by the commercial arrangements and in part by choices expressly provided for by the GST law, the question to be decided is whether, as a matter of proper construction of s 165-5(1) in context, the GST benefit is attributable to the choices or elections implemented within the scheme expressly provided for by the GST law, or whether, because the scheme is comprised of those choices and other steps or choices not expressly provided for by that law, the GST benefit is attributable to the aggregated arrangement, that is, the scheme rather than the choices forming part of the scheme, expressly provided for by the GST law itself.
178 The taxpayer contends that had Blesford and Mooreville not made choices or elections expressly provided for by the GST law to join the GST group of companies (of which Unit Trend is the representative) under s 48-5 of the GST Act; seek and obtain the approval of the Commissioner for that purpose; and enter into intra-group arrangements between Simnat and Blesford and Mooreville respectively for sales of Towers II and III as going concerns in conformity with the requirements of the GST Act under s 38-325(1)(c), a GST liability would have arisen on those sales.
179 The taxpayer also contends that but for those choices and the further choice or election to apply the margin scheme on end sales by Blesford and Mooreville under s 75-5 of the GST Act, the taxpayer “would have paid full GST on both the transfers from Simnat and on end sales”.
180 It follows for the taxpayer that it is only because of these choices expressly provided for by the GST law of which the steps in the scheme are the expression, that the taxpayer is liable for less GST than if Blesford and Mooreville had not made the identified choices and entered into the transactions embodying those choices, thus giving rise to the GST benefit.
181 On the face of the description of the object of the Division in s 165-1, there is nothing to suggest that the ordinary understanding of the English words “attributable to” ought to bear anything other than their ordinary meaning: “attributable” as an adjective (describing the proper noun “GST benefit” in s 165-5(1)(b)) means: “Capable of being attributed or ascribed, esp. as owing to, produced by”: Oxford English Dictionary (OED), 2nd Ed, 1989, online version December 2011. It is a derivative of the verb “to attribute”. As a verb, “attribute” has a number of meanings including: “To ascribe to as belonging or proper; to consider or view as belonging or appropriate to”; “To ascribe, impute, or refer, as an effect to the cause; to reckon as a consequence of”; “To ascribe to an author as his work”: OED, 2nd Ed, 1989, online version December 2011.
182 In Federal Commissioner of Taxation v Sun Alliance Investments Pty Limited (in liq) (2005) 225 CLR 488 (“FCT v Sun Alliance”), the High Court considered the approach to construction of a provision of the 1936 Act (and analogues in the 1997 Act) that sought to address the vice of company A generating a capital loss on disposal of shares in company B where no equivalent “economic loss” had been suffered by company A because pre-acquisition profits of company B (that is, retained profits in company B at the date of acquisition of the shares by company A) were subsequently distributed to company A as rebatable dividends. The capital loss on disposal of the shares in such circumstances was thought to not reflect the actual economic loss as company A had enjoyed the economic benefit of a distribution of retained profits before disposal of the shares.
183 The 1936 Act provides for the inclusion of net capital gains calculated by taking into account net capital losses, in the assessable income of the taxpayer. Capital losses can be carried forward. They are to be calculated by reference to the consideration received on disposal of the asset and the “reduced cost base” of the asset. The reduced cost base is to be calculated by reference to particular “amounts” contemplated by the 1936 Act. If the disposal asset is a share, the amount worked out in calculating the reduced cost base of the asset is to be further reduced by any rebatable dividend adjustment in relation to the share (called, for this purpose, an “RDA share”). For example, a share might be sold for $5.00 which has a reduced cost base of $10.00 (calculated according to the relevant amounts referred to by the 1936 Act) giving rise to a capital loss of $5.00. If, however, a dividend of pre-acquisition retained profits has been received of $5.00, the cost base might be adjusted by a reduction of $5.00 to reflect the economic benefit of the dividend, resulting in no capital loss.
184 A rebatable dividend adjustment might arise if four criteria are satisfied. Criterion (b) is the subject of the Court’s particular consideration in FCT v Sun Alliance. Criteria (a) and (b) were in these terms:
(a) under an arrangement, a company makes a distribution to the holder of the RDA share; and
(b) an amount (the “attributable amount”), being the whole or a part of the distribution, could reasonably be taken to be attributable to profits that were derived by the company before the holder acquired the RDA share
…
[the emphasis is that reflected in the provision quoted by the Court at [9]]
185 One aspect of criterion (b) concerned whether the entity had “derived profits before the holder acquired the RDA share”. The High Court concluded that a profit had relevantly accrued. That matter is not presently relevant. The High Court then considered whether the distribution “could reasonably be taken to be attributable to profits” etc.
186 At [77], the Court (Gleeson CJ, Gummow, Kirby, Callinan and Heydon JJ) observed that criterion (b) presents “a question of characterisation” requiring “an inquiry as to the existence of a sufficient link between that whole or part of the distribution and profits derived by the company before a specified event” [emphasis added]. The Court at [77] said this:
… that link may be described in terms of necessary causation but, as with all questions of causality, the starting point is the identification of the purpose (here the legislative purpose) to which the question is directed.
[emphasis added]
187 The Court determined that the legislative purpose of the particular provision was directed to ensuring that a capital loss not be claimed where the result of the course of action described in the subsection was that the taxpayer had suffered no economic loss. The Court also observed at [77] that the “criterion of linkage”, an attribution described by the subsection as “reasonable”, was to be “read and applied accordingly”. At [80], the Court observed that criterion (b) was concerned with “the concept of causation, rather than source …”. In considering the concept of causation embodied in the notion of “attributable to” for the purposes of the subsection, the Court said this at [80]:
In determining whether the plaintiff’s loss of employment was “attributable to” the provisions of the Local Government Act 1972 (UK), Donaldson J in Walsh v Rother District Council said:
‘[T]hese are plain English words involving some causal connection between the loss of employment and that to which the loss is said to be attributable. However, this connection need not be that of a sole, dominant, direct or proximate cause and effect. A contributory causal connection is quite sufficient.’
Nothing, in either the text of [the subsection] or in its objects as expressed in the Explanatory Memorandum on the Bill for the Amending Act, indicates that a narrower meaning should be presently ascribed to that phrase.
188 The Court also observed that the phrase “could reasonably be taken to be” suggested that for the subsection to be enlivened the pre-acquisition profits need not actually be a contributory cause. It would be sufficient if the profits “may reasonably be capable of being seen as such”. The Court said this at [82]:
… given the breadth of the nexus contemplated by the words “attributable to”, where a pre-acquisition unrealised gain is a contributory cause to a post-acquisition realised profit, then that unrealised gain would, failing some break in the proverbial chain of causation, reasonably be capable of being taken to be a contributory cause to any distribution sourced in the subsequent realised profit.
[emphasis added]
189 There are many authorities to the same effect as the view expressed by Donaldson J in Walsh v Rother District Council [1978] 1 All ER 510 approved by the High Court in FCT v Sun Alliance and almost all of them concern the meaning to be ascribed to “attributable to” in the context of beneficial legislation conferring rights and entitlements to compensation for matters such as loss of employment, workers’ compensation benefits, pensions or other entitlements concerning war service and legislation directed to beneficial social security measures in a civil society, more generally.
190 In Repatriation Commission v Law (1980) 47 FLR 57, Bowen CJ and Brennan and Lockhart JJ said at p 68 in the context of the Repatriation Act 1920 (Cth) that it seemed clear that the expression “attributable to” involved an element of causation and the “cause need not be the sole or dominant cause: it is sufficient to show ‘attributability’ if the cause is one of a number of causes providing it is a contributing cause”. In Roncevich v Repatriation Commission (2005) 222 CLR 115, McHugh, Gummow, Callinan and Heydon JJ in the context of a claim to an entitlement to a pension under the Veterans’ Entitlements Act 1986 (Cth) due to incapacity from a defence-caused injury, said this at [27]:
The use disjunctively in s 70(5) of the expressions “arose out of” and “attributable” manifest a legislative intention to give “defence-caused” a broad meaning, and certainly one not necessarily to be circumscribed by considerations such as whether the relevant act of the appellant was one that he was obliged to do as a soldier. A causal link alone or a causal connection is capable of satisfying a test of attributability without any qualifications conveyed by such terms as sole, dominant, direct or proximate.
[emphasis added]
191 In the tortious context, Mason CJ said this in March v Stramare (E. & M.H.) Pty Ltd (1991) 171 CLR 506 at p 509 about the law’s approach to the notion of causation and its relationship with scientific approaches to causation as an “explanation” of things:
It has often been said that the legal concept of causation differs from philosophical and scientific notions of causation. That is because “questions of cause and consequence are not the same for law as for philosophy and science”, as Windeyer J. pointed out in National Insurance Co of New Zealand Ltd v Espagne. In philosophy and science, the concept of causation has been developed in the context of explaining phenomena by reference to the relationship between conditions and occurrences. In law, on the other hand, problems of causation arise in the context of ascertaining or apportioning legal responsibility for a given occurrence. The law does not accept John Stuart Mill’s definition of cause as the sum of the conditions which are jointly sufficient to produce it. Thus, at law, a person may be responsible for damage when his or her wrongful conduct is one of a number of conditions sufficient to produce the damage …
192 Section 165-5(1)(b) is not a broadly based enabling provision of the kind found in legislation directed to the matters such as those described in [189] of these reasons. However, the statutory purpose of the provision in excluding the operation of the anti-avoidance Division is to preserve the entitlement to and effect of the specific legislative options, choices, elections etc expressly provided for under a GST law giving rise to benefits that might otherwise be defeated by an unintended operation of Division 165. The provision excluding Division 165 ought to be construed in a way that gives effect to that purpose.
193 Section 165-5(1)(b) crafts a rule that gives operation to the Division to secure the Parliament’s objectives recited in s 165-1 of preventing the Division (and the Commissioner’s power of negation) from operating if the GST benefit has the relevant degree of connection with the making of expressly conferred choices etc.
194 Having regard to the matters discussed at [168] to [176] of these reasons, the language of s 165-5(1) in the context of the Division as a whole, preventing the Division from operating, seems to more properly contemplate causation in an allocative sense asking whether the nexus between the GST benefit and the exercise of the statutory choice is sufficiently close to provide an answer to the question, is the choice etc made by the taxpayer as expressly provided by a GST law, the predominant cause or the direct cause of the GST benefit? In that sense, the subsection does not import by its terms in the context of the Division and the Act a concept of causation in which the relevant choice etc is simply one of a number of contributory causes, as a sufficient connection. Otherwise, the Division would seem to have little field of operation. In approaching the question of construction we have had regard to the principles set out in Project Blue Sky Inc. v Australian Broadcasting Authority (1998) 194 CLR 355 at [69] – [71] and [78] (McHugh, Gummow, Kirby and Hayne JJ); Network Ten Pty Ltd v TCN Channel Nine Pty Ltd (2004) 218 CLR 273 at 280-281 (McHugh ACJ and Gummow and Hayne JJ); Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue (2009) 239 CLR 27 at [47] (Hayne, Heydon, Crennan and Kiefel JJ); CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384 at 408 (Brennan CJ, Dawson, Toohey and Gummow JJ); Newcastle City Council v GIO General Ltd (1997) 191 CLR 85 at 99 (Toohey, Gaudron and Gummow JJ) and at 112-113 (McHugh J).
195 However, if, having regard to the legislative purpose, a view is formed that “attributable to” imports the notion of causation in the sense of “some connection” or a “causal link alone” or a test of attributability that does not involve any qualification or limitation conveyed by such terms as “sole, dominant, direct or proximate” or the notion that “a contributory causal connection is quite sufficient”, then, clearly enough, Unit Trend has satisfied that test of causation and the GST benefit is attributable to a causal link alone consisting of the exercise of one or more choices expressly provided for by the Act.
196 The GST benefit in this case is sourced in the scheme having regard to all of the elements of that scheme as found on the facts. Section 165-5(1)(b) asks whether the GST benefit obtained from the scheme is caused in an allocative sense by the choices made by the taxpayer in the sense of belonging to the choices, elections or agreements expressly provided for by the GST law.
197 There were a number of choices.
198 Simnat, Blesford and Mooreville chose to enter into a GST-free supply (and acquisition) of a going concern that satisfied the requirements of the GST Act, at a supply price to Blesford and Mooreville that transferred the land at the relevant date for a consideration that reflected the market value of the improved land. The transfers as part of the going concern transaction also effected an intra-GST group transfer which apart from the going concern transaction, gave rise to a GST-free transfer. Having effected a complying transfer of a going concern in conformity with the GST law, Blesford and Mooreville sold and settled units in each Tower having chosen to apply the margin scheme to those sales, and having agreed with purchasers that the margin scheme was to apply to those sales. Unit Trend chose to apply the margin scheme to all sales. The going concern transaction resulted in a supply price to Blesford and Mooreville on which the margin of supply to end purchasers would be calculated for settlements up to and including 16 March 2005.
199 Had not these choices been made to apply the margin scheme to end purchaser transactions, together with the choices made in the antecedent arrangements or transactions all forming part of the scheme from which the GST benefit arose, as found, the GST benefit calculated on the end purchaser transactions would not have arisen. The GST benefit is thus attributable to the choices, elections and agreements made by the taxpayer in the sense that the GST benefit is explained by those choices etc as expressly provided for by the GST Act.
200 The Commissioner correctly observes that the taxpayer’s election or choice to enter into agreements to transfer Towers II and III from Simnat to Blesford and Mooreville was not itself an election or choice expressly provided for by the GST law. It was a commercial election or choice that brought about, in effect, an uplift in the intermediate cost base in the hands of Blesford and Mooreville which would diminish the margin on end sales. However, entry into those intra-group transactions on terms consistent with a sale of a “going concern” in a manner which conformed with s 38-325(1)(c) of the GST Act (as the Commissioner accepts), did involve an election or choice to transfer on terms expressly in conformity with s 38-325 and thus in a manner expressly consistent with the GST Act. The taxpayer was entitled to make a choice or election to enter into a going concern transaction in conformity with s 38-325 which had the effect that GST would not become payable on settlement of the transfers from Simnat to those entities.
201 If what lies at the heart of the GST benefit obtained from the scheme is the intermediate transaction resulting in an uplift in the transactional cost base (coupled with the application of the margin scheme to end sales) the intermediate transaction within the scheme involved the taxpayer making a choice or election to enter into a going concern transaction in conformity with s 38-325(1)(c). But for the making of the choice or election to transfer Towers II and III as a going concern in conformity with s 38-325(1)(c), a GST liability would have arisen by reason of the settlement of each transfer.
202 However, the choice or election to engage in a going concern transaction in conformity with s 38-325(1)(c) was not the only choice. Put simply, Unit Trend entered into a scheme comprising a number of sequential steps that ultimately gave rise to a GST benefit attributable to (or owing to or produced by) a number of choices, elections or agreements made as expressly provided for by the GST law (as it then stood) given expression in the arrangements comprising the scheme giving rise to that benefit with the result that Division 165 does not apply as s 165-5(1)(b) of Subdivision 165-A is not satisfied. Section 165-5(1) is conditioned on the GST benefit being attributable to the making of a choice, election, application or agreement expressly provided for by the GST law. The fact that it could be said that the benefit is attributable to a “scheme” resulting from a series of such choices etc does not prevent the GST benefit also being attributable to the making of those choices. This arises from the express use of “attributable to” rather than a narrower or more restrictive test.
203 The Tribunal concluded that the application of the margin scheme to end purchaser transactions did not involve the exercise of a choice etc on the part of Unit Trend because the margin scheme, in the circumstances of the particular development, would necessarily have been applied in any event. However, even though the particular commercial circumstances may have inevitably led to the exercise of a prudent choice to apply the margin scheme, the election to do so nevertheless involved a choice. The supplier of each unit to an end purchaser could have chosen (for no apparently good commercial reason) to pay GST on the basis of the supply price. Alternatively (for apparently good commercial reason), it could have chosen to (and did) apply the margin scheme to those transactions with the result that GST would be calculated on the margin of supply only, appropriately determined.
204 As to ground (a) of the appeal, the Tribunal did not fall into error in determining that for the purposes of s 165-5(1)(b) the notion of “attributable to” means that the GST benefit must be explained by a choice, election, application or agreement in the sense of an allocative concept in which the GST benefit belongs to or is directly explained by that choice or election etc. The Tribunal, however, fell into error in concluding that for settlements up to and including 16 March 2005 the GST benefit was not explained by the choices, elections etc made by Unit Trend, as the GST benefit deriving from the scheme was properly explained by each choice, election and agreement made by Unit Trend in the transactions central to the scheme (and therefore the “getting” of the GST benefit), and also to the end purchaser transactions on which the amount of the GST benefit was ultimately calculated.
205 If the statutory purpose of s 165-5(1)(b) is to be served of preserving for the taxpayer the choices, elections etc expressly conferred by the GST law, the GST benefit must be answerable to, explained by or belong to those choices.
206 It follows that for all settlements up to and including 16 March 2005, Division 165 did not operate because it was excluded as the GST benefit on the end purchaser transactions was attributable to the choices etc made by Unit Trend as described. It also follows that the Tribunal’s decision affirming the Commissioner’s objection decision in relation to settlements by Simnat of Simnat contracts up to and including 16 March 2005 must be set aside.
The application of the margin scheme and issues in relation to the calculation or determination of the amount of the margin
207 Unit Trend makes these contentions concerning the application of the margin scheme and the methods for determining the amount of the margin.
208 Fundamentally, Unit Trend contends that the GST Act, by operation of choices made or agreements reached, applies, as a matter of law, the margin scheme to the relevant transactions but due to a failure to bring subordinate legislative instruments into existence, the relevant provisions of the primary Act cannot operate and either no GST is payable on the transactions or the amount of the GST is to be calculated in accordance with Blesford and Mooreville’s GST inclusive market value of their relevant interest at the time of their acquisition of that interest. That market value is said to be represented by the existing market valuations.
209 The reasoning is as follows.
210 Up to 29 June 2005 (the commencement generally of the 2005 Amendment Act), the supplier could exercise a choice under s 75-5(1) to apply the margin scheme and under s 75-10(2) the margin for the supply is the excess of the supply price over the supplier’s acquisition price for the relevant interest. The choice once made determined, by operation of s 75-5(1), the application of the margin scheme. The amount of the margin was determined, as earlier described, by s 72-10(2) the “acquisition method”. That method of calculating the margin applied to supplies up to and including 16 March 2005. A new method applied on and after 17 March 2005. For supplies up to and including 16 March 2005, the acquisition method might however be displaced if any one of the circumstances set out in the table to s 75-10(3) applied. If so, and if a valuation of the relevant interest at the specified date (1 July 2000) existed, the amount of the margin is the excess of the supply price over that value.
211 None of the circumstances set out in s 75-10(3) are said to be engaged.
212 From 29 June 2005, the taxpayer’s choice, as the event under the GST Act engaging the application of the margin scheme, was removed in favour of the application of the margin scheme by operation of s 75-5(1) if the supplier and the recipient had agreed in writing that the margin scheme is to apply.
213 Under the new s 75-10(2), the amount of the margin remained (for supplies on and after 17 March 2005) the excess of the supply price over the supplier’s acquisition price. Section 75-10(2) however was made subject to s 75-10(3) and also subject to s 75-11. Section 75-10(3) was also rendered subject to s 75-11.
214 Under the amended provisions, s 75-10(3) displaced the acquisition method (as it did previously) but subject to the operation of s 75-11. If s 75-11(2) applied, the margin would be determined as the supply price over an “approved valuation” as at 1 July 2000.
215 Unit Trend contends that s 75-10(3) does not apply as the circumstances in the table are not engaged and the second limb is not satisfied as no approved valuation has been obtained. Therefore, s 75-11 is engaged, it is said, and if s 75-11(2) applies, the margin is calculated by reference to an approved valuation as at 1 July 2000.
216 The central contention of Unit Trend is that for the period from 17 March 2005 to 30 November 2005 there was no legislative instrument in place prescribing the requirements for an approved valuation for a margin scheme that applied to end purchaser transactions and therefore s 75-11(2) could not operate.
217 On this argument, s 75-11(2) was stillborn for that period. Because s 75-11(2) could not operate for that period, s 75-11(7) must apply, it is said. In that case, the margin for the supply is the excess of the supply price over the GST inclusive market value of the interest, unit, etc at the time of acquisition.
218 In the alternative, Unit Trend says that if a legislative instrument for determining the requirements of an approved valuation did apply in the period 17 March 2005 to 30 November 2005, no GST liability arises on the end purchaser transactions because no approved valuation was “brought into existence” upon which s 75-11(2) can operate, or alternatively, the margin determined by s 75-11(7) must apply.
219 As to the absence of an instrument in the period 17 March 2005 to 30 November 2005, Unit Trend says that MSV2000/1 does not (in terms - para 3) apply as Blesford and Mooreville acquired their interest after 1 July 2000 and not before. The same proposition is said to apply to MSV2000/2. MSV2005/1 applies with respect to s 75-10(3)(b) which has no application in these proceedings.
220 The Commissioner accepts that MSV2005/2 has no application.
221 MSV2005/3 applies but only from 1 December 2005 thus creating the lacuna in the period between 17 March 2005 and 30 November 2005, according to Unit Trend. Since there is no instrument in place between 17 March 2005 and 30 November 2005, s 75-11(2) produces no “effect” for want of subordinate legislation and s 75-11(2) cannot be made workable, it is said, as the legislature has not provided the means for determining an “approved valuation” and, in any event, there is no approved valuation in existence.
222 Because s 75-11(2) cannot operate (and it is not suggested that any of the other subsections of s 75-11 apply (apart from s 75-11(7) itself)), s 75-11(7)(b) is satisfied and the margin falls, according to Unit Trend, to be calculated under s 75-11(7)(d), and thus the margin is the excess of the supply price over the GST inclusive market value of the interest at the time of acquisition. The relevant valuations are then said to be those in the material at AB, p 274-281 and AB, p 310-353.
223 Unit Trend contends that if however s 75-11(7) does not apply, and s 75-11(2) does not operate, s 75-10(2) must then apply because s 75-10(3) to which s 75-10(2) is subject, is not engaged as neither limb of s 75-10(3) is engaged. In that case, the margin is the excess of the supply price over the supplier’s acquisition price.
224 As to the position after 1 December 2005 when MSV2005/3 commenced operation, Unit Trend says that until an approved valuation comes into existence in accordance with MSV2005/3, no GST liability arises or, if it does, the margin is the s 75-11(7) margin.
225 Unit Trend says that for supplies in the period 17 March 2005 to 30 November 2005, the margin has been calculated based upon valuations as at or near the date of transfer of the interest sold by Simnat to Blesford and Mooreville which represents the GST inclusive market value of the interest for the purposes of s 75-11(7)(d). If s 75-10(2) applies, the same valuations will apply, it is said. Unit Trend says that if, however, it becomes relevant to have approved valuations to enable the margin scheme to apply, Unit Trend seeks the opportunity to provide the valuations. The present orders of the Tribunal requiring the submission of such valuations are stayed by Orders of Logan J pending the outcome of this appeal.
Conclusions in relation to the application of the margin scheme and the calculation of the amount of the margin
226 The position in relation to these contentions seems to me to be this.
227 Section 75-35 provides that the Commissioner may by legislative instrument determine the requirements for making valuations for the purposes of Division 75. A valuation made in accordance with those requirements is an “approved valuation”; s 75-35(2). The Commissioner contends that three applicable legislative instruments determine the requirements for making valuations for the purposes of Division 75: MSV2000/2 (dated 23 June 2000; commenced on 1 July 2000); MSV2005/1 (dated 11 March 2005; commenced on 16 March 2005); MSV2005/3 (dated 7 September 2005; commenced on 1 December 2005).
228 MSV2000/2 recites that it is made under “paragraph 75-10(3)(b) of the [GST Act] and subsection 4(1) of the Acts Interpretation Act 1901”. The instrument commenced on the commencement of the GST Act. Clause 3 provides as follows:
Circumstances in which the Determination will apply
3. This determination will apply where you acquired the freehold interest in land, stratum unit or long-term lease before 1 July 2000 and you:
(a) make a taxable supply of real property by:
(i) …
(ii) selling a stratum unit; or
(iii) …
(b) you choose to apply the margin scheme in working out the amount of GST on the supply for partly completed premises as at the valuation date.
229 The two methods for making a valuation for the purposes of Division 75 are set out at clauses 4, 5 and 6.
230 Item 21 of Schedule 6 of the 2005 Amendment Act provides (s 3) as follows:
21 Savings provision – determinations under paragraph 75-10(3)(b)
A determination by the Commissioner, for the purposes of paragraph 75-10(3)(b) of the [GST Act] that was in force immediately before the commencement of this Schedule:
(a) continues in force on that commencement as if it had been made under section 75-35 of that Act as amended by this Act; and
(b) may be revoked or amended by the Commissioner in the same way as a determination under s 75-35.
231 Item 20 of the 2005 Amendment Act introduced into the GST Act s 75-35. MSV2000/2 continued in force as if it had been made under s 75-35 of the GST Act as amended by the 2005 Amendment Act.
232 The Commissioner emphatically supports the correctness of the Tribunal’s conclusion that s 75-11 and s 75-35 govern the way in which determinations about approved valuations operate and that by virtue of s 75-35 it is the “requirements” that may be determined. Therefore, a valuation made in accordance with those “requirements” is an approved valuation.
233 There can be no doubt that MSV2000/2 is a determination in force as if made under s 75-35 and the requirements for making approved valuations are those set out in the determination. Item 21 continued the “determination” in force as if made under s 75-35. Item 21 does not select out of the determination only the requirements clauses. It continues in force the determination according to its terms and by clause 3, the requirements of the determination apply to a valuation of a completed freehold interest or stratum unit where the freehold has been acquired before 1 July 2000. Thus, on the face of the determination, it does not apply at all, by its terms, and therefore the determination apparently does not govern the requirements that apply where, as here, the freehold interest was acquired after 1 July 2000. However, determination MSV2000/2 was made on 23 June 2000 at a time when it could only apply to interests in land acquired before 1 July 2000. The underlying purpose of Item 21 was to apply earlier determinations made under s 75-10(3) to valuations required by Division 75 in its amended form. Item 21, in a practical sense, gathered up the earlier determinations and treated them as determinations authorised to be made by the Commissioner setting out the requirements for making valuations for the purposes of Division 75, as amended. MSV2000/2 therefore is an applicable instrument for the period on and after 17 March 2005 for the purposes of s 75(11)(2).
234 MSV2005/1 commenced operation on 16 March 2005. It continues in force by operation of Item 21 as a determination under s 75-35. It specifies an additional valuation method for the purposes of 75-10(3)(b) without altering or withdrawing the application of MSV2000/2. Clause 8 applies the determination “in respect of valuations made for the purposes of applying the margin scheme in working out the amount of GST on supplies made on or after 17 March 2005”. Clause 5 provides that a valuation complies with the requirements for making valuations for the purposes of Division 75 of the GST Act if it is made in accordance with the methods set out in the determination.
235 MSV2005/1 does apply. As already noted, the determination commenced operation on 16 March 2005 immediately prior to s 75-35 taking effect on the following day, 17 March 2005, in contemplation of the future operation of Division 75. It follows that although MSV2005/1 was made pursuant to s 75-10(3)(b), the determination was continued in force by Item 21 pursuant to s 75-35 for the purposes of the future operation of Division 75 and thus applied to supplies made on or after 17 March 2005.
236 MSV2005/3 commenced operation on 1 December 2005 and by clause 3, it “specifies the requirements for making valuations for calculating the margin for taxable supplies of real property made on or after 1 December 2005 for the purposes of Division 75 of the GST Act”. The earlier determinations continue according to their terms.
237 It follows that for the period from 16 March 2005 to 30 November 2005, MSV2000/2 and MSV2005/1 applied and for the period on and from 1 December 2005, MSV2005/3 applied.
238 The result is that for supplies on and after 17 March 2005, s 75-11(2) applied as Blesford and Mooreville acquired their respective interests as members of the same GST group and s 75-11(1) has no operation, thus satisfying s 75-11(2)(b). It seems to be common ground that s 75-11(1) does not apply.
239 The margin determined by s 75-11(2) is the excess of the supply price over an approved valuation for supplies on and after 17 March 2005. MSV2000/2, MSV2005/1 and MSV2005/3 supply the requirements for making approved valuations, by operation of s 75-35 and Item 21 of the 2005 Amendment Act.
240 It follows that: grounds (c) and (d) of the appeal must be dismissed; ground (a) of the Commissioner’s cross-appeal is upheld; ground (b) of the Commissioner’s cross-appeal is dismissed as it is not pressed; ground (c) of the Commissioner’s cross-appeal is upheld; and ground (d) is dismissed as that ground addresses MSV2005/2 which is not pressed as an applicable determination.
The shortfall penalty issues
241 At [171], the Tribunal determined that the question of whether a shortfall penalty arises for supplies made on and after 17 March 2005 is “moot” as each matter is to be remitted to the Commissioner to enable Unit Trend to obtain approved valuations in accordance with the applicable subordinate instruments. Accordingly, the Tribunal’s decision to set aside the Commissioner’s objection decision concerning shortfall penalties on those supplies, and remit each matter to the Commissioner for reconsideration in accordance with para 3 of the Tribunal’s decision (as varied in accordance with these reasons to reflect the applicable subordinate instruments) is affirmed.
242 As to shortfall penalties on supplies up to and including 16 March 2005, the position is this.
243 The Tribunal determined that Blesford and Mooreville were entitled to apply the margin scheme to settlements up to that date pursuant to contracts made by them, and determine the amount of the margin on the basis of their acquisition price for the freehold interest. The tax benefit they (Unit Trend) obtained from the scheme on those transactions was improperly negated by the Commissioner because Division 165 did not operate. That was found to be so because the sole or dominant purpose test and the principal effect test, were not satisfied so far as those companies were concerned, on the facts.
244 Apart from those conclusions on the facts as found by the Tribunal, Division 165 does not operate because, as determined in these reasons, the GST benefit from the scheme was attributable to choices, elections etc made by Unit Trend as expressly provided for by the GST Act.
245 Accordingly, the Tribunal’s decision at para 2 setting aside the Commissioner’s decision concerning shortfall penalties on those supplies is affirmed.
246 As to shortfall penalties on supplies up to and including 16 March 2005 pursuant to settlements of contracts entered into by Simnat, the Tribunal found that Unit Trend was entitled to apply the margin scheme on the same footing. However, the GST benefit obtained from the scheme on settlements of Simnat contracts was properly negated, according to the Tribunal, as those persons who entered into and carried out that part of the scheme did so for the dominant purpose of securing the GST benefit from the scheme. However, as set out in these reasons, Division 165 did not operate because the GST benefit from the scheme on the Simnat settlements was also attributable to choices, elections etc made by the taxpayer. Accordingly, the Tribunal’s decision affirming the Commissioner’s declaration and the imposition of shortfall penalties ought to be set aside and remitted to the Commissioner with a direction to allow the objection.
247 Accordingly, having regard to these reasons, the parties are requested to submit within seven days, proposed orders to be made. Should the parties not be able to agree proposed orders, the parties should, within a further seven days, file and serve written submissions as to the orders to be made and any submissions as to costs.
I certify that the preceding one hundred and ninety-six (196) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Bennett and Greenwood. |
Associate:
Dated: 17 August 2012
