Decision impact statement

Commissioner of Taxation v Unit Trend Services Pty Ltd

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Court Citation(s):
[2013] HCA 16
(2013) 297 ALR 190
(2013) 250 CLR 523
2013 ATC 20-389
(2013) 87 ATR 13

Venue: High Court
Venue Reference No: B61/2012
Judge Name: French CJ, Crennan, Kiefel, Gageler and Keane JJ
Judgment date: 1 May 2013
Appeals on foot: No
Decision Outcome: Favourable

Impacted Advice

Relevant Rulings/Determinations:

• Goods and Services Tax Ruling GSTR 2005/4
• Goods and Services Tax Ruling GSTR 2005/5

Impacted Practice Statements:

• Law Administration Practice Statement PS LA 2005/24

Subject References:
Goods and services tax
GST new residential premises
GST groups
GST free
GST supply of going concern
General anti avoidance provisions
Choice
Election

Précis

Outlines the ATO's response to this case involving the application of the general anti-avoidance provisions in Division 165 of the GST Act to a scheme that sought to reduce GST payable on sales of new residential premises.

Brief summary of facts

Unit Trend Services Pty Ltd (Unit Trend) is the representative member of a GST group. At all relevant times, this GST group included Simnat Pty Ltd (Simnat), Blesford Pty Ltd ("Blesford") and Mooreville Investments Pty Ltd (Mooreville).

Simnat was engaged in the development of three residential apartment towers on land that it had acquired prior to 1 July 2000. When construction of Tower I was completed, a strata plan was registered for each of the individual residential units in the tower. Simnat sold the units in Tower I 'off the plan' and applied the margin scheme in working out the GST applicable to those sales.

When construction of each of Towers II and III was almost complete, Simnat sold the towers for their market value as GST-free going concerns to Blesford and Mooreville respectively. Blesford and Mooreville completed construction of the towers and sold the completed residential units to home buyers and investors.

Blesford and Mooreville applied the margin scheme for the purposes of working out their GST liability on the sale of each of the completed residential units and calculated the margin for those sales with reference to the market value consideration that they had provided for their acquisition of the respective towers.

The Commissioner made a declaration in relation to Unit Trend under Division 165 of the GST Act to negate the GST benefit obtained on sales of completed residential units in Towers II and III. The GST benefit was the difference between GST payable under the margin scheme on the sale of the completed units by Blesford and Mooreville compared to GST that would have been payable under the margin scheme if Simnat had completed the towers and sold completed units to home buyers and investors.

The declaration under Division 165 for sales of completed units in Towers II and III that occurred prior to 17 March 2005 was upheld by the Administrative Appeals Tribunal (AAT), which found that the companies were engaged in a scheme under subsection 165-10(2). The GST benefit got from the scheme, which Division 165 was invoked to negate, was the benefit obtained as a result of intermediate sales by Simnat to Blesford and Mooreville respectively of a going concern. The GST benefit reflected the amount agreed to be paid to Simnat by Blesford and Mooreville as consideration for the intermediate sales, and which brought about an uplift in the intermediate cost base of units supplied by them to buyers and investors. As a result, the GST payable by Unit Trend was less than it would have been if the scheme had not existed.

On appeal, a majority of the Full Federal Court (Greenwood and Bennett J) overturned the AAT decision. It was held that the GST benefit obtained by Unit Trend was attributable to the making of a choice, election, application or agreement expressly provided for by the GST Act and, therefore, that Division 165 did not apply to the pre-17 March 2005 sales of units in Towers II and III. In particular, the majority referred to the choice by Simnat, Blesford and Mooreville to enter into a GST-free supply of a going concern and the choice by Blesford and Mooreville to apply the margin scheme to the sales of units in each tower.

By special leave, the Commissioner appealed to the High Court.

Issues decided by the court

The issue before the High Court was whether a declaration under Division 165 operated to negate the GST benefit that Unit Trend got from the scheme because the GST benefit obtained by Unit Trend was 'not attributable to' the making of a choice, election, application or agreement that was expressly provided for by the GST Act.

The Court unanimously held in a joint judgment that Division 165 operated to negate the GST benefit obtained by Unit Trend in relation to pre-17 March 2005 sales of units in Towers II and III. The Court held that the phrase 'not attributable to' in paragraph 165-5(1)(b) is concerned with whether the GST benefit in question is not one to which the taxpayer was entitled by exercise of a statutory choice.

It was noted by the Court at [48] that paragraph 165-5(1)(a) poses a question which must be answered before one enters on the inquiry invited by paragraph 165-5(1)(b); that question being whether 'an entity ... gets or got a GST benefit from a scheme'. The Court said at [49] that paragraph 165-5(1)(b) assumes, in accordance with paragraph 165-5(1)(a), that an identified GST benefit has been 'got ...from the scheme; and proceeds from this postulate to invite attention to whether the particular GST benefit 'got' from the scheme is 'not attributable to' the making of a choice expressly provided for by the GST Act'.

The Court noted at [50] that the crucial phrase in paragraph 165-5(1)(b) is 'not attributable to' and went on to say that paragraph 165-5(1)(b) is concerned to include, within the scope of Division 165, GST benefits got from a scheme in which the exercise of statutory choice has had some operation. The phrase 'not attributable to' is concerned with whether the GST benefit in question, which has (as had been found) been got from the scheme, is not one which the exercise of a statutory choice has entitled the taxpayer. The purpose of paragraph 165-5(1)(b) is to ensure that GST benefits got from a scheme, but not attributable to the making of a statutory choice, are not immunised against the possible effect of Division 165.

The Court said that the Supplementary Explanatory Memorandum to the A New Tax System (Goods and Services Tax) Bill 1998 confirmed the mischief to which paragraph 165-5(1)(b) was directed - that being, 'to ensure that the GST Act did not contradict itself by allowing the general anti-avoidance provisions of Division 165 to trump specific provisions of the Act which allow an entity to get a GST benefit'. This was also confirmed by section 165-1 as an 'explanatory section' within Division 165.

The Court concluded at [58] that the GST benefit that Unit Trend got from the scheme was not something that Unit Trend was entitled to as a matter of any statutory choice. Rather, it was the transfer of the towers to Blesford and Mooreville at market value under the scheme at a time when there had been a substantial increase in the value of the properties. It was this which brought about an uplift in the intermediate cost base on which Blesford's and Mooreville's margin was determined and which gave rise to the GST benefit that Unit Trend got from the scheme.

ATO view of Decision

Paragraph 165-5(1)(b)

As held by the AAT, and confirmed on appeal by the Full Federal Court, amendments to the margin scheme provisions in Division 75 of the GST Act mean that a GST benefit no longer arises in relation to sales of real property made on or after 17 March 2005, as part of a scheme that is similar to the one considered in this case.

However, the High Court decision has broad application to all GST, Wine Equalisation Tax (WET) and Luxury Car Tax (LCT) schemes involving one or more statutory choices. The decision means that inclusion of a statutory choice or choices as an integer or step in a GST, WET or LCT scheme does not automatically preclude the operation of the general anti-avoidance provisions in Division 165.

Paragraph 165-5(1)(b) will only preclude the operation of the general anti-avoidance provisions in Division 165 to a GST, WET or LCT schemes that include statutory choices in cases where the GST benefit got from the scheme is the particular benefit or benefits that the taxpayer is entitled to access as a result of an exercise of the statutory choice or choices in question.

At [60], the High Court confirmed that an identified GST benefit is not attributable to the making of a choice by an entity if: (a) the GST Act or another relevant law does not operate to confer the identified GST benefit by reference to that choice; or (b) the choice made in fact as part of the scheme would have been made in any event without the scheme. Reference to a choice that would have been made in any event without the scheme is consistent with the Commissioner's submission that the GST benefit that Unit Trend got from the scheme was not attributable to the choice to apply the margin scheme. The declaration made in this case sought to negate the GST benefit that Unit Trend got from the scheme because sales of residential units were made by Blesford and Mooreville respectively under the margin scheme, rather than by Simnat under the margin scheme.

Subsection 165-5(3) - creating circumstances or state of affairs

The High Court [at 66] agreed with the Commissioner's submission that insertion of subsection 165-5(3) into Division 165 in 2008 did not affect the meaning of the phrase 'not attributable to' in paragraph 165-5(1)(b), and that it is only if the GST benefit is attributable to the statutory choice that one then addresses whether it was the purpose of the scheme to create the occasion for the exercise of that choice.

This is taken to mean that, in cases where a scheme includes a statutory choice and the GST benefit got from that scheme is the benefit that the taxpayer is entitled to as a result of the exercise of the statutory choice, Division 165 may still operate if the conditions stated in paragraphs 165-5(3)(a) and 165-5(3)(b) are met.

Relevance to Part IVA of the Income Tax Assessment Act 1936

Part IVA includes a provision that is similar in important respects to paragraph 165-5(1)(b). Relevantly, subparagraph 177C(2)(a)(i) precludes the operation of Part IVA if the tax benefit obtained by a taxpayer in connection with a scheme 'is attributable to the making of [a] choice ... expressly provided for by' the income tax legislation.

Walters v Commissioner of Taxation [2007] FCA 1270 is a decision which considers subsection 177C(2). In that case, Greenwood J observed at [83] that the phrase in subparagraph 177C(2)(a)(i) 'attributable to' the particular election, choice or event means there must be a direct relationship between the non-inclusion of the relevant amount and the choice or election made by the taxpayer.

Subsection 177C(2) in Part IVA refers to a tax benefit that is attributable to a 'choice', unlike paragraph 165-5(1)(b) which refers to a GST benefit that is not attributable to a 'choice' and section 165-5 has no analogue to subsection 177C(3), which deems tax benefits to be attributable to statutory choices in particular circumstances. However, having regard to the analogous purpose of the provisions and in the absence of contrary authority, the Commissioner will apply subsection 177C(2) in the same general way as the High Court applied paragraph 165-5(1)(b) in the present case. That is, a tax benefit is considered to be attributable to a 'choice' only if it is the actual benefit which the taxpayer is entitled to by virtue of the exercise of that statutory choice.

Administrative Treatment

Implications for ATO precedential documents (Public Rulings & Determinations etc)

GSTR 2005/4 and GSTR 2005/5 address the GST treatment schemes similar to the one that was the subject of the High Court's decision.

GSTR 2005/4 and GSTR 2005/5 will be reviewed in light of the High Court's decision.

Implications on Law Administration Practice Statements

PS LA 2005/24, which addresses the practical application of the various general anti-avoidance provisions in Part IVA and other taxation acts, including Division 165 of the GST Act, is currently being reviewed and updated.

PS LA 2005/24 will be updated to reflect the High Court's decision on paragraph 165-5(1)(b).

Legislative References:
A New Tax System (Goods and Services Tax) Act 1999
165-5
165-5(1)
165-5(1)(a)
165-5(1)(b)
165-5(3)

Case References:
Re Taxpayer v Commissioner of Taxation
[2010] AATA 497
2010 ATC 1-022
76 ATR 917
77 ATR 170

Unit Trend Services Pty Ltd v Commissioner of Taxation
[2012] FCAFC 112
2012 ATC 20-342