CASE 3/2010
Members:PE Hack SC DP
FD O'Loughlin SM
Tribunal:
Administrative Appeals Tribunal, Brisbane
MEDIA NEUTRAL CITATION:
[2010] AATA 497
Deputy President PE Hack SC; FD O'Loughlin, Senior Member
Introduction
1. These proceedings concern the affairs of a company that we shall call Developco, a publicly listed company, and companies within the Developco Group[1]
2. The applicant is in dispute with the respondent, the Commissioner of Taxation, about the GST liabilities arising on sales to third party purchasers of apartments in two high-rise towers in the centre of a resort town and the effect that earlier transfers of those towers between related entities had on those GST liabilities. In broad outline the proceedings involve consideration of the operation of the margin scheme in Div 75 of the A New Tax System (Goods and Services Tax) Act 1999 (Cth) (the GST Act) and the anti-avoidance provisions in Div 165 of that Act.
Background
3. We start by recording some uncontroversial background. The GST group included all four wholly owned subsidiaries of Developco that were the principal players involved in the transactions that led to the present proceedings - Oldco Pty Ltd (Oldco), Newco 1 Pty Ltd (Newco 1), Newco 2 Pty Ltd (Newco 2) and Contractors Pty Ltd (Contractors). Newco 1 became a member of the group on 12 July 2004, but with effect from 1 March 2004, as a consequence of an application made to the Commissioner around 15 June 2004. Newco 2 became a member of the group on 20 August 2004, but with effect from 1 July 2004, as a consequence of an application made to the Commissioner around 22 July 2004.
4. In December 1998, Oldco agreed to purchase a parcel of improved land in the resort town. The purchase price was $30m. The purchase was completed in April 1999. Thereafter, Oldco obtained development approval from the local council to undertake the development on the site of a three tower high rise building. The development contemplated specialty shops, a supermarket, a tavern, office space and car park and three residential towers with a total of 575 residential apartments. The first stage of the development, the construction of the retail centre on the ground floor, was completed in October 2000. Developco then turned its attention to the construction of the residential towers.
5. Apartments in Tower One were sold "off the plan", applying the margin scheme, with sales being reported in the applicant's business activity statements (BAS). In July 2001, Oldco engaged Contractors to construct Tower One. It was engaged to construct Tower Two in July 2002. By the end of November 2002 all but 27 of the 183 apartments in Tower One had been sold, 69 of the 288 apartments in Tower Two were unsold and 151 of 240 apartments in Tower Three were unsold[2]
6. Construction of Tower One was completed by December 2002 and a survey plan was registered that month. Registration of the survey plan created separate titles for the apartments in Tower One and separate lots for Tower Two and Tower Three. One of the effects of registration of the survey plan was that the Tower Two and Tower Three developments were capable, in law, of separate sale.
7. To this point in its development history Developco had followed the pattern of using a separate company to undertake the development and sale of each of its developments, even where the development was a staged development. During 2003 and 2004 Developco altered the way in which it undertook developments with Towers Two and Three. What motivated the change in approach is very much an issue in the proceedings and we will consider that issue below. It is enough for present purposes to say that a decision was made to transfer the then partly completed Tower Two and Tower Three developments from Oldco to separate special purpose development companies. The change contemplated that the Tower Two development be transferred from Oldco to Newco 1 and the Tower Three development from Oldco to Newco 2.
8. On 14 April 2004, Oldco and Newco 1 executed an agreement for the sale by Oldco to Newco 1 of the Tower Two development. The purchase price was "the amount determined by an independent valuer". The agreement specified mechanisms for the appointment of a valuer and the assumptions that the valuer was required to make. The parties agreed that the sale was the supply of a going concern. On 6 May 2004, Oldco, Newco 1 and Contractors executed a tripartite deed whereby Oldco, with the consent of Contractors, assigned the benefit of the Tower Two building contract to Newco 1. The agreement for the sale of Tower Two was completed on 7 May 2004. A valuation, undertaken by a registered valuer, of $149.8m as at 22 April 2004 became the purchase price. The purchase price was paid in part by the purchaser assuming responsibility for the external finance for the project and as to the balance by way of a loan balance owing to Oldco (the vendor loan) to be repaid out of the proceeds of sale of finished apartments after external finance had been repaid.
9. A similar sale agreement, with similar terms as to payment of the purchase price, was executed by Oldco and Newco 2 in relation to the Tower Three development, on 15 April 2004. There was a delay in completing this agreement because, on the applicant's case, Oldco's financier took six months to approve the transfer. On 23 November 2004, Oldco assigned to Newco 2 the benefit of the management sale rights contract (with another company within the Group) and the building contract with Contractors, with the consent of Contractors. The sale by Oldco to Newco 2 was completed on 23 November 2004. A valuation, undertaken by a registered valuer, of $109.5m as at 18 November 2004, became the purchase price.
10. Settlement of the sales of Towers Two and Three occurred before they had been completed. The towers and the apartments in them were not completed residential premises at that time. Rather, they were part of an incomplete, albeit advanced, construction project.
11. Following settlement of the sales of Towers Two and Three to Newco 1 and Newco 2 respectively, these companies continued the process of marketing and selling unsold apartments and completing sales of apartments previously sold by Oldco. The same standard form contracts were used both before and after settlement of the sales of Towers Two and Three. One of the terms of each of the standard form contracts was an "entire agreement" clause in conventional form. These clauses sought to limit a purchaser's ability to rely on any prior representations.
12. The construction of Tower Two was completed in June 2004. Thereafter, Newco 1 completed sales of apartments applying the margin scheme. Oldco was the named vendor of 230 of 289[3]
13. The applicant reported the GST payable on its BAS commencing from May 2004 and monthly thereafter. It chose to apply the margin scheme with the purchase price paid by Newco 1 to Oldco or Newco 2 to Oldco being used as the consideration for the acquisition.
14. The applicant's GST affairs became the subject of an audit by the Commissioner during 2004 to 2006. Those investigations initially led to the making of assessments on 7 December 2006 of GST net amounts for the months of December 2004 and January 2005 together with an assessment of shortfall penalty. An objection to the assessments was lodged on the applicant's behalf on 5 February 2007. By agreement, the objection was put into abeyance whilst the Commissioner completed the audit.
15. On 29 February 2008, the Commissioner made assessments and amended assessments of the applicant's GST net amount for the periods between May 2004 and May 2007 in an amount exceeding $21m. It is enough to say that the basis of the Commissioner's decision was that the margin scheme had no application to the supplies to end purchasers. On the same day the Commissioner made a declaration under Div 165 of the GST Act negating GST benefits in excess of $21m. Then on 13 March 2008 the Commissioner made an assessment of shortfall penalties in the total sum of $5,405,367. The assessment was undertaken on alternate bases - that the applicant had failed to take reasonable care or that there had been a scheme shortfall - in each case imposing penalty at the rate of 25%.
16. The applicant objected to the net amount assessments and amended assessments and to the Div 165 declaration on 30 April 2008. On 12 May 2008, it objected to the penalty assessment. On 21 October 2009, the Commissioner made decisions on the applicant's objections of 5 February 2007, 30 April 2008 and 12 May 2008. In considering the objections the Commissioner made some relatively minor adjustments to the GST net amounts but generally maintained his stance on the application of the margin scheme and the application, in the alternative, of Div 165 of the GST Act. The Commissioner maintained his stance on shortfall penalties.
17. These proceedings were commenced on 17 December 2009. There are four applications in the Tribunal dealing with the objection decisions relating to GST net amount and penalty for each of the 2004, 2005, 2006 and 2007 income tax years.
The issues
18. At an earlier time, the Commissioner had taken the view that the sales by Oldco to Newco 1 and to Newco 2 were not sales of going concerns. Similarly, it had been contended by the Commissioner that s 48-40(2) of the GST Act did not operate in the present circumstances. These matters have now been conceded by the Commissioner and we proceed on the basis that those sales were GST free. Additionally, and subject to the matters that follow, there are no issues between the parties regarding matters of calculation i.e. the applicant accepts that if the Commissioner's arguments are otherwise accepted the amount of the GST shortfall has been correctly assessed.
19. Aside from the question of penalty what remains in issue are two questions:
- (a) what is the appropriate "consideration for the acquisition" when calculating the margin on the supplies to end purchasers;
- (b) was the Commissioner entitled to make a Div 165 declaration?
20. For reasons that will become apparent, these issues need to be addressed in the context of supplies of four different categories of apartments in the Tower Two and Tower Three developments to end purchasers. The first distinction that needs to be drawn is between supplies made before, and those made on and after, 17 March 2005. That distinction is relevant because the legislation was amended, with effect from that date, by the Tax Laws Amendment (2005 Measures No 2) Act 2005 (Cth). The details of the amendments are set out in paragraphs [23] and [24] below. It is also necessary to distinguish between supplies made pursuant to contracts with end purchasers entered into by Oldco and supplies made pursuant to contracts with end purchasers entered into by either of Newco 1 or Newco 2.
The appropriate consideration
21. It will suffice for present purposes to say that the general scheme of the GST Act is that a supply is taxable if, relevantly, it is made for consideration in the course of an enterprise carried on by a person who is registered, or is required to be registered, for GST and if the supply is neither GST free nor input taxed. The enterprise is entitled to claim input tax credits equal to the amount of GST paid by it on supplies by others to it. The general scheme is varied by special rules including those in Div 75 of the GST Act that arise for consideration here. Property developers frequently acquire land in circumstances where no input tax credits are available because the land was acquired, as here, prior to the introduction of GST or because the land was acquired from an entity not liable to pay GST on the supply. The margin scheme operates to avoid the developer having to pay GST on the whole value of the completed development and permits an election to be made to apply the margin scheme and pay GST on a concessional basis.
22. The provisions of Div 75 were amended during the course of the period in issue in these proceedings. For supplies made up to and including 16 March 2005 Div 75, so far as is presently relevant, was 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) However, if:
- (a) the circumstances specified in an item in the second column of the table in this subsection apply to the supply; and
- (b) a valuation of the freehold interest, *stratum unit or *long-term lease, as at the day specified in the corresponding item in the third column of the table, has been made that complies with any requirements determined in writing by the Commissioner for making valuations for the purposes of this Division;
the margin for the supply is the amount by which the *consideration for the supply exceeds that valuation of the interest, unit or lease.
Use of valuations to work out margins Item When valuations may be used Days when valuations are to be made 1 The supplier acquired the interest, unit or lease before 1 July 2000, and items 2, 3 and 4 do not apply. 1 July 2000 2 The supplier acquired the interest, unit or lease before 1 July 2000, but does not become *registered or *required to be registered until after 1 July 2000. The date of effect of your registration, or the day on which you applied for registration (if it is earlier) 2A The supplier acquired the interest, unit or lease on or after 1 July 2000, but the supply to the supplier:
(a) was *GST-free under subsection 38-445(1A); and
(b) related to a supply before 1 July 2000, by way of lease, that would have been GST-free under section 38-450 had it been made on or after 1 July 2000.1 July 2000 3 The supplier is *registered or *required to be registered and has held the interest, unit or lease since before 1 July 2000, and there were improvements on the land or premises in question as at 1 July 2000. 1 July 2000 4 The supplier is the Commonwealth, a State or a Territory and has held the interest, unit or lease since before 1 July 2000, and there were no improvements on the land or premises in question as at 1 July 2000. The day on which the *taxable supply takes place - (3A) If:
- (a) the circumstances specified in item 4 in the second column of the table in subsection (3) apply to the supply; and
- (b) there are improvements on the land or premises in question on the day on which the *taxable supply takes place;
the valuation is to be made as if there are no improvements on the land or premises on that day.
- (4) This section has effect despite section 9-70 (which is about the amount of GST on taxable supplies).
Note: Section 9-90 (rounding of amounts of GST) can apply to amounts of GST worked out using this section.
- 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."
23. Tax Laws Amendment (2005 Measures No 2) Act 2005[4]
- " 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:
- (a) the circumstances specified in an item in the second column of the table in this subsection apply to the supply; and
- (b) an *approved valuation of the freehold interest, *stratum unit or *long-term lease, as at the day specified in the corresponding item in the third column of the table, has been made;
the margin for the supply is the amount by which the *consideration for the supply exceeds that valuation of the interest, unit or lease.
Use of valuations to work out margins Item When valuations may be used Days when valuations are to be made 1 The supplier acquired the interest, unit or lease before 1 July 2000, and items 2, 3 and 4 do not apply. 1 July 2000 2 The supplier acquired the interest, unit or lease before 1 July 2000, but does not become *registered or *required to be registered until after 1 July 2000. The date of effect of your registration, or the day on which you applied for registration (if it is earlier) 2A The supplier acquired the interest, unit or lease on or after 1 July 2000, but the supply to the supplier:
(a) was *GST-free under subsection 38-445(1A); and
(b) related to a supply before 1 July 2000, by way of lease, that would have been GST-free under section 38-450 had it been made on or after 1 July 2000.1 July 2000 3 The supplier is *registered or *required to be registered and has held the interest, unit or lease since before 1 July 2000, and there were improvements on the land or premises in question as at 1 July 2000. 1 July 2000 4 The supplier is the Commonwealth, a State or a Territory and has held the interest, unit or lease since before 1 July 2000, and there were no improvements on the land or premises in question as at 1 July 2000. The day on which the *taxable supply takes place - (3A) If:
- (a) the circumstances specified in item 4 in the second column of the table in subsection (3) apply to the supply; and
- (b) there are improvements on the land or premises in question on the day on which the *taxable supply takes place;
the valuation is to be made as if there are no improvements on the land or premises on that day.
- (4) This section has effect despite section 9-70 (which is about the amount of GST on taxable supplies).
Note: Section 9-90 (rounding of amounts of GST) can apply to amounts of GST worked out using this section.
- 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.
…
- 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."
24. Additionally, s 75-35 of the GST Act was introduced to permit the Commissioner to determine, by legislative instrument, requirements for making of valuations for the purposes of Div 75.
25. The parties have advanced a number of contentions about the operation (or non-operation) of Div 75 before and on or after 17 March 2005. It is, however, common ground that it is the settlement of a sale, and not the making of the agreement, that is the "supply"[5]
26. For settlements in the period up to 16 March 2005, the applicant contends that it was entitled to use the margin scheme, and to use the sale prices from Oldco to Newco 1 and from Oldco to Newco 2, as the basis for determining "the consideration for your acquisition" as that expression is used in s 75-10(2) of the GST Act. The Commissioner's first contention is that the margin scheme cannot apply to apartment sales that settled in that period.
27. The Commissioner advances his case in this way[6]
"On a proper construction of the GST Act, in particular Divisions 48 and 75, s 75-10(2) of the Act (as it then stood) is to be construed as referring to, in this case, the consideration for the acquisition by [Oldco] of the land it acquired (apportioned in accordance with s 75-15 of the GST Act). The expression 'you' applies to entities generally unless its application is expressly limited… The term 'entity' covers groups of legal persons, and other things, that in practice are treated as having a separate identity in the same way as a legal person does…The consequence is that the consideration paid for the acquisition of the interest by the GST group which [Newco 1 and Newco 2] form part, is the consideration on which the margin is to be calculated."
28. Some of the provisions from Div 48 of the GST Act, dealing with GST groups, need be noticed. First, s 48-40 provides that GST payable on taxable supplies and taxable importations that a member of a GST group makes, is payable by the representative member and not by the member that made the supply (unless it is the representative member). Sections 48-45 and 48-50 of the GST Act contain similar provisions regarding input tax credits and adjustments. Section 48-55(1) then provides:
- "(1) Despite sections 48-45 and 48-50, a *GST group is treated as a single entity, and not as a number of entities corresponding to the *members of the GST group, for the purposes of working out:
- (a) the amounts of any input tax credits to which the *representative member is entitled; and
- (b) whether the representative member has any *adjustments; and
- (c) the amounts of any such adjustments."
29. The Commissioner places reliance upon the Explanatory Memorandum to the A New Tax System (Goods and Services Tax) Bill 1998 (Cth) and, in particular, the statement in paragraph 6.7 that,
"GST groups are effectively treated as a single entity. Supplies and acquisitions made wholly within a GST group are taken out of the GST system",
and this statement in paragraph 6.10:
"As the GST group is effectively a single entity the adjustment provisions apply to the group as a whole."
30. Reference need also be made to the definition of "you" in s 195-1 of the GST Act. It provides that,
"if a provision of this Act uses the expression you , it applies to entities generally, unless its application is expressly limited".
31. By a combination of ss 184-1 and 195-1 of the GST Act "entity" is defined as meaning any of an individual, a body corporate, a corporation sole, a body politic, a partnership, any other unincorporated association or body of persons, a trust or a superannuation fund.
32. We do not accept the Commissioner's argument. The GST system does not have a single entity style rule of the kind provided for in part 3-90 of the Income Tax Assessment Act 1997 (Cth). Particular, and it might be observed, piecemeal, provision is made in the GST Act for dealing with, or ignoring, some, but not all, transactions that occur within a GST group. These provisions, and the effect they produce, can be described in the terms referred to in the Explanatory Memorandum. These references in the Explanatory Memorandum are not a warrant for advancing a single entity concept that would allow the term "your acquisition" to be construed as an acquisition by another entity. Further, the introduction of the amendments in 2005 would have been unnecessary if the section was to be construed as the Commissioner contends. There is no doubt that the requirements of Div 75 are otherwise satisfied. Each of Newco 1 and Newco 2 acquired the land, they did so by a non-taxable supply, and they did so for a consideration determined by an arms' length valuation.
33. 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 Oldco and Newco 1 and between Oldco and Newco 2.
34. The parties accept that different considerations arise for post 16 March 2005 supplies of apartments to end purchasers. We should deal first with one argument for the applicant. It identifies the transfers from Oldco to Newco 1 and to Newco 2, 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 Newco 1 and Newco 2 to end purchasers in respect of contracts settled on or after 17 March 2005.
35. We next deal with an argument raised by the applicant in supplementary submissions lodged after the conclusion of the hearing. It submits that:
- "(a) for the period from 17 March 2005 until 1 December 2005:
- (i) there was no legislative instrument made under s 75-35 setting out the requirements for making valuations in the circumstances of the present case, and that the combined effect of ss 75-11(2) and 75-11(7) is that s 75-11(7) applies to make the margin for the supplies by [Newco 1 and Newco 2] the difference between the sale prices of the units and the apportioned GST inclusive market value of the relevant land at the dates of acquisition by [Newco 1 and Newco 2]; or in the alternative
- (ii) if there was an applicable legislative instrument, then either:
- (A) if an approved valuation is not brought into existence, no liability to GST arises; or in the alternative
- (B) the same margin applies as in (a), that is to say s 75-11(7) applies
but either the applicant or the respondent (or any other person) may avoid this result by bringing such an approved valuation into existence;
- (b) for the period from 1 December 2005, the position is as in (a)(ii)."
36. The argument for the applicant accepts that s 75-11(2) of the GST Act applies but contends that there was no applicable legislative instrument with the result, it is said, that s 75-11(2) could not be applied to give effect to the requirement of s 75-5(1) that the margin scheme should apply. The submissions proceed to a consideration of the various legislative instruments and propound various reasons why none of them has operation in the present circumstances.
37. The argument must be rejected, at least because there were applicable legislative instruments. The submission focuses upon the words of the determinations that purport to determine applicability. Thus it is said that a determination made in 2000 "cannot apply" because it is expressed to apply where land was acquired before 1 July 2000. But the submission overlooks the savings provision in Item 21 of the Tax Laws Amendment (2005 Measures No. 2) Act 2005. It provides:
" 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 A New Tax System (Goods and Services Tax) Act 1999, 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."
38. As will appear, the Commissioner relies upon four determinations - the A New Tax System (Goods and Services Tax) Margin Scheme Valuation Requirements Determination (No 2) 2000 (MSV 2000/2) with respect to settlements up to and including 30 November 2005, the A New Tax System (Goods and Services Tax) Margin Scheme Valuation Requirements Determination MSV 2005/1 (from 17 March 2005 to 30 November 2005), the A New Tax System (Goods and Services Tax) Margin Scheme Valuation Requirements Determination MSV 2005/2 (from 1 July 2005 to 30 November 2005) and the A New Tax System (Goods and Services Tax) Margin Scheme Valuation Requirements Determination MSV 2005/3 from 1 December 2005. The applicant's argument operates on the premise that the determinations alone set out the circumstances under which they apply. But that is not so. The legislation, and in particular, ss 75-11 and 75-35, governs the way in which determinations about approved valuations operate. By virtue of s 75-35 it is the "requirements" for making valuations that may be determined and a valuation made in accordance with those requirements is an approved valuation.
39. Thus we reject the applicant's arguments raised in its supplementary submissions.
40. We turn then to a consideration of the arguments raised in the course of the hearing. The Commissioner's argument for the post 16 March 2005 supplies relies on the terms of s 75-11 of the GST Act. The Commissioner contends, in relation to those contracts, that s 75-11 of the GST Act is satisfied in such cases. It is common ground that s 75-11(1) can have no application[7]
41. The requirements of an approved valuation are specified in legislative instruments to which reference has already been made - MSV 2000/2, MSV 2005/1, MSV 2005/2 and MSV 2005/3. Under MSV 2000/2 the valuation of a partly completed interest could be determined by either of two methods. That which the applicant says was adopted here was Method 1, i.e. "the value of the property determined in writing by a professional valuer in accordance with the method described in clause 5" of MSV 2000/2. That clause required that the valuation be provided by a professional valuer who was obliged to have regard to,
- "(a) the market value of the completed premises;
- (b) the cost to complete the partly completed premises; and
- (c) the profit margin and holding costs that are attributable to the period on or after the valuation date."
42. MSV 2005/1 prescribed what was described as an "additional valuation method". It provided explicitly that MSV 2000/1 and MSV 2000/2 were not altered or withdrawn. It is not suggested by either party that is has any present application. MSV 2005/2 provided for an extension to the "cost to complete" method approved in MSV 2000/2. Again, there is no suggestion that it has present application.
43. MSV 2005/3 changed the requirements for an approved valuation significantly. Where the real property being supplied was not the same interest as that which was in existence at the valuation cl 6 required the valuation to be made as follows:
- "(a) a valuation of the interest, unit or lease in existence at the valuation date must be made; and
- (b) the valuation of that interest, unit or lease must be apportioned on a fair and reasonable basis, to ascertain the part of the valuation that relates to the interest, unit or lease that you supply."
44. A valuation complied with the requirements of the Commissioner if made in accordance with one of three methods described in the Determination and if made by a time specified in cl 15 or cl 16. The Commissioner made no submissions regarding the timing of the valuation here so we assume that the timing aspect was satisfied. The valuation relied on here was evidently designed to satisfy the requirements of Method 1 which are in these terms:
" Method 1:
- 9. A written valuation by a professional valuer determining the market value of the interest, unit or lease at the valuation date. The valuation must be made in a manner that is not contrary to the professional standards recognised in Australia for the making of real property valuations.
- 10. The valuation must include a signed certificate which specifies:
- (a) a full description of the property being valued;
- (b) the applicable valuation date;
- (c) the date the valuer provides the valuation to the supplier;
- (d) the market value of the property at the valuation date;
- (e) the valuation approach and the valuation calculation; and
- (f) the qualifications of the valuer."
45. The Commissioner was provided with two documents that purported to be valuations that satisfied the requirements of the Determinations. One produced a valuation of Tower Two as at 30 June 2000 (not 1 July 2000) of $29,022,052[8]
46. The Commissioner submits that, for a variety of reasons, the certificate in relation to Tower Two does not comply with the requirements of the MSV 2000/2. We should first consider what is required by that Determination. MSV 2000/2 does not expressly require that the valuation demonstrate, on its face, that the valuer has taken into account the matters specified in cl 5(2) but, as it seems to us, where there is a contest about the efficacy of a valuation we need to be satisfied that the valuer has had regard to the matters specified in cl 5(2). As long ago as January 2007, the Commissioner raised the deficiencies that were relied on at the hearing. No attempt has been made to demonstrate by evidence that the valuer had regard to all of the matters specified in cl 5(2). Thus, in our view, if it is not apparent on the face of the valuation that the valuer has had regard to those matters we could not be satisfied that the valuation satisfies the requirements of the Determination.
47. Matters of compliance with the Determination were considered by Middleton J in Brady King Pty Ltd v Commissioner of Taxation (Cth) (No 2)[10]
"29 Equally the valuer 'must' have regard to three matters: the market value of the completed premises; the cost to complete the partly completed premises; and the profit margin and holding costs that are attributable to the period on or after the valuation date. Further, these matters would need to be given appropriate weight as important or essential elements in the making of the valuation: …If the valuer did not have regard to these three matters, nor give them appropriate weight, then the language of s 75-10(3) and purpose for the valuation coming into existence, indicate that the valuation would be invalid and of no operation for the purposes of the Determination."
48. Mr Harrison QC, who led Mr Marks for the applicant, submitted that we ought not to follow his Honour's decision so far as it suggests that a valuation where the valuer did not give the matters appropriate weight was invalid. We need not decide the question. We can determine the matter on the basis of his Honour's conclusion that, where a valuer does not have regard to the matters in cl 5(2), the valuation would be invalid and of no operation for the purposes of the Determination. In the context in which the valuation is provided it seems to us that it is necessary, at least, that the valuation appear on its face to comply with the requirements of the Determination and that a valuation that does not self-evidently do so does not comply with the Determination with the result, as Middleton J put it, that it is "invalid and of no operation for the purposes of the Determination".
49. Here, in our view, some of the Commissioner's criticisms are somewhat pedantic and do not really go to matters of substance. The first criticism is that the date of valuation is the incorrect date and undertakes a valuation prior to the introduction of GST. We do not regard that, without more, as being of any particular significance and we may ignore it. In the absence of any suggestion of an event that might affect valuation, a valuation as at 1 July 2000 can be regarded as also representing a valuation as at 30 June 2000. Some of the other criticisms warrant similar comment. For example, the certificate regarding Tower Two does not use the term "the market value of the completed premises"; rather it uses the expression "completed market value". We think it safe to regard a value said to be the "completed market value" of an apartment tower to be the same as the "market value of the completed premises". While the terminology used in the documents prepared by the valuer might be loose, or contain valuer's' jargon, taking technical points is not consistent with the approach the authorities dictate is required in relation to the construction to be afforded to, and the administrative approach to be adopted for, GST laws - a practical common sense approach consistent with the tax being a business tax. The decision of Greenwood J in Meridien Marinas Horizon Shores Pty Ltd v Commissioner of Taxation (Cth)[12]
50. But that approach does not assist the applicant so far as the requirements of cl 5(2)(c) of the MSV 2000/2 are concerned. That requires the valuer to have regard to "the profit margin and holding costs that are attributable to the period on or after the valuation date." It is, perhaps, possible that the valuer did have regard to these matters however no evidence was elicited from him to that effect. Moreover, we are unable to discern from his valuation that he has done so. In circumstances where the applicant bears the onus we are left in the position where we are unable to be satisfied that the valuation complies in this respect with the requirements of MSV 2000/2.
51. Thus, in our view, the valuation of Tower Two cannot be regarded as valid for present purposes. The applicant accepts that no valuation of Tower Three 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.
52. The Commissioner submits[13]
53. It is right to say, as does the Commissioner, that a taxpayer is not obliged to use the margin scheme; it is a concession which is "allow(ed)"[14]
54. We need not decide whether the argument is correct given that the Commissioner has accepted that, if we reach the conclusion that the valuation is not an approved valuation, the applicant ought to be given an opportunity to provide an approved valuation within a further period of time.
55. 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, the applicant 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 Oldco and Newco 1 and Newco 2. In relation to sales settled on and after 17 March 2005, the calculation of the margin needs to be based on an acceptable valuation. There is no acceptable valuation for either Tower Two or Tower Three. 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 the applicant.
Division 165
56. It is readily apparent that the scheme of the GST anti-avoidance provisions is very similar to the scheme of the anti-avoidance provisions in Part IVA of the Income Tax Assessment Act 1936 (Cth) (Part IVA). Much of the language and structure of the legislation is identical. It seems reasonable to assume that where Parliament has repeated words and phrases which have been judicially considered those words and phrases are intended to bear the meaning already attributed to them by decisions of high authority[15]
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 the applicant 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.
58. Before turning to relevant factual matters and the principles that need to be considered in the context of Division 165, we will make some observations in relation to some of the evidence. Evidence of the way in which the re-structuring of the ownership of Towers Two and Three developed was given by the CEO, by the Company Secretary of Developco, and the Accountant, the GST partner at the Firm that advised the Group.
59. There is, and was, an air of unreality that pervaded the written and oral evidence of these witnesses. Time and time again during the course of cross-examination, generally irrespective of the question, and at times uncalled for, references to notions of asset protection were raised. There was, as well, the complete absence of any reference in any document (apart from the accountant's jottings) to the enormous GST savings, as it turned out in the order of $21m, that would flow to Developco were the re-structure put in place. We are however not concerned with matters of subjective motivation. This approach was made clear, among other places, in the decision of Gummow and Hayne JJ in Commissioner of Taxation (Cth) v Hart.[16]
60. Subject to these matters we regard the Company Secretary and the Accountant as generally reliable historians. The CEO had a more limited recall of factual matters, but he struck us as a person very much engaged with the broader landscape who was prepared (probably sensibly) to leave the detail of corporate, financial and taxation matters to others with that expertise. In reaching these views we are conscious of the criticisms made by the Commissioner of, in particular, the Company Secretary, and the contention, implicit in the Commissioner's case, that the many references in contemporaneous materials to notions of asset protection were merely a device to disguise the true purpose of the re-structure. Were this to be true, it would not matter so far as motivation is concerned and it would not lead us to regard the witnesses as unreliable in the few issues of fact that are disputed.
History of the restructure
61. We need, at this juncture, to set out some greater detail of the history of the re-structure. The starting point is an earlier Group development. In mid-to-late 1997 a group of purchasers refused to complete purchases of apartments in the development because, they alleged, they had been induced to enter into the contracts to purchase by reason of misleading and deceptive conduct on the part of the real estate agent responsible for the sales. The vendor company, another Group member, commenced proceedings for specific performance. Thereafter, the purchasers commenced separate proceedings seeking, inter alia, damages for misleading and deceptive conduct against the real estate agent, the vendor company, the CEO and Developco. The proceedings were ultimately resolved, but at a considerable cost to Developco, in about October 2000.
62. The Company Secretary says, and we accept, that he was surprised that action had been taken against Developco and the CEO when they had not been directly involved in the sales. After discussions with the CEO it was decided to seek legal advice from the Developco's solicitors "concerning the circumstances in which a court will 'lift the corporate veil'"[17]
63. The Group implemented some, but not all, of the recommendations. A practical approach was taken to implementing the advice that had been taken and the matters seen to be decisive were attended to. We regard it as appropriate to observe that when practicing lawyers are asked questions of the kind asked by Developco the advice given would more likely than not be conservative and set out all of the steps, including important steps and less important steps, that might be taken to reduce risk. We also think it appropriate to accept that people in trade and commerce would take views on the steps suggested in these circumstances, adopting important ones and taking a view on the usefulness and practicalities associated with less important steps and possibly not adopting them.
64. There were at least two types of risk that Developco perceived needed to be managed; purchasers not settling their purchases and purchasers who had settled suing for damages. The overall impression we gained from the evidence of the Company Secretary was that a purchaser refusing or failing to settle was not regarded as the most significant exposure because the relevant unit would have been available for resale.
65. In the period leading up to the introduction of GST, Group engaged external accountants (the Firm) to provide general advice about GST compliance. That contact led to a meeting in September 2000 between the Company Secretary and another employee from Developco and the Accountant from the Firm. The Accountant practised and continues to practice as a specialist GST consultant. The details of that meeting are noted in a letter from the Firm to the Company Secretary.[19]
66. In early 2001, the Accountant spoke to Developco's finance manager about a "joint venture" GST saving proposal which the Firm had developed. According to the Accountant, Developco "seriously considered" the proposal but ultimately did not proceed after obtaining advice from senior counsel.
67. By late 2001, the Accountant had developed an arrangement that posited significant GST savings for property developers, albeit, possibly not property developers that adopted the Developco business model of marketing and pre-selling before development construction works commenced. It involved the sale of a development to a related entity (and member of the same GST group) at a stage where the development had reached 90% of construction. The Accountant had obtained the opinion of junior counsel that endorsed the efficacy, for GST savings purposes, of the proposal. Significant aspects of the opinion that need to be noted are that it assumes that development work would increase the value of the property, the developed property should be sold to the marketer before marketing commenced, and the marketing should be carried out by a company or entity other than the developer.
68. In mid-September 2002, a personal friend of the CEO died suddenly causing him to consider the need "to undertake asset protection" in relation to his personal affairs which in turn led him to think about asset protection for Developco as a very substantial part of his and his family's assets were interests in Developco. According to the Company Secretary "asset protection" and "crisis management" were particular interests of the CEO in late 2002.
69. The evidence regarding the development of the re-structure was, in many resects, quite vague. Moreover, it is one of the curiosities of the applicant's case that throughout 2002, 2003 and 2004 there is barely a mention in the material of the likely GST savings available to the applicant were the re-structure to go ahead. The re-structure that eventuated appears to have been first raised in a meeting involving the Company Secretary, the Accountant and a partner from the Firm in early December 2002. It appears from the Firm's letter sent following that meeting[20]
70. It appears that there was a further meeting, this time involving the CEO, another Group employee, the Accountant and another member of the Firm, that took place in February 2003. The meeting was not referred to in the evidence in chief of either of the CEO or the Accountant; the details of it emerged in cross-examination of the Accountant. The Firm's letter of 10 March 2003[21]
71. The issue of the Firm's fees were discussed further in early March 2003. Accordingly to the Accountant, the Firm proposed a fee of $800,000, "based on the GST saved by [Developco]" at a conference involving the CEO and the Company Secretary. The CEO countered with an offer of $700,000. At around this time the Accountant made hand written notes on the letter of 10 March 2003 that suggest that, at least in his mind, fees in the order of $640,000 might be paid in March 2004 "upon transfer of the second tower and the conclusion of the second tower"[22]
72. The Company Secretary and another senior Developco employee met with Developco's solicitors to discuss legal aspects of the re-structure. The Accountant attended the meeting. Following the meeting the solicitors sent a draft advice[23]
- • "You immediately approach each of your financiers, detail a proposal to them and seek their response to it. Their position will be fundamental to you being able to implement the proposal.
- • Obtain an opinion from a barrister on the insolvency law issues if those issues are important to you.
- • Communicate with the Foreign Investment Review Board as to their position with the existing off the plan approvals.
- • Make an application to the Office of State Revenue for a ruling in relation to the exemption from duty under the corporation restructure provisions."
73. There is no evidence of what steps Developco took in the aftermath of the March 2003 meeting. There was a further meeting between the Company Secretary and Developco's solicitors in early August 2003. The solicitors' letter following the meeting described its subject matter as "asset protection strategies" for Developco. There was a further meeting between the Company Secretary and one of the solicitors on 7 October 2003. No evidence was given about the subject matter of the meeting but the Company Secretary did say that he had intended, but had forgotten, "to raise the issue of asset protection" with that solicitor. The following day he sent an email to the solicitor proposing a further meeting, this time involving the Accountant as well, "to look at some asset protection issues"[25]
74. In November 2003, an advice was obtained from senior counsel on "asset protection" aspects of the re-structure. Thereafter, in December 2003, Developco sought further oral advice from its auditors and tax agents about the re-structure. In the result, according to the Company Secretary,
"[the CEO] decided to proceed with the asset protection strategy outlined in the advice [Developco] had received from its professional advisors, with the intended date of settlement of Tower Two being 27 February 2004."
75. The strategies developed were implemented by (among other steps):
- (a) seeking approval of financiers to the property;
- (b) seeking stamp duty exemptions;
- (c) seeking Foreign Investment Review Board approval; and
- (d) seeking consent to transfer the benefits of deposit Bonds and Bank guarantees,
Some of these took a degree of time.
76. It is not clear whether purchasers of apartments who had entered contracts with Oldco were notified of the restructure arrangements and the conclusion we draw is that they were not notified nor asked to consent to the assignment.
77. Implementation of the strategy was also delayed for a period in 2003 and into early 2004 when the Group finance staff, especially the Company Secretary, were focused on organising replacement funding for the Group. The costs of the project had increased by an amount of approximately $13m which needed to be funded. This was a priority over any implementation of asset protection strategies because the need to refinance the development was critical and without the refinancing put in place there would not have been an asset to protect. By March 2004 the finances of the Developco had been brought under control with a new financier, Suncorp Metway Limited, as the principal lender.
78. We were left with the clear impression that the Group had limited resources available to attend to corporate accounting and financial matters and that the Company Secretary, being the executive responsible for these matters and in his role as company secretary, prioritised his attention and there were some delays from time to time in implementing the "asset protection strategy". We accept the Company Secretary's evidence on this aspect of the matter.
79. The Accountant was concerned about the delays in implementing the strategy because, had the sales of Tower Two and Tower Three been settled after the apartments had been completed, sales to independent purchasers would have been input taxed supplies of residential premises that had been previously sold as such with the effect that all input tax credits associated with the development would have to be repaid to the Commissioner.
80. At the time that the sale of Towers Two and Three by Oldco to Newco 1 and Newco 2 was under consideration, the financial position of the Group was such that the benefit to be gained by way of reduction of GST liability was greater than the net asset position of the whole Group and four times the 2003 year annual profit. As at 30 June 2003, the Group consolidated net asset position was approximately $17.5m and the consolidated Group profit for the year ended 30 June 2003 was approximately $5.1m.
81. The potential GST saving would have had a significant impact on the financial position of the Group as a whole. The profits generated on the development and sale of Tower One were approximately $10m and in November 2002 the expected profits to be generated on development and sale of Tower Two were approximately $26m based on sales revenue of $156m and expenses of $130m (including with a GST of approximately $12m). The Tower Three projections at this time were sales revenue of $126m, expenses of $104.3m (including GST of $8.8m) and retained income from development and sale of apartments of $21.7m.
82. Throughout the marketing of the development, little prominence was given to the identity of the actual owner of the development. Significant prominence was given to the Group identity through the use of the Developco name and the Developco corporate logos. Throughout both the construction and marketing phases of the development, none of Oldco, Newco 1 or Newco 2 had any employees. Developco had a central personnel provider which charged out the cost of its employees to the Group companies who used their services or on whose activities they were engaged. During the same period, Oldco, Newco 1 and Newco 2 and Developco had common directors. Formal meetings of directors of Oldco, Newco 1 and Newco 2 were held on an as needed basis whereas regular formal meetings of directors of Developco were held and minuted. The business affairs of Oldco, Newco 1 and Newco 2 and the status of the development were reviewed at the Developco directors' meetings. On a day to day basis, discussions concerning the business affairs of Oldco, Newco 1 and Newco 2 and day to day decisions concerning the development were made by common directors.
The legislation
83. Division 165 of the GST Act, in particular s 165-40, allows the Commissioner to make a declaration negating the benefits obtained from a scheme where Div 165 operates. For Division 165 to operate it is necessary that there be a scheme, that there be a GST benefit from the scheme, and either that the sole or dominant purpose of the persons or parties who entered into or carried out the scheme was to secure the GST benefit or that the principal effect of the scheme was the creation of the GST benefit. The division operates where each of the matters specified in s 165-5(1) are satisfied, that is,
- "(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)."
84. The matters in issue are whether the applicant obtained a GST benefit from the scheme (the GST benefit issue), whether any benefit was attributable to the making of a choice, election, application or agreement provided for in the GST Act (the choice issue) and whether, taking into account the prescribed matters, it is reasonable to conclude either that the applicant entered into the scheme with the sole or dominant purpose of obtaining a GST benefit or that the principal effect of the scheme is that the applicant got the GST benefit from the scheme (the purpose or effect issue).
Scheme
85. The Commissioner formulated the relevant scheme in alternate ways in his Statement of Facts, Issues and Contentions[27]
"Developco received advice from a professional advisor 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);
- (b) company A 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 A paid for the land;
- (c) company A sells the partially completed development to company B at market value. The timing of the sale is to occur at a time when the market value is significantly higher than the price A paid for the land;
- (d) the sale by A to B is to be free of GST (either because it is a sale of a going concern, or because A and B are within a registered GST group under Division 48);
- (e) company B completes the development, and sells to end buyers. Any sales made by A to end buyers would be honoured and completed by B;
- (f) upon transfer to end buyers, company B would choose to apply the margin scheme in respect of its liability for GST (calculated based upon consideration B provided to A).
Alternatively, the scheme involved the transferring by Oldco of Towers Two and Three to Newco 1 and Newco 2 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 Oldco completed the sales or, in a broader sense, the transferring by Oldco of Towers Two and Three to Newco 1 and Newco 2 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 Oldco completed the sales; and choosing to apply the margin scheme in respect of the subsequent supplies by Newco 1 and Newco 2 to third party purchasers."
86. The term "scheme" is defined in s.165-10 (2) as:
- "(a) any arrangement, agreement, understanding, promise or undertaking:
- (i) whether it is express or implied; and
- (ii) whether or not it is, or is intended to be, enforceable by legal proceedings; or
- (b) any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise."
87. The jurisprudence on Part IVA establishes the following propositions. Part of a scheme is not a scheme[28]
88. The requirement that the scheme be related to the benefit said to be obtained requires the fact of sales of the finished apartments by Newco 1 and Newco 2 and completion of the sales of finished apartments by those companies to be included in the scheme. It is only on completion of sales by those companies that the higher value (the amount of the consideration for the purchase of Towers Two and Three) can be factored into the margin calculation. Accordingly, in applying the s 165-15 tests, it is necessary to have regard to the effect of these features of the scheme and the transfers of assets that led to them.
89. We do not understand the applicant to dispute that the arrangements identified by the Commissioner as constituting the scheme came within that definition. Nor did we understand there to be any dispute that the timing element in s 165-5(1)(d) was satisfied.
The GST benefit issue
90. Section 165-10(1) sets out the circumstances in which an entity gets a GST benefit from a scheme. Only paragraph (a) is relevant. It provides that an entity gets a GST benefit 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;"
91. The applicant says there was no GST benefit at all. It asserts that asset protection was the end sought and that the only way to achieve this outcome was to do what it did to protect itself and its assets from exposure to claims of purchasers of apartments. Accordingly, on the applicant's case, the necessary comparison is the GST outcome that actually ensued (based on the transactions actually entered) and the GST outcome that would ensue on a very similar, or identical, transaction designed to secure a degree of asset protection. The consequence of this approach to determining whether there is a GST benefit is that there is no such benefit. The apparent logic behind the submission seems to be the comments of Gummow and Hayne JJ in their decision in Hart[34]
92. The Commissioner puts his case on the basis that it is necessary to remove the scheme and look to see what GST liability would have arisen. The Commissioner contends that the GST benefit is an amount by which the GST payable by the applicant was reduced as a consequence of Newco 1 and Newco 2 being interposed between Oldco and third party purchasers, an amount in excess of $21m. in relation to all sales but a lesser, unquantified sum, in relation to sales that settled up to 16 March 2005.
93. Part IVA of the Income Tax Assessment Act 1936 adopts a parallel structure. Section 177C(1) of that Act deals with obtaining a "tax benefit" in connection with a scheme involving a deduction. It provides that a reference to a taxpayer obtaining a tax benefit in connection with a scheme is to be read as a reference to:
- "(b) a deduction being allowable to the taxpayer in relation to a year of income where the whole or a part of that deduction would not have been allowable, or might reasonably be expected not to have been allowable, to the taxpayer in relation to that year of income if the scheme had not been entered into or carried out…"
94. Adopting judicial consideration of Part IVA as applicable to Division 165, in each Act the necessary enquiry includes an enquiry into what could (or might) reasonably be expected to have happened. In Peabody[35]
"A reasonable expectation requires more than a possibility. It involves a prediction as to events which would have taken place if the relevant scheme had not been entered into or carried out and the prediction must be sufficiently reliable for it to be regarded as reasonable."
95. It has been said[36]
"consider, in the absence of the scheme, what activity the taxpayer would have undertaken. The taxpayer can satisfy the onus of showing that he or she has not obtained a tax benefit in connection with a scheme if:
- • he or she would have undertaken or might reasonably be expected to have undertaken a particular activity in lieu of the scheme; and
- • the activity would or might reasonably be expected to have resulted in an allowable deduction of the same kind as the deduction claimed by the taxpayer in consequence of the scheme."
96. There are a number of errors in the logic of the applicant.
97. The first is that its formulation of an alternate hypothesis ignores the phrase "apart from the scheme or a part of the scheme". Apart from the scheme, Oldco would have continued to be the vendor of all 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.
98. Secondly, Part IVA has been said to be operative notwithstanding the setting might be a commercial dealing that delivers or secures both commercial and taxation benefits[37]
99. Next, Division 165 has at least one important difference to Part IVA. Subsection 165-10(3) indicates that an entity can "get a GST benefit from a scheme" even if the entity could not have economically engaged in activities that would produce the equivalent commercial effect of the scheme, or part thereof, other than by entering into or carrying out the scheme. This provision answers the applicant's assertion that there was no GST benefit because the Group would have done something to secure the benefits of asset protection and the only options were to do what was done.
100. To the extent that the Commissioner's approach to the operation of Division 165 merely looks to removing the scheme steps and then postulating what the GST outcome would have been with the steps that remain, we think it is wrong. To the extent that this approach is a shorthand description of a postulation that the course of action that would have been adopted was a continuation of the pre-existing arrangements entered into and executed by Oldco in relation to Tower One, and this prediction is sufficiently reliable to be regarded as reasonable, then the approach is consistent with authority.
101. While the Commissioner's alternate postulate tends to overlook that there were factors that induced an awareness of both the need to take steps to protect assets, that there were benefits that taking such steps would or could deliver, that Developco took advice in this regard and that the scheme did produce a degree of protection that was said to be sought (albeit there is debate as to the extent of that degree), that postulate is not inconsistent with the requirement that there needs to be a hypothesis as to what would have occurred but for the scheme and that that hypothesis is sufficiently reliable to be regarded as reasonable. It is also consistent with the terms of s 165-10(3).
102. On the basis of the alternative postulate, that is, had the pre-existing arrangements been continued, the margin on Oldco'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 Newco 1 and Newco 2. There is then a GST benefit in the case of supplies prior to 17 March 2005.
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[38]
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.
The choice issue
105. The applicant contends that any GST benefit obtained by it was attributable to the making of a choice, election, application or agreement expressly provided for by the GST Act. It identifies those events as:
- (a) the choices made by Newco 1 and Newco 2 to become members of the GST group, a choice made under s 48-5 of the GST Act;
- (b) the agreement by Oldco and Newco 1 that the supply of Tower Two was of a going concern, an agreement made under s 38-325(1)(c) of the GST Act;
- (c) the agreement by Oldco and Newco 2 that the supply of Tower Three was of a going concern, an agreement made under s 38-325(1)(c) of the GST Act;
- (d) the choices made by Newco 1 and Newco 2 to apply the margin scheme, choices made under s 75-5 of the GST Act.
106. The applicant asserts that, had the election to sell the apartments as margin scheme sales not been made, the sales of apartments to third party purchasers would have been liable to GST and the amount would have been one eleventh of the sale price. Accordingly, the applicant asserts that the only reason a reduction in GST liability arises is the making of the election to effect margin scheme sales. It says that the relevant test in s 165-10 calls for an analysis of whether or not the GST benefit is attributable to the making of an election, election, application or agreement and that the decision of the High Court in Federal Commissioner of Taxation v Sun Alliance Investments Pty Ltd (in liq)[39]
107. The Commissioner denies that any benefit arose as a result of simply making elections. Rather, the Commissioner says, the benefit arose as a consequence of the combination of the transfer of ownership of Tower Two and Tower Three to Newco 1 and Newco 2 and the sales under the margin scheme contract. The Commissioner says that where there is a benefit that arises as a result of more than the mere election then s 165-5(1) does not apply. In support, the Commissioner refers to the decision of Greenwood J in Walters which considered the equivalent Part IVA provision. There, His Honour observed[41]
- "[83] The phrase in s 177C(2)(a)(i) 'attributable to' the particular election, choice or event means that there must be a direct relationship between the non-inclusion of the relevant amount and the choice or election made by the taxpayer . Here, each taxpayer chose to obtain a roll-over within the framework of Subdiv 122A of the 1997 Act with the result that upon disposal of the share to Sailpeal and Port Bracknell a capital gain, otherwise realised in the hands of the taxpayer upon disposal of the CGT asset, 'is disregarded' (s 122-40). Had the Commissioner contended that the step of disposing of each share to the relevant entity constituted a disposal of a CGT asset giving rise to a realised capital gain in the hands of each taxpayer, the respondent would have been met with a complete answer under s 177C(2)(a).
- [84] However, the Tribunal concluded on the facts that each taxpayer entered into and carried out a scheme comprising a series of transactions including the sale or disposal of the share to Sailpeal and Port Bracknell in each case and the entire subsequent sequence of transactions leading up to the ultimate sale of the share to Terrence and Annette Walters by each taxpayer (in a trustee capacity) with the result, in part, that the cost base upon disposal of the asset at $350,000.00 did not give rise to a realised capital gain in the hands of the vendor, resulting in the subsequent distribution of the entire profit upon disposal. The non-inclusion of the amount of $349,999.00 representing the capital gain that would have been realised in the hands of each taxpayer but for the scheme, is not attributable to the choice made by each taxpayer to obtain a roll-over. The non-inclusion is 'attributable to' the construct adopted by each taxpayer of a sequence of integrated and interdependent steps making up the scheme one of which was the initial disposal to Sailpeal and Port Bracknell, the subject of a choice by each taxpayer to obtain a roll-over for that step.
- [85] Accordingly, the Tribunal correctly determined that no nexus was made out between the choice or election made by each taxpayer and the non-inclusion of the amount of $349,999.00 in the assessable income of each taxpayer that would have been included, or might reasonably be expected to have been included, if the scheme had not been entered into or carried out. Thus, the exclusion provided by s 177C(2)(a)(i) was not made out and each taxpayer obtained a tax benefit in connection with the scheme for the purposes of ss 177C(1)(a) and 177D, enlivening the power of the Commissioner to make a determination pursuant to s 177F(1)(a)." [emphasis added]
108. The Commissioner also relies on the amendment of the GST Act in 2008 by the addition of s 165-5(3). That subsection provides that schemes entered into or carried out to put an entity in a position so as to be able to make an election which has the effect of reducing GST liability are not eligible for the concessional treatment afforded by s 165-5(1)(b). The Commissioner relies on the Explanatory Memorandum to the Bill introducing the amending legislation to the effect that the amendment confirms the pre-existing law. The difficulty with this contention is that that Explanatory Memorandum was not before the Parliament at the time of passing the original legislation which did not have that provision. And, as Graham J observed in MW McIntosh Pty Ltd v Federal Commissioner of Taxation[42]
"Needless to say, one cannot treat an Explanatory Memorandum in respect of a later Bill as extrinsic material to which reference may be made in discerning the meaning of an earlier statutory provision."
109. The Commissioner submits, in any event, that amending legislation may be taken into account in arriving at the proper construction of the pre-amended Act, particularly where there is ambiguity in the pre-amended Act. Reference was made to the decision of the Full Federal Court in Ajinomoto Co Inc v NutraSweet Australia Pty Ltd[43]
110. On the view we take of the matter, it is not necessary to have regard to the 2008 amendments which introduced s 165-5(3) of the GST Act. 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[44]
The purpose or effect issue
111. There are two limbs to the test, one of which, at least, must be satisfied before Division 165 can apply; the sole or dominant purpose limb (s 165-5(1)(c)(i)) and the principal effect limb (s 165-5(1)(c)(ii)).
112. The matters to be taken into account in determining purpose or effect are set out in s 165-15(1) of the GST Act in these terms:
- "(1) The following matters are to be taken into account under section 165-5 in considering an entity's purpose in entering into or carrying out the *scheme from which the avoider got a *GST benefit, and the effect of the scheme:
- (a) the manner in which the scheme was entered into or carried out;
- (b) the form and substance of the scheme, including:
- (i) the legal rights and obligations involved in the scheme; and
- (ii) the economic and commercial substance of the scheme;
- (c) the purpose or object of this Act, the Customs Act 1901 (so far as it is relevant to this Act) and any relevant provision of this Act or that Act (whether the purpose or object is stated expressly or not);
- (d) the timing of the scheme;
- (e) the period over which the scheme was entered into and carried out;
- (f) the effect that this Act would have in relation to the scheme apart from this Division;
- (g) any change in the avoider's financial position that has resulted, or may reasonably be expected to result, from the scheme;
- (h) any change that has resulted, or may reasonably be expected to result, from the scheme in the financial position of an entity (a connected entity ) that has or had a connection or dealing with the avoider, whether the connection or dealing is or was of a family, business or other nature;
- (i) any other consequence for the avoider or a connected entity of the scheme having been entered into or carried out;
- (j) the nature of the connection between the avoider and a connected entity, including the question whether the dealing is or was at arm's length;
- (k) the circumstances surrounding the scheme;
- (l) any other relevant circumstances."
113. Our task, having regard to these matters, is to answer the question posed by s 165-5(1)(c) of the GST Act.
The sole or dominant purpose limb
114. It is clear that the transfers of Tower Two and Tower Three by Oldco to Newco 1 and Newco 2 were commercial transactions which changed ownership arrangements in relation to very valuable interests in land, changed responsibilities under contracts to sell apartments either constructed or to be constructed on the land, and changed responsibilities within the Group for meeting obligations to financiers. However, being a part of a commercial transaction does not, of itself, put the transaction beyond the reach of Division 165 as noted above at paragraph [98]. Accordingly, even if the ultimate objective of the transaction is genuinely commercial or the transaction producing the GST benefit also delivers a desired non tax commercial outcome, Division 165 may still operate. Division 165 might apply if there is enough in the way in which a transaction is entered into or carried out, viewed thorough the prism of the matters listed in s 165-15(1) of the GST Act, that the purpose of obtaining the GST tax benefit outweighs the commercial objectives. The greater the degree of artificiality or contrivance in the transaction directed to obtaining the GST benefit the greater the prospect that the commercial pursuits of the transaction will not be dominant. Similar conclusions can be drawn if the way the transaction has been entered has "no explanation other than … fiscal consequences … contrived by the particular form of the … transaction"[45]
115. The question posed by s 165-5 in conjunction with s 165-15 is whether, having regard to all[46]
- (a) the focus of the enquiry is on the purpose of the persons who entered into or carried out the scheme. It is not an enquiry into any purpose of the scheme;[47]
Spotless Services [1996] HCA] 34;(1996) 186 CLR 404 at 423Hart [2004] HCA 26 ;(2004) 217 CLR 216 at [63] per Gummow & Hayne JJ - (b) the actual subjective purpose of those persons is irrelevant. Statements about why parties may have done what they did and why they structured transactions the way they did are not to the point. There are twelve objective matters to be addressed listed in s 165-15(1) from which conclusions as to dominant purpose or principal effect are to be drawn and they do not require or even permit enquiries concerning subjective motives of taxpayers or their associates or advisors.[48]
Hart [2004] HCA 26 ;(2004) 217 CLR 216 at [65] - (c) the objective tests must be undertaken at the time of entering into or carrying out the scheme or the part of the scheme.[49]
Commissioner of Taxation vMochkin [2003] FCAFC 15 ;(2003) 127 FCR 185 at [45]Vincent vCommissioner. of Taxation [2002] FCAFC 291 ;(2002) 124 FCR 350 at 372–373CPH Property Pty Ltd vCommissioner of Taxation (1998) 88 FCR 21 at 42
116. The matters relevant to the tests to be addressed and our analysis of them are set out below.
Manner of execution (para (a))
117. It is necessary to address the analysis of the twelve tests against a backdrop of the other possibilities that existed so as to form a view as to whether the steps taken are explained by reference to commercial or non tax considerations on the one hand or tax considerations on the other. Asset protection against an unknown litigant or class of litigants is put forward by the applicant as the dominant purpose that ought to be found thus it is relevant to have regard to the other possible ways in which asset protection might be achieved. So far as that question is concerned it seems to us that there are no immediate answers beyond the mechanism adopted here by Developco. The steps that were undertaken, involving separation of activities and asset pools are steps commonly taken by corporations to protect assets against exposure associated with business operations. Whether the steps achieved asset protection is another question.
118. Contrary to the position of borrowers whose arrangements were the subject of scrutiny in Hart[50]
119. The fact that the scheme may have been brought to Developco by a specialist GST adviser, and one who had previously brought other proposals that had not been acted upon, does not bear great weight. Whether the Firm did or did not bring the concept of the sale of Tower Two and Tower Three to the Group is not strictly relevant to the application of Division 165[51]
120. In many respects the transfers of Tower Two and Tower Three to Newco 1 and Newco 2 took the form of ordinary transactions. The steps taken were largely as would be expected in an arms length sale of a going concern with the exception of:
- (a) the vendor debt,
- (b) the manner in which the purchasers' (Newco 1 and Newco 2) assumed primary liability (within the Group) for repayment of the debt financing; and
- (c) the absence of more formal steps to notify purchasers of apartments from Oldco of the changed arrangements.
121. Contracts were entered, transfers of interests in land where executed, other contractual arrangements were assigned or novated, stamp duty exemptions were sought and approvals from regulators and external financiers were sought and obtained. The absence of the steps listed in paragraph [120] above can equally be explained by reference to the fact that transactions were conducted within a wholly owned group of companies. Less formality can be expected in such circumstances and there is no suggestion of a sham. In fact, the Commissioner accepts that there were transfers of two going concerns. Necessarily, that acceptance means that the Commissioner accepts that all the assets and liabilities required for the continued operation of the development of Tower Two and Tower Three and the sale of all the apartments developed were, as a matter of law, transferred from Oldco to Newco 1 and Newco 2.
122. The Commissioner points to the delay between identification of the need to protect assets and the entry into and carrying out of the scheme. That delay had the effect of transferring Tower Two and Tower Three after substantial additional development work had been completed with the effect that the value of the assets transferred, and although not observed by the Commissioner, presumably the amount of liabilities associated with funding the development as well, was higher and the amount of the GST liability was reduced. The delays are partly explained by other factors. First, for a period, Developco needed to refinance the original funding of the development. The business model of Developco was not to invest substantial capital in its developments. Its model was to borrow against the improved or potential value of the development. The Company Secretary's evidence, which we accept, was that there was a need to arrange refinancing of the development, that that work preoccupied him, and without getting the refinancing in place there would not have been an asset to protect[53]
123. The delays explained by reference to an inability to transfer Tower Two and Tower Three because the Queensland group titles legislation prevented it cannot be accepted. The legislation permitting volumetric titling came into force in 1997. If the Group executives thought that the transfers could not be made for this reason, these are subjective matters which do not factor into the analysis. Clearly, if they held these understandings they were wrong.
124. The Commissioner also pointed to the fact that Newco 1 and Newco 2 had no separate employees and had no minutes of meetings of directors and the like. The submission is at odds with the Commissioner's concession that Oldco carried on an enterprise and that there were transfers of going concerns when Oldco had exactly the same resources available to it. Quite apart from the contradiction that this argument reveals, in the circumstances of matters of this type involving the actions of entities in a Developco, this line of analysis carries little weight in considering questions of dominant purpose. It can be readily accepted that a wholly owned subsidiary without its own personnel resources and which undertakes business transactions approved and/or directed by its parent company carries on its own business[54]
125. In this regard, we note that, had an arms' length party purchased either of the Towers in the development as going concerns, there would not have been any argument that the vendor would not have been liable for GST or that the purchaser would have been able to sell the apartments under the margin scheme with exactly the same GST outcome as contended for by the applicant. Such a purchaser would have taken similar transactional steps as were taken by the parties here, albeit that the steps as to financing would have been different. That difference is explicable on the basis of the intra group nature of the transaction comprising the scheme. Looked at in this way, the manner of execution of the scheme entered into and carried out within the Group is shown in a different light and produces the same result from a GST perspective.
126. On balance, the enquiries directed to the manner of execution of the scheme do not point significantly one way or the other. If this factor is to lead to one conclusion rather than another, the vendor debt and delay may suggest a dominant purpose of securing the GST benefit but if it does, the weight would be regarded as minimal. Given the existence of tests which look to economic and GST effects and timing it is not necessary to consider any comparisons of benefits secured by the scheme under this test.
Form and substance test (para (b))
127. The legal form of the transactions was generally consistent with the economic substance. Actual assets and liabilities were transferred or assigned. Companies with the same critical features as Oldco, namely a common parent, minimal capital and no employees', stepped into and assumed the position that Oldco had held in relation to Tower Two and Tower Three. Again, an assertion to the contrary is at odds with the Commissioner's acceptance that there were transfers of going concerns.
128. There is a distinction to be drawn under this head between supplies made pursuant to contracts with end purchasers entered into by Oldco (and completed by Newco 1 or Newco 2) and those made pursuant to contracts entered into by Newco 1 and Newco 2 with end purchasers. In the former category, Oldco remained liable to potential claims by purchasers alleging misleading or deceptive conduct or other matters that might permit repudiation of the contract or damages for its breach. The risks identified from the earlier litigation continued unabated in such cases. On balance this test suggests a conclusion that producing the GST benefit was the dominant purpose of the scheme for these supplies.
129. For the remainder of the apartments, that is, supplies by virtue of contracts with end purchasers made by Newco 1 or Newco 2, we think that the form and substance is neutral.
Purpose or object of Act (para (c))
130. There does not, at least before 17 March 2005, appear to be any purpose or object of the Act that seeks to ignore all aspects of transfers of assets between members of a GST group. There is no single entity rule of the kind included in Part 3-90 of the Income Tax Assessment Act (1997). To the contrary, the GST Act had a piecemeal approach to intra GST group matters. After 17 March 2005, the legislation was altered to deal with transfers of assets of the kind presently under review. Moreover, had Tower Two and Tower Three been transferred for market value to an independent purchaser it is likely that the GST outcome contended for by The applicant in the present matter would have been the result.
131. This factor does not suggest a conclusion that producing the GST benefit was the dominant purpose of the scheme for these supplies.
Timing of the scheme (para (d))
132. The delay in implementation of the scheme, of itself, produced a greater GST benefit than otherwise would arise. Additionally, delay reduced the efficacy of asset protection. In this regard, the delay in implementation of the scheme produced two effects. First, there would have been fewer apartments sold by Newco 1 and Newco 2 and a consequent reduction in the extent of effective asset protection. And there would have been greater profits earned by Oldco and lower profits earned by Newco 1 and Newco 2 to which purchasers from Newco 1 and Newco 2 might have had recourse. Unexplained, these delays suggest a conclusion that producing the GST benefit was the dominant purpose of the scheme. There are explanations for most of the delays.
133. The same is true of supplies made by virtue of contracts made by Oldco prior to 17 March 2005. In such cases there was an inherent GST liability, based upon the margin between 1 July 2000 value and contract price. The subsequent sale to Newco 1 or Newco 2 had the consequence that the margin on the end purchaser's sales, and thus the GST, was lower. The timing of the scheme in relation to these supplies suggests a conclusion that producing the GST benefit was the dominant purpose of the scheme in respect of these sales.
The period over which the scheme was entered into or carried out (para (e))
134. Similar considerations to those noted in relation to the timing of the scheme (para (d)) apply for this test and the same conclusions ought to be reached.
The effect of the Act on the scheme apart from Division 165 (para (f))
135. This test invariably suggests a conclusion that producing the GST benefit was the dominant purpose of the scheme.
136. In this regard, in considering the tax consequences achieved by the intra-Developco transfers of Tower Two and Tower Three, the fact of a tax consequence (in the present matters the higher amount used in the margin calculation lowering GST payable) resulting from a given transaction, attracts no inference that the parties to the transaction entered into it or carried it out for the sole or dominant purpose of obtaining that tax consequence[55]
137. Little weight ought to be given to this factor.
Change in the avoider's financial position (para (g))
138. This test must look to the position of Oldco, Newco 1 and Newco 2 and possibly Developco, rather than the applicant.
139. From a Developco perspective the following facts are relevant:
- (a) GST liability was reduced dramatically;
- (b) exposures to external financiers remained the same;
- (c) exposure to the risk of non-completion of purchases remained the same. In this regard, a purchaser refusing or failing to settle ought not be regarded as the most significant exposure because the relevant unit would have been available for resale;
- (d) exposures globally to claims for damages for misrepresentation in the selling process remained the same subject to the following caveats:
- (i) if the exposure to damages claims were to be isolated to the particular company conducting the selling process and could not be pursued against the parent company (Developco) then the pools of assets available to meet any successful claim made by purchasers of apartments in the development would have been smaller for those purchasers of apartments who purchased from Newco 1 and Newco 2. In this regard, the marketing of the development as a Developco development using the Developco corporate logo could have compromised the effect of isolating exposures to damages claims to Newco 1 and Newco 2;
- (ii) if the standard sales contracts for apartments in Tower Two and Tower Three of the development could be relied on in accordance with their terms, including, relevantly, the entire agreement clauses, then exposures to damages for marketing misrepresentations may well have been ameliorated in any event;
- (iii) if the controls put in place to restrict or regulate the content of marketing representations, and to test whether those controls were being observed, were effective the exposures to damages for misrepresentation in the marketing process would similarly have been ameliorated in any event;
- (iv) a substantial proportion of the apartments in Tower Two and a significant proportion of the apartments in Tower Three had been sold to independent parties before the sales of these towers to Newco 1 and Newco 2. To this extent, any asset pools representing Oldco's profits may well have been exposed to these purchasers of Tower Two and Tower Three apartments who had dealt with Oldco notwithstanding the sale contracts with these purchasers were completed by Newco 1 and Newco 2;
- (v) if the assignments of the contracts for the sale of apartments in Tower Two and Tower Three by Oldco to Newco 1 and Newco 2 exposed the enforceability of deposit bonds and bank guarantees that had been given to Oldco then the extent of asset protection produced by the scheme would have been reduced;
- (vi) the exposure of the parent company of the group (Developco) to direct claims for damages would not have been altered. If it was so exposed before the transfers as a consequence of either its involvement (through its directors) in the affairs of its subsidiaries or the branding of the development as a Developco development then that exposure would not have altered;
- (vii) the indirect exposure of Developco to loss of assets in its subsidiaries and the extent to which that exposure was ameliorated or protected by the scheme is unquantifiable, the considerations in paragraphs (ii) to (vi) necessarily leading to that conclusion.
140. Quantifying the effect of the asset protection scheme secured from the perspective of the Group as a whole is difficult. For the supplies made pursuant to contracts with Newco 1 and Newco 2 there would have been some degree of greater asset protection. Conversely, in those cases there were significant GST savings. Assessing the effect of the scheme from the perspective of the participants (Oldco, Newco 1 and Newco 2) it is clear that there were individual, significant and material changes in ownership of assets and responsibility for liabilities of magnitudes in excess of any GST benefit.
141. Newco 1 and Newco 2 became owners of assets valued at $149.8m and $109.5m respectively, assumed material liabilities to financiers for the debt associated with developing Tower Two and Tower Three and assumed obligations to pay the vendor loans. They began businesses of selling unsold apartments in the development and completing sales of apartments sold pursuant to contracts between Oldco and purchasers that had been assigned to them, were placed in a position of being able to enjoy profits associated with the sale of the unsold apartments in those towers and, importantly, for the unsold apartments, Newco 1 and Newco 2 assumed commercial risks of finding purchasers and concluding sales.
142. Oldco disposed of land holding interests worth in excess of $250m, as between Group entities, Oldco was relieved of primary responsibility for repayment of financiers' loans, and Oldco assumed an entitlement to the vendor loans. Oldco discontinued marketing and selling apartments and its assets were protected from any future exposures that these marketing and selling processes could have entailed. Oldco forwent at least some of the profits that could have been earned on the sale of the balance of the apartments in Tower Two and Tower Three and was able to protect itself and its assets from damages claims associated with selling those apartments.
143. Viewed globally, the only measurable financial benefit was the saving of GST. There was an intangible benefit from a greater measure of asset protection for supplies made pursuant to contracts with Newco 1 or Newco 2 but, in our view, no greater asset protection for Oldco in relation to supplies made by virtue of contracts entered into by it. On balance, this test suggests a conclusion that producing the GST benefit was the dominant purpose of the scheme for supplies made pursuant to Oldco contracts. The matter is neutral for the remaining supplies.
Change in financial position of connected entities (para (h))
144. The considerations, and conclusions, reached in relation to the change in the avoider's positions (para (g)) apply here.
Other consequences for the avoider or connected entities (para (i))
145. There are no additional consequences that need to be addressed.
Nature of connection between entities (para (j)).
146. All relevant entities were connected. Minimal weight ought to be given to this factor.
Circumstances surrounding the scheme (para (k)) and other relevant circumstances (para (l))
147. There are none that need to be addressed.
Dominant purpose conclusions
148. 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 Oldco contracts. We do not reach that conclusion in relation to the supplies made pursuant to Newco 1 and Newco 2 contracts. In those instances we are satisfied that the dominant purpose was asset protection.
The principal effect limb
149. Section 165-5(1)(c)(ii) calls for conclusions to be drawn as to whether the principal effect of the scheme, or part of the scheme, is that the avoider gets the GST benefit. In our view that requires consideration of:
- (a) from whose perspective is the effect measured; and
- (b) what is the effect that is to be measured.
150. The Explanatory Memorandum to the A New Tax System (Goods and Services Tax) Bill 1998 (Cth) suggests that it is not those who entered into or carried out the scheme that are the focus of attention as is the case with the purpose limb. Rather, the Explanatory Memorandum indicates that:
- "6.344 This test is different from the purpose test in that it applies specifically to the avoider and the GST benefit obtained by the avoider.
- 6.345 For this test, a principal effect is an important effect, as opposed to merely an incidental effect."
151. If the effect is to be measured from the perspective of the taxpayer in question, the applicant, then the effect can only be that it was to reduce the GST liability for which it was jointly and severally liable pursuant s 444-90 of Schedule 1 to the Taxation Administration Act 1953 (Cth) (the Administration Act) and to reduce its rights to seek contribution to that liability pursuant to s 265-45 of the Administration Act. We do not consider focusing on the representative taxpayer in these circumstances to be the intended operation of Division 165 and it is not the approach that we adopt. Further, the matter has been conducted on the basis that it is not the effect from the perspective of the representative taxpayer that needs to be addressed.
152. In our view, the focus should be on the participants in the scheme who undertook the transactions which either attracted the GST liability (Newco 1 and Newco 2) or would have attracted GST liability but for the scheme (Oldco). These entities are the nearest equivalent to the avoider referred to in s 165-5 and s 165-15 and in the Explanatory Memorandum.
153. Turning to the twelve tests in s 165-15(1) of the GST Act by reference to which the Act requires the principal effect of the scheme to be measured, we observe that not all of them throw light on the principal effect of the scheme.
154. The manner in which the scheme was entered into or carried out (para (a)), the purpose of the Act (para (c)), the timing of the scheme (para (d)), and the period over which the scheme was entered into or carried out (para (e)), do not lend themselves to any assessment of the effect of the scheme.
155. The form and substance test (para (b)) looks to legal rights and obligations and the economic and commercial substance of the scheme. These are matters that touch on the effect of the scheme and the conclusions reached in relation to the dominant purpose of the scheme above apply equally here.
156. The change in the avoider's position (para (g)) looks to the effect of the scheme and the conclusions reached in relation to the dominant purpose of the scheme above apply equally here.
157. On any analysis, if there is a GST benefit, the para (f) test must point in favour of the effect of the scheme being to secure the GST benefit. Given this will inevitably be the case in most, if not all, analyses, such an indication would not be regarded as determinative. The observations made in relation to the dominant purpose test apply equally here.
158. The change in financial position of connected entities (para (h)) looks to the effect of the scheme and the conclusions reached in relation to the dominant purpose of the scheme above apply equally here.
159. The nature of the connection between the applicant and the parties to the scheme (para (j)) does not suggest what the principal effect of the scheme is. It does indicate a need to look to the position of all of the players in the scheme.
160. The remaining two tests do not involve examination of facts that have not already been considered.
161. The conclusion we draw in relation to the principle effect of the scheme, having regard to the tests by reference to which that effect is to be measured, is that, for the sales of apartments where the contract for the sale was entered by Oldco, 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 Newco 1 and Newco 2 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
163. Division 284 of the Administration Act deals with the imposition of administrative penalties. By virtue of s 284-75 of that Act, a liability to pay an administrative penalty arises where a taxpayer (or agent) makes a statement to the Commission that is false or misleading in a material particular and that results in a shortfall i.e. a tax liability that is less than it would have been but for the false or misleading statement. The Act imposes a "base penalty amount", determined by reference to the character of the act or omission that led to the shortfall amount. That amount can be increased by aggravating conduct or reduced for mitigating conduct.
164. The Commissioner assessed penalties of $5,405,367.00 for the GST shortfalls arising from the assessments and amended assessments. The penalties were assessed on two alternative bases namely:
- (a) pursuant to s 284-75 of Schedule 1 to the Administration Act 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));
165. After objection, the penalty amounts were reduced to take into account a reduction in the shortfall however the imposition of penalties at 25% was maintained. The Commissioner declined to remit the scheme penalty.
166. The system of penalties set out in Division 284 of Schedule 1 to the Administration Act does not impose penalty simply because there has been a tax shortfall - something more is required.[56]
167. The concept of reasonable care embraces a level of care that is less than perfect care. Whether or not reasonable care has been taken depends on the circumstances of the case [57]
168. At times, a taxpayer can be said to have taken reasonable care when a position is taken based on professional advice.
169. In MLC Limited v Commissioner of Taxation Hill J said of the reasonable care test:
- "[52] It is not appropriate in this case to endeavor to set out what would constitute reasonable care in all circumstances. For much will depend upon the facts of a particular case. Some assistance may be obtained, however, from the decision of the Full Court of this Court in North Ryde RSL Community Club Ltd v Commissioner of Taxation (Cth) (2002) 121 FCR 1; ATC 4293. In that case the Commissioner claimed that the appellant had not exercised reasonable care in lodging a return omitting a percentage of subscriptions allocated to Clubkeno Holdings on the basis that the amounts were not assessable because they were mutual receipts and not the proceeds of trading and in circumstances where the club knew that the Commissioner took a contrary view. Notwithstanding that the Court agreed with the Commissioner that the amounts in question were assessable income it was held by Spender, Finn and Merkel JJ that it had not been shown that the Club had not exercised reasonable care. The Administrative Appeals Tribunal, which had affirmed the penalty did so both because there had been a failure to disclose an opinion on the matter which the club had sought, and the failure to do so entitled the Tribunal to infer that the opinion would not assist the club's case and because it was said to be imprudent not to have sought a ruling where the circumstances were that the club was aware there was a real conflict of views. It was held, however, on the appeal that there was no basis for a finding that the club had failed to exercise reasonable care. In particular failure to seek a binding private ruling from the Commissioner was not in the circumstances failure to exercise reasonable care.
- [53] In my view the present is also a case where on the facts it cannot be said that there was a failure to exercise reasonable care [sic]. … Here, the taxpayer through its accountants had made an inquiry and been told that the view it took, a view taken in good faith and highly arguable, was correct. The view was one held generally in the insurance industry. It is true that it could have sought a binding ruling from the Commissioner, but clearly failure to seek a ruling will not in every case be equated with failure to exercise reasonable care. … A taxpayer who relies upon expert advice as here where the advice is held generally in the industry and does not conflict with any statement made by the Commissioner and indeed is confirmed by inquiry of the ATO is not required to obtain a ruling to guard against an allegation that the taxpayer has not exercised due care."
Similarly, in North Ryde RSL Community Club Limited v Commissioner of Taxation[59]
"[84] In all the circumstances we can see no basis for a finding that the appellant failed to take reasonable care to comply with its obligations under the ITA Act or the regulations. … We see no basis, on the facts found by the Tribunal, for its conclusion that the failure to apply for a private ruling constituted a 'failure to take reasonable care' to comply with the ITA Act or regulations."
170. The Explanatory Memorandum to the A New Tax System (Tax Administration) Bill (No 2) 2000 that led to enactment of Division 284 indicated that:
- "1.67 The reasonable care test requires a taxpayer to exercise the care that a reasonable person would be likely to have exercised in the circumstances of the taxpayer to fulfil the taxpayer's tax obligations. … Whether a taxpayer has behaved reasonably will depend on all the facts of each case.
- 1.68 The test looks to whether a person, in all the circumstances of the taxpayer, would have foreseen as a reasonable probability or likelihood the prospect that the act or failure to act would result in a shortfall amount. It is not a question of whether the taxpayer actually foresaw the probable impact of the act or failure to act, but whether a person in the same circumstances of the taxpayer would have foreseen it. The test does not depend on the actual intentions of the taxpayer.
- 1.69 Reasonable care requires a taxpayer to make a reasonable attempt to comply with the provisions of a taxation law. The effort required is one commensurate with all the taxpayer's circumstances, including the taxpayer's knowledge, education, experience and skill.
- 1.70 The reasonable care test is not intended to be overly onerous for taxpayers. …
- 1.71 … Whether penalty is attracted will depend on the circumstances of the case.
- …
- 1.73 On questions of interpretation, reasonable care requires a taxpayer to come to conclusions that would be reasonable for an ordinary person to come to in the circumstances of the taxpayer. …
- 1.74 The taking of a position with respect to a tax matter that is frivolous, or which lacks a reasonable basis, would be a strong indication of a lack of reasonable care.
- …
- 1.76 If a taxpayer seeks to rely upon the wrong advice, and the taxpayer's skill and education was such that the taxpayer could reasonably be expected to have known or suspected that the advice was wrong, the taxpayer would risk penalty. A taxpayer would also risk penalty if the taxpayer was careless in presenting all of the relevant facts to the adviser and this had materially affected the advice on which the taxpayer sought to rely.
- 1.77 Where a taxpayer uses a registered tax agent or other person to help prepare and lodge a BAS or tax return, the taxpayer will be vicariously liable for any penalties caused by the agent providing information that results in a shortfall amount. This includes the tax agent not taking reasonable care. The standard expected of a tax agent will be much higher than the standard expected of the client."
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 the applicant 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 the applicant. 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 Oldco but settled by Newco 1 and Newco 2. The penalty has been properly imposed to the extent of these supplies.
173. For the supplies represented by sales of apartments contracted for by Newco 1 and Newco 2 and settled before 17 March 2005 there is no shortfall and no penalty applies.
Conclusions
174. The result of all of this is as follows:
- (a) for supplies up to and including 16 March 2005, the applicant was entitled, subject to the paragraph (c) hereof, to apply the margin scheme on the basis that the consideration for the acquisition was the sale price between Oldco and Newco 1 and Newco 2;
- (b) for supplies on and from 17 March 2005, the applicant ought to be given the opportunity to produce to the Commissioner an approved valuation of Tower Two and Tower Three as at 1 July 2000;
- (c) for supplies up to and including 16 March 2005, and in respect of supplies pursuant to contracts made by Newco 1 or Newco 2 and completed by Newco 1 or Newco 2, the Commissioner's declaration negating the GST benefits should be set aside;
- (d) the objection decision regarding penalties ought be set aside so far as it related to supplies of the type specified in paragraph (c) but otherwise affirmed.
175. It seems to us that the appropriate form of a decision to give effect to these conclusions would be as follows:
In each of applications 2009/5952-5955:
- (a) insofar as the proceedings concern decisions that relate to supplies made on and after 17 March 2005 (including decisions on shortfall penalty) those decisions are remitted to the respondent pursuant to s 42D of the Administrative Appeals Tribunal Act 1975 (Cth) for reconsideration within a period of 90 days;
- (b) insofar as the proceedings concern decisions that relate to supplies made before 16 March 2005 pursuant to contracts made by either of Newco 1 or Newco 2 those decisions (including decisions on shortfall penalty) are set aside and remitted to the respondent with a direction to allow the objection in full;
- (c) the decisions under review are otherwise affirmed.
176. We will direct the parties to lodge and serve further submissions within 14 days about the appropriateness (or otherwise) of decisions in these terms.
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