STNK v FC of T

Members:
R Olding SM

Tribunal:
Administrative Appeals Tribunal, Sydney

MEDIA NEUTRAL CITATION: [2021] AATA 3399

Decision date: 17 September 2021

R Olding (Senior Member)

WHAT IS THIS CASE ABOUT?

'This is a GST gold scheme case'.[1] Commissioner’s Statement of Facts, Issues and Contentions, [1].

'[I]f there was a "carousel fraud" then it was the applicant who was taken for a ride".[2] Applicant’s Statement of Facts, Issues and Contentions, [1].

1. The first italicised sentence above appears as the first sentence in both the Commissioner of Taxation's Statement of Facts, Issues and Contentions and his Outline of Closing Submissions. It implies, as the Commissioner's submissions confirm, that the Commissioner says this is a case involving a scheme to avoid payment of GST or increase input tax credit (' ITC ') entitlements.

2. Implicitly, that statement might also be viewed as an invitation to consider this matter through the lens of the history of GST scheme cases in Australia. It is appropriate, therefore, to make clear at the outset that is not my approach. I consider the correct approach to be to make relevant findings of fact based on the evidence before the Tribunal and apply the law to those facts, free of any predisposition that this is a 'scheme case'.

3. With that in mind, I note the Commissioner alleges this case follows the pattern of GST gold schemes in which:

4. The underlying mischief in such schemes starts with a fraud on the Commonwealth: the missing trader's failure to pay GST. It may be because the missing trader is 'missing' - such that the Commissioner cannot recover the GST it failed to pay - that the Commissioner's gaze turned to the applicant.

5. The Commissioner does not allege the applicant was aware of the adulteration of the bullion bars and non-payment of GST, or otherwise a participant in a fraud. Nor does the Commissioner allege the applicant was engaged in sham transactions.

6. Rather, the Commissioner disputes the character of the applicant's

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supplies. The Commissioner says those supplies do not satisfy the statutory requirements for GST-free supplies. Alternatively, the Commissioner says the general anti-avoidance provision in Division 165 of the GST Act applies.

7. The applicant maintains it made creditable acquisitions of scrap gold and GST-free supplies of gold bullion (in the First Period indicated below) and GST-free supplies by way of export sales of scrap gold bars (in the Second Period). On those premises, the applicant would be entitled to ITCs on its acquisitions and not liable for GST on its sales.

8. As the opening quotation from the applicant's Statement of Facts, Issues and Contentions extracted above suggests, the applicant effectively says if there was a scheme to evade or avoid paying GST or increase ITC entitlements, the applicant was not a part of it.

DECISIONS UNDER REVIEW

9. The contested transactions fall into two categories:

10. The applicant has applied for review of the Commissioner's decisions dated 25 January 2019 and 21 October 2019 disallowing objections against the assessments of net amounts for tax periods in the First and Second Periods and associated against penalty assessments.

SUMMARY OF CONCLUSIONS

11. In summary, I have concluded:

RELEVANT PROVISIONS OF THE GST LAW

12. At relevant times, the GST Act provided as follows below.[9] All legislative references in this section of these reasons are to the GST Act.

Input tax credits

13. An entity that is registered for GST is entitled to an ITC for any 'creditable acquisition' that it makes: s 11-20.

14. Under s 11-5, an entity makes a 'creditable acquisition' if:

15. An entity acquires a thing for a 'creditable purpose' to the extent that it acquires the thing in carrying on its enterprise: s 11-15(1). However, a thing is not acquired for a creditable purpose if its acquisition 'relates to making supplies that would be input taxed': s 11-15(2)(a).

16. The Commissioner abandoned a submission that the applicant's purported acquisitions were not in the course of an enterprise that it carried on. Broadly speaking, this means that the applicant will be entitled to ITCs if it made acquisitions of scrap gold which it resold in a taxable or GST-free supply, but not to the extent that any acquisitions relate to making supplies that were input taxed supplies.

Supplies of 'precious metal'

17. 'Precious metal' is relevantly defined as 'gold (in an investment form) of at least 99.5% fineness': s 195-1.

18. Under s 38-385, a supply of precious metal is GST-free if:

19. Any other supply of precious metal is input taxed under s 40-100.

'refiner of precious metal'

20. This expression is defined in s 195-1, as follows:

refiner of precious metal means an entity that satisfies the Commissioner that it regularly converts or refines *precious metal in *carrying on its *enterprise

'dealer in precious metal'

21. This expression is also defined in s 195-1, as follows:

dealer in precious metal means an entity that satisfies the Commissioner that a principal part of *carrying on its *enterprise is the regular supply and acquisition of *precious metal.

22. The applicant submitted that this definition, in its reference to a principal part of the carrying on of an entity's enterprise being the regular supply and acquisition of precious metal, operates on a qualitative rather than quantitative basis.

23. I accept that the definition does not require greater than 50% of the entity's enterprise to be the supply and acquisition of precious metal. That would be inconsistent with the reference to a principal part, rather than the principal part, of the enterprise meeting the required description. The use of the indefinite article suggests there may be more than one principal part of an enterprise. That being so, the definition must admit of at least two principal parts in which case, self-evidently, both cannot exceed 50% of the enterprise. Further, Parliament should not be taken to have required suppliers to undertake a mathematical exercise regarding the recipient's business of which they may have but limited knowledge.

24. However, the requirement that the regular supply and acquisition of precious metal is a principal part of the recipient's enterprise suggests that at least a substantial part of the enterprise must meet that description. It is not necessary for me to resolve this issue with any more precision. That is because, for the reasons indicated below, the evidence before the Tribunal is insufficient to prove the applicant made supplies of precious metal to, in each case, an entity in respect of which a substantial part of its enterprise comprised the regular supply and acquisition of precious metal.

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Export sales

25. Broadly, a supply of goods is GST-free under s 38-185(1) if 'the supplier exports them' within 60 days.

General anti-avoidance rule - Division 165

26. So far as relevant to this matter, Division 165 operates where:

27. A GST benefit includes that an amount under the GST Act payable by an entity is smaller, or an amount payable to an entity is larger, than it would be apart from the scheme or part of the scheme: s 165-10(1).

28. The expression 'scheme' is defined broadly and includes an arrangement or understanding, whether or not legally enforceable and may include a unilateral course of conduct: s 165-10(2).

29. Where Division 165 operates, the Commissioner may make a declaration that an amount is, and has been at all times, the avoider's net amount for a tax period: s 165-40. Effectively, if Division 165 applies, the Commissioner may negate the GST benefit from the scheme.

30. It is uncontroversial that Division 165 operates objectively. That is to say, the relevant inquiry is not into whether an entity subjectively intended to obtain a GST benefit. Rather, the decision-maker must consider, having regard to the matters described in s 165-15, whether 'it is reasonable to conclude' that an entity entered into or carried out the scheme or part of the scheme with the sole or dominant purpose of that or another entity getting a GST benefit or that that is the principal effect of an entity entering into or carrying out the scheme.

PRELIMINARY ISSUE - EVIDENTIARY STATUS OF TAX INVOICES

31. The applicant has the burden of proving the assessments are excessive and, if so, what net amounts and administrative penalties, if any, should have been assessed: Taxation Administration Act 1953 (" TAA "), s 14ZZK.

32. So far as the ordinary provisions of the GST Act are concerned, this case will turn on the proper characterisation of transactions undertaken by the applicant. It follows that the applicant has the burden of proving the character of the transactions is as it maintains - in particular, to satisfy the Tribunal that the character of its sales accords with the statutory criteria for GST-free supplies.

33. The applicant says the character of the relevant transactions is generally supported by copies of tax invoices that it held in its records. Further, the applicant says that, in accordance with s 1305 of the Corporations Act 2001 (' Corporations Act' ), the descriptions of the transactions in those invoices are prima facie evidence of the transactions.

34. Section 1305(1) states:

Admissibility of books in evidence

  • (1) A book kept by a body corporate under a requirement of this Act is admissible in evidence in any proceeding and is prima facie evidence of any matter stated or recorded in the book.

35. So, for example, an invoice that describes the subject of the invoice as 'gold bullion' is,[11] It is clear that in s 1305 a ‘ book ’ includes an invoice: Corporations Act 2001 , s 9. the applicant says, prima facie evidence that it sold gold bullion. The applicant submits that it follows that evidence must be accepted unless the Tribunal is satisfied otherwise by evidence adduced by the Commissioner.

36. The Commissioner says this would effectively and impermissibly shift the burden of proof to the Commissioner, contrary to s 14ZZK of the TAA.

37. Counsel for the applicant drew attention to a number of tax cases,[12] Montgomery Wools Pty Ltd as trustee for Montgomery Wools Pty Ltd Superannuation Fund and Commissioner of Taxation [2012] AATA 61 , [70]; Confidential and Commissioner of Taxation [2013] AATA 112 , [450]; A & C Sliwa Pty Ltd and Commissioner of Taxation [2011] AATA 390 , [60]. in which members of

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this Tribunal have applied s 1305 in its terms to treat a business record as prima facie evidence to be accepted unless displaced by evidence adduced by the Commissioner. However, the reasons in those cases largely proceeded on the basis that s 1305 applied without exploring whether the Tribunal is bound by s 1305. Surprisingly, it appears there is no authoritative decision in which the matter has been squarely raised and considered.

38. The Commissioner did draw attention to the following statement by a Senior Member of this Tribunal rejecting a similar submission in
Hadrian Fraval Nominees Pty Ltd and Commissioner of Taxation:[13] [2013] AATA 127 .

65. The problem, as I see it, with attempting to apply s. 1305 (1) of the Corporations Act in taxation cases, is the onus of proof cast on the taxpayer by the TAA. Following the Commissioner making an Objection Decision, with which the taxpayer plainly disagrees and seeks review before the Tribunal, where the taxpayer relies on company books as evidence of a payment or disbursement having been made and which is the subject of the Objection Decision, it necessarily follows that such an entry in the books of account of the company is in dispute.

66. Furthermore, because the onus is on the taxpayer to prove that an assessment is excessive or, in this case, the decision should have been differently made, were the taxpayer permitted to simply rely on an entry in the company books despite the Commissioner having rejected the entry, an onus would then be placed on the Commissioner to adduce evidence to support his rejection of the taxpayer's claim. This is impermissible as was explained by the High Court of Australia in Federal Commissioner of
Taxation v Dalco [1990] HCA 3; (1990) 168 CLR 614. Brennan J said, at 624-625:

… Absent such a confining of the issues for determination, the Commissioner is entitled to rely upon any deficiency in proof of the excessiveness of the amount assessed to uphold the assessment, though the taxpayer is limited to the grounds of his objection. In Gauci v. Federal Commissioner of Taxation, Mason J. said:

"The Act does not place any onus on the Commissioner to show that the assessments were correctly made. Nor is there any statutory requirement that the assessments should be sustained or supported by evidence. The implication of such a requirement would be inconsistent with s. 190(b) for it is a consequence of that provision that unless the appellant shows by evidence that the assessment is incorrect, it will prevail."

39. In approaching this issue, in my view it is important to bear in mind the distinction between the burden of proof and the means of discharging that burden. To my mind, s 1305 is concerned with the latter. On that view, s 1305 would not be inconsistent with the taxpayer bearing the burden of proof. Rather, it would provide a means by which a corporate applicant may prove a matter stated in a business record, the proof of which may discharge or assist in discharging its burden of proof.

40. Such an approach would be consistent with the remarks of Steward J, with whom Greenwood J and Logan J agreed, in the decision of the Full Court of the Federal Court in
Commissioner of Taxation v Cassaniti.[14] [2018] FCAFC 212 . After determining that payslips and PAYG summaries were financial records for the purposes of s 1305, his Honour stated:

It follows that the payslips and the PAYG summaries are probably prima facie evidence of the matters stated in them by reason of s 1305 of the Corporations Act. That includes the respondent's entitlement to gross salary, the payment to her of a net amount, and the withholding of amounts from her. If that is so, then for practical purposes, the onus probably shifted to the Commissioner to prove otherwise. On this basis, it would have been incumbent upon him to lead evidence showing that the matters stated in the business records were false or mistaken. This he did not do.[15] [2018] FCAFC 212 , [72].

41. As Logan J noted,[16] [2018] FCAFC 212 , [4]. the case concerned proceedings for declaratory relief. It was not a taxation appeal under Part IVC of the TAA. As

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the applicant in the proceedings, the taxpayer bore the burden of proof. However, the source of that burden is found in the general rules of governing civil litigation, not s 14ZZK of the TAA. Accordingly, this case does not address the interaction between s 1305 of the Corporations Act and s 14ZZK of the TAA.

42. Further, as the proceedings the subject of the appeal to the Full Court were initiated in the Federal Court's original jurisdiction, it was not necessary for the Court to consider s 33(1) of the Administrative Appeals Tribunal Act 1975 (' AAT Act '). That provision states:

Procedure of Tribunal

  • (1) In a proceeding before the Tribunal:
    • (a) the procedure of the Tribunal is, subject to this Act and the regulations and to any other enactment, within the discretion of the Tribunal;
    • (b) the proceeding shall be conducted with as little formality and technicality, and with as much expedition, as the requirements of this Act and of every other relevant enactment and a proper consideration of the matters before the Tribunal permit ; and
    • (c) the Tribunal is not bound by the rules of evidence but may inform itself on any matter in such manner as it thinks appropriate.

      (emphasis added)

43. Mr Redenbach, who appeared for the applicant, argued that s 33(1)(c) did not have the effect that s 1305 of the Corporations Act does not bind the Tribunal. He submitted that the exclusion of the 'rules of evidence' in s 33(1)(c) referred only to the general rules of evidence developed by the common law and incorporated substantially into and modified by the various Evidence Acts. According to this submission, s 33(1)(c) does not extend to rules contained in other enactments, such as s 1305 the Corporations Act. Mr Redenbach submitted that these were requirements of an 'other relevant enactment' for the purposes of s 33(1)((b). This, Mr Redenbach submitted, meant the construction that the phrase 'rules of evidence' does not include s 1305 was congruent with s 33(1)(b).

44. I do not find this reasoning persuasive. The authorities and commentary to which Mr Redenbach referred are not directed specifically to this issue. That the issue of whether s 1305 of the Corporations Act applies in reviews of taxation decisions awaits authoritative determination appears from this recent comment by a Full Court of the Federal Court in
Carter v Federal Commissioner of Taxation:[17] [2020] FCAFC 150 , [41].

The circumstances referred to by the Tribunal amply justify its lack of persuasion that a meeting had in fact occurred. It is doubtful that the Tribunal was bound to apply s 1305 of the Corporations Act particularly in circumstances where the issue was not directly raised - cf: s 33(1)(c) of the AAT Act. That question need not be decided here because, if the Tribunal did not apply s 1305, it applied reasoning which was not shown to have any different effect.

45. Section 1305 in my view satisfies the ordinary meaning of a rule of evidence. It is a rule about admissibility of evidence and the prima facie status of that evidence. Why would such a rule not be a rule of evidence? It is true that s 1305 refers to 'any proceeding' and is not limited in its terms to court proceedings in which the rules of evidence apply. But it does not follow that it is not a rule of evidence; in its terms, it is a rule about evidence that would apply in a court proceeding.

46. It is, of course, well established that, although the rules of evidence do not apply in the Tribunal, their tried and tested underlying principles will often appropriately guide the Tribunal in its decision-making. In appropriate cases, that may mean the Tribunal adopts or effectively applies the principle underpinning a rule of evidence.

47. However, I consider it would not be consistent with the Tribunal's duty to reach the correct decision to approach invoices on the footing that they are prima facie evidence of the subject matter they describe. That would, by virtue of a document prepared by the taxpayer, effectively shift the burden of proof to the Commissioner. That in turn would be inconsistent with the rationale behind s 14ZZK of the TAA - that the taxpayer bears the

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burden of proof because it is uniquely in possession of knowledge of the relevant transactions.

48. Rather, I consider the correct approach, consistent with the Tribunal's common practice in tax cases, is to weigh up all relevant evidence to decide whether I am satisfied on balance that a fact is established by the evidence. That does not mean the invoices are to be disregarded - they are powerful probative evidence of the transactions they purport to record - but nor does it mean they should be accorded a special evidentiary status.

49. I adopt the following approach:

50. While the submissions regarding s 1305 of the Corporations Act raise fundamental questions regarding the proper approach of the Tribunal to corporate business records in tax cases, its importance should not be overstated in the particular circumstances of this case. That is because the characterisation of the transactions will depend substantially upon uncontroversial facts. The controversy is largely about the character of the transactions that should be gleaned from those facts rather than their existence or otherwise.

51. In that regard, for the First Period the applicant maintains that refiners provided a refining service to the applicant in respect of its scrap gold bars following which the applicant sold the refined gold bullion to the refiners. The Commissioner says the practical reality is that the applicant supplied scrap gold to the refiners. Which of those is the correct characterisation is a matter in relation to which the description of the subject of the invoices as gold bullion is plainly both relevant and important.

52. But even if, contrary to my view, the description of transactions in invoices should be treated as prima facie correct, that would not, in the absence of contrary evidence, mean the applicant must succeed. The statutory provisions for GST-free treatment of the applicant's supplies require fulfilment of other elements such as the status of the refining entity and the recipient of the supplies.[20] See, in this regard, s 38-385 of the GST Act as outlined at [18] above.

53. In the Second Period, there is a controversy regarding whether the applicant was the exporter of the gold. That, in turn, may require a determination of whether the applicant had title to the gold at the time it purported to make the supplies. If title is a requirement and it is not established that the applicant held title at the relevant time - which I address further below - an invoice that is silent on the question of title will not assist the taxpayer in respect of that issue, even if treated as prima facie evidence of subject matter stated in the evidence. That would be so even though the invoice records the applicant as the supplier and an overseas location for delivery of the scrap gold.

54. I return to these issues in more detail below.

BACKGROUND

The Director's education and employment history

55. The Director gave evidence to the following effect which I accept.

56. The Director was born in Pune, India. After attending school in Pune, he went on to obtain a Diploma of Mechanical Engineering and Bachelor of Mechanical Engineering from educational institutions in India.

57. After graduating, the Director obtained work as a purchasing engineer with Sulzer, a Swiss company. In this role, he was responsible for purchasing and selling a range of electric motors and large equipment in and out of Pune.

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These transactions were arranged and executed by telephone. The Director stated:

Not once during my time doing that job did I ever inspect the physical goods.

58. The Director moved to Australia and studied at RMIT University, graduating in December 2005 with a Post Graduate Diploma in Manufacturing Engineering.

59. In October 2008, the Director commenced work with RCR Engineering. There he worked on a FIFO (which I understand to mean Fly In Fly Out) basis on a number of projects. This included over 10 years at the Cadia gold mine in Orange.

60. Following the death of his father, the Director's family returned to Pune in India permanently in January 2015. The Director began to explore setting up a business so he could live with his family in Pune. He was attracted to a trading business because it could be set up with less capital and risk than a manufacturing business.

Investment in La Gajjar Pty Ltd

61. Through a colleague at RCR Engineering, he met a Mr Pratik Gajjar. He discussed a number of potential trading businesses with Mr Gajjar. One they discussed in 2015 was the potential to export gold to Ghana. The Director travelled to Ghana to explore this potential opportunity, but the venture did not proceed. He also explored the possibility of a gold export business from Tanzania but that also did not proceed.

62. The Director also understood Mr Gajjar operated a gold business. The business, he understood, involved buying scrap gold just below spot price; paying a contract refiner to refine the gold; and selling the resulting bullion to ABCRA or some other entity.

63. The Director saw scales and other equipment at Mr Gajjar's premises that he understood to be consistent with a gold trading business. The fact that Mr Gajjar was Indian was also significant to the Director as it is common in India to purchase gold as a substitute for currency and a store of value.

64. The Director agreed to invest in Mr Gajjar's business which was operated by La Gajjar. In deciding to do so, it was significant to the Director that the business was 'clean'. By this the Director means that the transactions were properly recorded in bank statements which were shown to him, with all transactions conducted electronically. A clean entity accounts for tax appropriately.

The applicant's operations

65. Mr Gajjar approached the Director to increase his investment in La Gajjar but he was not comfortable to do so. Instead, they agreed that:

66. La Gajjar would effectively conduct the transactions on behalf of the applicant. Its remuneration would come from 'profitless sales' of gold bullion that had been refined on behalf of the applicant. The intention was that the margin on those sales would be passed to La Gajjar. The applicant would retain the rest of the margin earned with his capital.

67. According to the applicant's invoices, these sales proceeded through the First Period until the Director became unhappy with the applicant's profitability. The business was not as profitable as he had hoped it would be and he was risking a significant amount of capital. There were issues about gold content and margins. Relations with Mr Gajjar soured.

68. With another colleague, the Director investigated the possible importation of gold from Papua New Guinea with a view to increasing the applicant's margins. The colleague travelled to PNG to

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investigate the possible venture. Funds and tools were sent to PNG, but these were lost in what the Director understands to have involved theft. The PNG venture did not proceed.

69. The Director also approached Emirates Gold DMCC (' Emirates Gold' ) in Dubai. In due course, scrap gold came to be sold to Emirates Gold and transported to that company in Dubai.

70. The applicant purchased the scrap gold directly from PM Melt Services Pty Ltd (' PMMS '). PMMS agreed to be paid partly in advance and partly in arrears. Apparently to provide PMMS with some security against the risk of non-payment of outstanding arrears of payments for scrap gold, the Director made Mr Viciconte of PMMS a signatory to the applicant's bank account into which the proceeds of the sales to Emirates Gold would be deposited.

71. The sales of gold to Emirates Gold in Dubai occurred in the Second Period.

FIRST PERIOD

Some further details of the alleged transactions

72. The Commissioner asserted by reference to various documents that the gold said to have been acquired by the applicant as scrap gold and sold by the applicant as a GST-free supply of gold bullion passed through some nine entities. Appendix A to these reasons is a flowchart of one set of these transactions produced by the Commissioner. The applicant did not deny the assertion or that the sample of transactions in the appendix was representative of other transactions in this period. I find accordingly.

73. Adopting the language explained in the introduction to these reasons, the entity called ' Manila Exchange ' is the missing trader. Manila Exchange was the recipient of a GST-free supply of gold bullion which it adulterated so that its subsequent supplies would be taxable supplies of scrap gold. The GST payable on those taxable supplies made by Manila Exchange was never paid.

74. The same abbreviation for ABC Refinery (Australia) Pty Ltd - ABCRA - appears in Appendix A. Under arrangements described by the Director, ABCRA is said to have refined the applicant's scrap gold on behalf of the applicant. The applicant is then said to have sold the resulting gold bullion in a GST-free supply of precious metal to ABCRA. The applicant maintains that ABCRA was a 'dealer in precious metal'. On this basis, the applicant's purported sales to ABCRA are, according to the applicant, GST-free under s 38-385 of the GST Act.

75. In respect of two transactions in the First Period, the applicant claims La Gajjar refined the scrap gold, or had it refined, on the applicant's behalf. Again, the resulting gold bullion is said to have been sold to La Gajjar.

Character of the First Period supplies

76. The Commissioner rejects the applicant's characterisation of the applicant's purported sales as GST-free supplies on several bases.

77. The Commissioner says as a matter of 'practical reality' the sales were not supplies of gold bullion but rather supplies of scrap gold. This is what La Gajjar invoiced in the period before the First Period. And the Director based the applicant's operations on his understanding of La Gajjar's business model.

78. When the applicant commenced making sales which it treated as GST-free supplies of gold bullion in the First Period, there was little change to this business model other than the invoicing and the entry into a refining agreement with ABCRA. Before and during the First Period it was scrap gold that was physically delivered to ABCRA, not gold bullion. However, in the First Period that paperwork showed the applicant having scrap gold refined on its behalf and being sold as bullion by the applicant to ABCRA.

79. The Commissioner relies in part upon cases referring to GST as a 'practical business tax' or in like terms.[21] Sterling Guardian Pty Ltd v Federal Commissioner of Taxation 2005 ATC 4796 ; Saga Holidays Ltd v Commissioner of Taxation (2005) 149 FCR 41 ; ATS Pacific v Commissioner of Taxation (2014) 219 FCR 302 . In looking to the substantive character of transactions, the Commissioner submits that in all the circumstances the true character of the applicant's supplies is that they are sales of scrap gold to ABCRA/La Gajjar. The Commissioner also referred to a statement by Deputy President McCabe in Zhang v Commissioner of Taxation that the Tribunal should not be 'handcuffed' to the terms in a contract and should have regard to the commercial and practical reality of the

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relevant transactions.[22] [2020] AATA 3008 , [2]. I respectfully adopt that statement.

80. However, I do not understand those cases and the Deputy President's comments to endorse a characterisation of a transaction that is completely contrary to the terms of a transaction agreed between the parties. In this case there is no allegation by the Commissioner that the purported transactions are a sham - that is, that the documents entered into were not intended to govern the legal relations between the parties. The surrounding circumstances may provide context for the parties' contract and transaction documents. But that does not mean they may be ignored or reconstructed according to a perception of the 'commercial and practical reality' of the transaction.

81. Further, there is nothing necessarily untoward in an entity outsourcing its operational activities. It is true that the extent to which this occurred in this case lies at the extreme end of the spectrum. However, absent a finding of sham, which the Commissioner did not invite me to make, it would be a significant step to disregard the character of a transaction reflected in the documents exchanged by the parties, and confirmed in the Director's affirmed evidence both in an interview conducted by the Commissioner's officers and before the Tribunal. That would risk impermissibly disregarding the actual transaction and characterising the events by reference to another form of transaction not entered into by the parties. Such is the province of the law relating to sham and general anti-avoidance provisions.

82. The applicant may well have supplied scrap gold to ABCRA (and La Gajjar), in the sense that it is scrap gold that was physically delivered to ABCRA for refining. However, that would not be inconsistent with a conclusion that, in accordance with the invoices issued, the consideration paid by ABCRA/La Gajjar was for the gold bullion refined from the scrap gold on the applicant's behalf.

83. For the reasons that follow, it is not necessary for me to reach a final view on these submissions. Even if, as it asserts, the applicant supplied gold bullion to ABCRA and La Gajjar, it would not follow that the applicant has discharged the burden of proving such supplies were GST-free. That would require the Tribunal to be satisfied that ABCRA and La Gajjar were each a dealer in precious metal at the relevant times. As noted earlier, that would require a conclusion that a principal part of the enterprise of ABCRA and La Gajjar respectively was the regular supply and acquisition of precious metal.

84. There is little evidence on which I could conclude that a principal part of ABCRA's enterprise is the regular supply and acquisition of precious metal. The applicant submits that ABCRA was 'a cornerstone of the Australian gold trading system' - apparently adopting ABCRA's and its successor's self-characterisation in a website entry - and produces a hallmarked form of bullion that is regularly traded.

85. However, even if it is accepted that ABCRA was an established gold refiner that does not prove that it met the definition of a dealer in precious metal. A gold refiner may carry out gold refining either on a fee-for-service (tolling) basis or by acquiring gold that is not bullion and refining it into bullion. Neither of those activities involves acquisition of precious metal. In the case of toll refining, there is no acquisition of gold by the refiner, let alone gold in the form of precious metal. In the case of gold acquired for refining and resale, in the usual case it would be expected that what is acquired is not precious metal.

86. The position in respect of the purported GST-free supplies to La Gajjar is even more difficult for the applicant. There is little independent evidence to support a conclusion that La Gajjar either refined the applicant's scrap gold as a service to the applicant or contracted another entity to do so. The applicant was not able to shed any real light on the details of this arrangement. Nor are there supporting invoices or a refining agreement with La Gajjar.

87. Indeed, in both cases the only significant evidence of the recipient of the supplies regularly acquiring precious metal is the very transactions in which the applicant claims to have supplied precious metal refined by the alleged refiner. That, in my view, is insufficient for the Tribunal to be satisfied that either recipient regularly acquired precious metal as significant part of their enterprise. While, as

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observed above, the reference to 'a principal part' of an entity's enterprise does not require that the supply and acquisition of precious metal be greater than 50% it must still be significant relative to the entity's overall activities. No evidence before the Tribunal could found a conclusion to that effect in respect of La Gajjar or ABCRA.

88. Additionally, for a supply of precious metal to be GST-free under s 38-385 of the GST Act, the entity that refined the precious metal must be a 'refiner of precious metal'. As noted above, that requires the Tribunal to be satisfied that the entity regularly converts or refines precious metal in carrying on its enterprise. The Commissioner accepts that ABCRA satisfies this definition but not La Gajjar. There is little direct evidence to support a conclusion that La Gajjar regularly converts or refines precious metal. The applicant invited me to infer as much from the applicant's 'understanding' of La Gajjar's business based on discussions with Mr Gajjar, the Director's sighting of scales and other equipment and the refining said to have been carried out on behalf of the applicant. That is in my view insufficient to support an inference that La Gajjar 'regularly' converted or refined precious metal. No evidence from La Gajjar to support these claims was adduced by the applicant.

89. It follows that I am not satisfied the applicant has discharged the burden of proving the supplies in the First Period were GST-free. The Commissioner now accepts that the applicant acquired the scrap gold in the course of its enterprise. Neither party submitted that the applicant's supplies to which those acquisitions related were input taxed supplies. Accordingly, the applicant is entitled to ITCs on the acquisitions of scrap gold it made for the purpose of making those supplies and liable for GST on the supplies.

Division 165

90. The Commissioner submitted 'further or alternatively' that Division 165 applies in respect of the First Period. The Commissioner says the 'counterfactual' - what it would be concluded would have occurred if the potential scheme he identified had not been entered into - was that the applicant's supplies would be taxable supplies.[23] Respondent’s Outline of Closing Submissions dated 6 August 2021, [104]. Alternatively, under a broader scheme, that none of the transactions in the series of transactions would have been entered into.[24] Respondent’s Outline of Closing Submissions dated 6 August 2021, [113].

91. On the basis that the applicant's supplies in the First Period were taxable supplies, neither of those counterfactuals would support a conclusion that the applicant obtained a GST benefit. It follows that there is no occasion for the making of a declaration under Division 165 in respect of the First Period.[25] Where the Tribunal accepts the Commissioner’s submissions on the application of the ordinary provisions, it is not strictly necessary for the Tribunal to consider the application of Division 165, but it may do so. However, as the Commissioner’s case became that the applicant’s supplies were taxable supplies, to give effect to that position may have required the Tribunal to consider whether to make a fresh Division 165 declaration. That is because the Division 165 declaration in its terms negated the applicant’s ITCs. However, no submissions were made in relation to this at the hearing. In those circumstances, and also as this matter is in the Small Business Taxation Division with the requirement for the Tribunal’s decision and reasons to be published within 28 days of the hearing, it is not appropriate or practicable to state an alternative conclusion on the application of Division 165.

SECOND PERIOD

Did the applicant export scrap gold?

92. In respect of the Second Period, the applicant acquired scrap gold from PMMS which was exported to Emirates Gold in Dubai. PMMS undertook most of the logistical arrangements for the export of the gold, taking care of customs and freight arrangements, in the name of the applicant.

93. The Commissioner submitted that the applicant had not obtained title to the scrap gold when it was exported and therefore could not be the entity that exported the gold. On that basis, the Commissioner said the applicant's supplies were not covered by s 38-185(1) which, as noted above, confers GST-free status on supplies of goods where the supplier exports the goods. The applicant maintains that it did obtain title before the scrap gold was exported.

May an entity 'export' goods to which it does not hold title?

94. At the hearing of the application for review, I queried whether an entity must have title to goods when they are exported for the entity's supply to fall within s 38-185(1). As I indicated to counsel, I had in mind that it may be arguable that an entity may export goods if in carrying out a transaction it causes the goods to be removed from Australia, even if at the time that occurs it does not have title to the goods.

95. The Commissioner maintained his position that the supplier must have title at the relevant time. The applicant did not make any submissions on this issue. The applicant's submissions focussed on why the applicant says it did hold title to the scrap gold when it was exported to Dubai.

96.

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A Full Court of the Federal Court has held in another context that:

The ordinary meaning of 'export' is to send commodities from one country to another using the verb 'send' as indicating that which occasioned or brought about the carriage of the goods from one country to another.[26] Australian Trade Commission v Goodman Fielder Industries Ltd [1992] 36 FCR 517 , [523].

97. There is nothing in that ordinary meaning which requires the entity said to have sent the goods from Australia to be the owner of the goods when that occurs. As the majority of another Full Federal Court has stated (albeit again in another statutory context):

It is not the passing of property which identifies the exporter . . . but rather the identification of which party satisfies the requirements of truly being the exporter.[27] Companhia Votorantum de Celulose e Papel v Anti-Dumping Authority (1996) 71 FCR 80 ; cited in Expo-Trade Pty Ltd v Minister of State for Justice & Customs [2003] FCA 1421 , [24]-[25].

98. Indeed, it has been held at the highest level that a sale of goods F.O.B. Sydney to an overseas buyer was sufficient to support a prosecution for exporting prohibited goods. It was sufficient that the seller had placed the goods on the ship even though title passed before the goods left the wharf.[28] Henty v Bainbridge-Hawker (1963) 36 ALJR 354 , 356 .

99. In the current matter, in terms of logistics, PMMS essentially caused the scrap gold to be sent from Australia to Dubai. However, as there is no allegation that the export and freight documentation in the name of the applicant did not reflect their intended legal effect, it must be concluded that these actions were undertaken as agent for or otherwise on behalf of the applicant. In those circumstances, I would conclude that the applicant exported the scrap gold regardless of whether it obtained title before the goods were sent from Australia.

100. However, since I did not have the benefit of submissions on this issue and in case I am wrong, I have also considered the parties' submissions regarding whether the applicant held title to the scrap gold at the relevant time.

Did the applicant have title to the scrap gold when it was exported?

101. The Director asserted for the first time, in a witness statement dated 18 June 2021 filed three days before the hearing, that its verbal agreement with PMMS was that title to the scrap gold would remain with the applicant while the gold was in Australia.

102. The Commissioner says I should give that late evidence little weight. It had been clear since late October 2019 that the Commissioner considered the applicant was not the exporter because it did not hold title to the scrap gold at the time of export.[29] Objection decision dated 21 October 2019, [16]. This was confirmed in the Commissioner's Statement of Facts Issues and Contentions dated 12 February 2021. And yet it was not until 18 June 2021 that the applicant first mentioned the alleged agreement that title would be held by the applicant while the goods were in Australia. I consider that submission has some force and approach the applicant's statement with the care required in respect of self-serving statements.

103. The Commissioner also points to an agreement dated 27 January 2017 between PMMS and the applicant which provided that property and risk would pass to the applicant upon delivery of the goods and payment of the purchase price.

104. That agreement never governed any of the transactions in dispute because no relevant trades occurred after the date it was signed. However, the Commissioner says that it confirmed an earlier agreement between PMMS and the applicant. This submission is based on the following exchange in a formal interview of the Director conducted by the Commissioner's officers:

[Director]: In - as far as the legal knowledge goes, my - the agreement is already in place …. agreement. You are putting in place to get more clarity on this one. So…

[Officer]: That's fine. So you're saying that you've already discussed this in whatever month…

[Director]: Month.

[Officer]: . . . prior to January.

[Director]: January.

[Officer]: And it was only put to paper in January . . .

[Director]: January.

[Director]: Yes. But now - I want to be very sure that if you are going to interview Mr Pat - if you are going to interview Mr Pat, the

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legal term of this agreement is this personal guarantee which he is holding money for … I don't want is that he use - for what … reason, that he says you said that this agreement in … then he comes and asks me "You agreed that this is the personal guarantee you are going to provide. Give me my money."…[30] Transcript of interview on 20 September 2017, p 103, ln 36 – p 104, ln 9.

105. With respect to the Commissioner, that submission gives the Director's responses more work to do than they can bear on a reasonable reading considered in the context of the surrounding discussion. That context included the Director immediately proceeding to urge the officers not to suggest to Mr Viceconte of PMMS that the Director had agreed to a personal guarantee before the agreement was signed. It was clear that the Director was not saying every detail in the written agreement was already agreed verbally. That the terms of the agreement in its entirety had not been adopted earlier by oral agreement is clear from the Director's testimony, which I accept, that he was concerned about the requirement, found in the executed agreement, for him to provide a personal guarantee. I do not accept the exchange in the interview provides that a sufficient foundation for a finding that the transactions between PMMS and the applicant were conducted on the basis that title did not pass to the applicant until PMMS had been paid in full.

106. I accept the applicant's submission that the earlier transactions were not governed entirely by the same terms as the written agreement that came to be executed. However, that is not to say that the written agreement is entirely irrelevant. To the extent that it provided for title not to pass from PMMS to the applicant until PMMS had been paid in full it would represent a significant departure from the previous verbal agreement said to have been reached. There is nothing in the Director's evidence that explains his thinking in agreeing to such a change. On his evidence, the written agreement contained significantly more risk for the applicant and the Director with the provision for a personal guarantee and the delay in passing of title.

107. On the other hand, in circumstances where the scrap gold was paid for partly in advance and partly in arrears, and to be quickly on-sold, it is not inherently improbable that the parties would have agreed to title passing before the final payment was made. That is especially so when PMMS's position was protected to an extent by access the applicant had granted PMMS as signatory to the applicant's bank account into which the proceeds of sale of scrap gold to Emirates Gold and the applicant's GST refunds were deposited. Further, in circumstances where PMMS had parted with possession of the goods and they were destined for Dubai, retention of title by PMMS would have had limited practical utility in protecting its position.

108. What seems to me to be less probable, though, is not only that discussions between PMMS and the applicant descended to this level of detail but particularly that the Director would recall such discussions almost five years later. That would be in some contrast to the high level approach of the Director in his evidence regarding entry into these arrangements in which he emphasised his then relationship of trust with the director of PMMS, Mr Viceconte, to whom he left most details of the conduct of the transactions apart from invoicing and banking. In his evidence in respect of both periods, the Director seemed to focus on the big picture, so to speak, rather than the detail of transactions, and more than once could not recall fairly basic details.

109. It is also notable that the applicant did not seek to provide evidence from the other party to the transactions, PMMS, regarding the agreement on passing of title, which may have assisted in discharging the burden of proving the applicant was the exporter of the scrap gold. Of course, the absence of evidence from PMMS is not fatal; it is open to the Tribunal to make findings about the terms of an oral agreement on the basis of the testimony of one party and the surrounding circumstances. However, no explanation was offered for the absence of such evidence. Nor was any contextual detail provided in relation to the discussions said to have taken place about title. I do not draw an adverse inference from the failure to adduce evidence from PMMS, but it is a factor relevant to the weight to be given to the applicant's evidence which I may and do take into account.

110.

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On the other hand, in the absence of contrary agreement, it is implicit in the actions of PMMS in arranging the export of scrap gold on behalf of and in the name of the applicant that the applicant was the owner of the gold. The applicant could, after all, not transfer title to Emirates Gold that it did not have. Again, there is no allegation that the sales, export and freight documentation are shams.

111. Weighing up these considerations, I accept that, consistent with the invoicing and the export documentation prepared and lodged by PMMS, and the Director's evidence, the applicant as its owner was entitled to and did export the scrap gold.[31] The conclusion that the applicant obtained title to the scrap gold before it was exported may also be supported by Rule 1 in s 23 of the Sale of Goods Act 1923 (NSW). However, neither party made submissions in respect of this provision. I should add that I consider this matter to be finely balanced and that the applicant has in my view only the slightly stronger case on this point. But that is all that is required. The applicant having, in my view, tipped the balance in its favour is entitled to a finding that it made the export sales, even if the applicant holding title to the scrap gold when the export occurred is a prerequisite to that finding. In any case, as I have already concluded the applicant was the exporter of the gold even if it did not hold title when the gold left Australia.

112. That being so, the applicant is entitled to ITCs on its purchases of scrap gold from PMMS and to have its sales to Emirates Gold treated as GST-free supplies, unless the entitlement is negated by Division 165.

Division 165

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

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

115. The Commissioner provided a diagram - reproduced as Appendix B to these reasons - to illustrate one series of transactions in the Second Period, which contained references to various documentary evidence before the Tribunal. The applicant did not suggest this sample series of transactions is not illustrative of the basic form and sequence of other transactions of a similar kind in the Second Period. I accept that it is.

116. As can be seen from the diagram, the series of transactions begins with Baird & Co selling bullion to QN Traders which on-sells the bullion to Manila Exchange. Manilla Exchange adulterates the bullion, so it is no longer precious metal, and sells it to GB Traders in a taxable supply, but fails to pay the GST on that supply. GB Traders claims ITCs on the acquisition of the adulterated bars, now scrap gold, and pays GST on its sale to PMMS. PMMS in turn claims ITCs on purchase of the scrap gold and pays GST on its taxable supply to the applicant. The applicant, as already discussed, sells the scrap gold to Emirates Gold in a GST-free export sale.

117. Without doubt, that series of back-to-back transactions constitutes a 'scheme' as defined. The applicant did not suggest otherwise.

118. It is also clear that the applicant obtained a 'GST benefit' as defined. It became entitled to ITCs on its purchases of scrap gold. Since it had no GST liability on its export sales, it received a GST benefit, being the ITCs it would not otherwise have been entitled to. In other words, but for its participation in the purchase and the export sale of scrap gold, the applicant would not have received the ITCs. That is a GST benefit for the purposes of Division 165.

119. The controversy is whether, in terms of s 165-5(1)(c) of the GST Act, taking into account the matters described in s 165-15, it is reasonable to conclude that either:

120. In approaching this consideration, the applicant emphasises that it had no knowledge of or dealings with the entities (or their controllers) in the series of transactions other than PMMS and Emirates Gold. It simply set out to make a small profit on each transaction. By repeating the transactions regularly, the applicant aimed to make a significant profit.

121. The Commissioner says it is irrelevant whether the applicant knew of the scheme or its participants.

122. What is required is an objective consideration of the factors described in s 165-15 which I now turn to consider.

(a) the manner in which the scheme was entered into or carried out

123. The Commissioner has presented unchallenged evidence regarding the series of transactions comprising the scheme. However, there is not a great deal of evidence regarding the manner in which those parts of the scheme that involve entities other than the applicant, PMMS and Emirates Gold were carried out. I have considered the Commissioner's submissions on this factor, which I regard as more relevant to some of the other factors, below.

124. In respect of the dealings between the three named entities, the heavy involvement of PMMS in the applicant's transactions is certainly unusual. This weighs in favour of a conclusion that PMMS had a purpose of ensuring the applicant carried out the transactions which would generate an entitlement to ITCs on the applicant's acquisitions of scrap gold. I do not see how it could support a conclusion that the principal effect of the scheme was to secure a GST refund for the applicant.

(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

125. The form of the scheme is that scrap gold was sold by Manila Exchange to GB Traders. GB Traders and PMMS each on-sold the gold at a profit, with the applicant exporting the scrap gold. I do not see any real difference between the form and substance of these transactions, other than in respect of the export sales by the applicant where, as already noted, the transactions were significantly facilitated by PMMS.

126. The telling element of substance is that Manila Exchange acquired bullion, adulterated it and sold the adulterated scrap gold at a lower price before GST than it paid for the bullion. And did not pay GST on those sales.

127. However, that to me suggests Manila Exchange was intent upon perpetrating a fraud on the Commonwealth rather than securing the applicant's entitlement to ITCs. And its actions, and those of any other entities that joined in the fraud, do not, in my view, point to a principal effect of the scheme being the securing of the applicant's ITCs.

(c) the purpose or object of [the GST Act] . . . and any relevant provision of this Act . . . (whether the purpose or object is stated expressly or not)

128. The purpose or object of the GST Act includes to generally relieve GST-registered businesses of GST costs on their inputs, through the ITC mechanism, other than those related to making input taxed supplies.

129. Clearly, at least Manila Exchange sought to abuse that system by taking steps to incur but not pay a GST liability on sales of adulterated gold bars. It may be that other entities in the chain of transactions were parties to that fraudulent endeavour. There is no evidence, and the Commissioner does not allege, that would include the applicant or the Director. I find that they were not.

130. That course of conduct, considered against the objects of the GST Act, may point to a purpose of perpetrating a fraud on the Commonwealth. But I cannot see how it favours a conclusion that the dominant purpose or principal effect of the scheme was to secure the applicant's ITC entitlement.

131.

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Another object of the GST Act is to ensure that goods that are exported do not bear GST. The applicant's sales to Emirates Gold being GST-free is consistent with that object. To the extent that PMMS, the applicant or any other entity in the chain facilitated that outcome that would be consistent with the object of the GST law. Regardless of how the subject of the export came to be scrap gold rather than bullion, it would be inconsistent with the object of the GST Act for the exported goods to bear GST. The inconsistency of the scheme with the object of the GST law lies in the adulteration of the bullion and fraudulent non-payment of GST, not in an export sale being GST-free.

(d) the timing of the scheme

132. The Commissioner submitted that the first transaction in the scheme occurring within a fortnight of Manila Exchange being incorporated suggests Manila Exchange was incorporated to participate in the scheme. I accept that submission.

133. However, it does not follow that that timing supports a conclusion that the scheme was entered to secure a benefit for the applicant. Since Manila Exchange did not pay GST on even its first round of transactions in the series, this certainly supports a conclusion that Manila Exchange intended to obtain an advantage for itself. It does not, in my view, lend much weight to a conclusion that any entity entered into or carried out the scheme to secure a benefit for the applicant.

134. I accept that completion of the back-to-back transactions within a few days suggests an artificial arrangement to secure a benefit. Again, it does not necessarily follow that this significantly supports a conclusion that any entity entered into or carried out the scheme to secure a benefit for the applicant.

135. It is true that PMMS and the earlier entities in the chain stand to benefit from the applicant purchasing scrap gold from PMMS. That funded PMMS's purchases from GB Traders which in turn funded GB Traders' purchases from Manila Exchange. But GB Traders and PMMS only benefitted from the scheme to the extent of their profit on each of the series of transactions. That profit could have been achieved by direct sale to a refiner or export customer. Sales to the applicant were not required to achieve that outcome, nor BG Traders' or PMMS's entitlement to ITCs.

(e) the period over which the scheme was entered into and carried out

136. The Commissioner notes that in the period over which the scheme was entered into and carried out GST gold schemes were rife, and also that the scheme ceased when the applicant's refunds were withheld. I agree that these factors weigh in favour of a conclusion that an entity or entities had a dominant purpose of securing the applicant's ITCs. The cessation of the scheme may, however, also be explicable as a reaction to the scheme coming under scrutiny as evidenced by the Commissioner withholding the applicant's GST refunds.

(f) the effect the Act would have in relation to the scheme apart from [Division 165]

137. The Commissioner points out that but for Division 165 the applicant would be entitled to ITCs of $503,084 in respect of the Second Period.

138. It is true that, but for the scheme, the applicant would not be entitled to those ITCs, but nor would it have outlaid the purchase price of the scrap gold or received the selling price. An exporter receiving ITCs on goods purchased for and in fact exported is an entirely orthodox and common application of the GST law. It is consistent with the scheme of the GST law.

139. Seen in that context, the mere fact that the applicant became entitled to the ITCs in my view does not, in itself, strongly support a conclusion that an entity had a dominant purpose of the applicant obtaining the ITCs.

(g) any change in [the applicant's] financial position that has resulted, or may reasonably be expected to result, from the scheme

140. The Commissioner points out that in the sample transaction illustrated in Appendix B the applicant made a modest profit of $4,388 but without the scheme - which I take to mean without the ITCs for that transaction - the applicant would have made a loss of $76,919.89.

141. The modest profit is consistent with a conclusion that the applicant entered into the scheme for the purpose of generating a profit. That the applicant would suffer a loss but for the ITCs does not, in my view, provide strong

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support for a conclusion that an entity had a dominant purpose of the applicant obtaining the ITCs. The same may be said of any business with relatively low margins - denial of ITCs may put it into losses.

142. Although put forward in respect of the next factor below, it is convenient to note here that the Commissioner in submissions referred to the applicant paying 99.0975% of the spot gold price (plus GST) to PMMS but selling the scrap gold to Emirates Gold for 98.996% of the spot price. At first blush, that does indeed appear odd. It suggests the applicant traded at a loss.

143. However, closer examination reveals a different picture. As already noted, the applicant in fact generated a small profit. The difference may be the result of movements in the spot price - that is, the prices being percentages of different spot prices. In any case, the applicant's dealings were profitable. They were not uncommercial. For the reasons already indicated, while it is true that the applicant would have suffered a loss but for the ITCs, the applicant obtaining ITCs is consistent with the scheme of the GST law. It is not necessarily, and commonly will not be, suggestive of a dominant purpose of obtaining a GST benefit.

144. In any case, as the Commissioner submitted, the 'counterfactual' to the scheme is that none of the transactions would have been entered into. On that premise, the applicant would not have obtained the ITCs. But nor would it have paid a price for the scrap gold that included GST in the same amount. The difference in the financial position of the applicant would be the modest profit on each transaction, not the substantial ITCs.

145. For these reasons, I do not see any change in the financial position of applicant significantly favouring a view that an entity entered into the scheme for the dominant purpose of the applicant obtaining ITCs.

(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 [applicant] . . .

146. The Commissioner identified two connected entities of the applicant - PMMS and Emirates Gold.

147. In relation to PMMS, the Commissioner notes that but for the GST refunds obtained by the applicant it would not have been in a position to pay PMMS a GST-inclusive price for the scrap gold. That may be so, but again GST on acquisitions is intended to be creditable to a business purchaser in the usual course. Nevertheless, I accept that this weighs in favour of a conclusion that PMMS had an interest in, and therefore one might say a purpose of, the applicant securing its ITC entitlement.

148. Similar considerations apply in respect of the applicant's dealings with Emirates Gold. The applicant could only profit by selling scrap gold to Emirates Gold if it obtained ITCs on its purchases.

(i) any other consequence for the [applicant] or a connected entity of the scheme having been entered into or carried out

149. The Commissioner did not suggest any further matters for consideration in respect of this factor.

(j) the nature of the connection between the [applicant] and a connected entity, including the question of whether the dealing was at arm's length

150. I accept that the close involvement in PMMS in the applicant's transactions is relevant to this factor. It weighs in favour of a conclusion that PMMS had a purpose of assisting the applicant in its business which necessarily included obtaining the benefit of the ITCs.

(k) the circumstances surrounding the scheme

(l) any other relevant circumstances

151. I take these two factors into account below in considering the scheme as a whole.

ACN 154 520 199 Pty Ltd (in liq) v Commissioner of Taxation

152. Both parties sought to draw support from the decision of the Full Federal Court in
ACN 154 520 199 Pty Ltd (in liq) v Commissioner of Taxation.[32] [2020] FCAFC 190 . I refer to the case as ' the ACN case ' and the applicant in the case as ' ACN '. With respect, I did not find either submission persuasive. I explain why.

153. The ACN case also involved a controversy about entitlement to ITCs on scrap gold that had been acquired by an entity as

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bullion but defaced so that it no longer satisfied the definition of 'precious metal'. The facts as found included a series of transactions in which ACN refined scrap gold and sold the resulting bullion to dealers. The bullion was subsequently defaced, and the resulting scrap gold found its way back to ACN which claimed ITCs on its acquisition of the scrap gold.

154. The suppliers to ACN were liable for GST on their supplies of scrap gold and ACN paid a GST-inclusive price to the suppliers. In common with Manila Exchange in the current matter, those suppliers failed to pay the GST on those supplies. In the alternative to its decision under the ordinary provisions of the GST Act, the Tribunal below indicated it would have upheld the Commissioner's decision that Division 165 applied to negate ACN's entitlement to ITCs on these acquisitions.

155. The Commissioner drew attention to the following passage of the Tribunal's reasons cited in the Full Court's judgement in response to a submission that the dominant purpose of the scheme in that case was the non-payment of GST:

268. The applicant's arguments have a superficial appeal, but the reality is that the applicant's entitlement to the input tax credits was more important to the operation of the scheme than the GST liabilities evaded by the Division 165 Supplying Entities. The input tax credits paid by the Commonwealth to the applicant funded the round-robin arrangements because, in simple terms, it was only economically feasible for the applicant to pay those GST-inclusive prices to the Division 165 Supplying Entities in the knowledge that the applicant would receive the input tax credits. Without the entitlement to the input tax credits, the applicant would not have paid those prices to the Division 165 Supplying Entities and, consequently, there would have been no acquisition of precious metal by the third-party suppliers (including the Division 165 Supplying Entities) from the Dealers. There would have been no defacing of that precious metal, no taxable supplies in altered form to the applicant, no processing of the metal by the applicant, and no sale of an equivalent amount of precious metal back into the market by the applicant to the Dealers, and so on. In other words, the round robin arrangements would have fallen over if the applicant had not been able to claim the input tax credits. It was the GST benefit in the form of the larger input tax credits payable by the Commonwealth to the applicant, because of the Division 165 Supplying Entities making taxable supplies to the applicant, that underpinned the scheme.[33] [2020] FCAFC 190 , [123].

156. Those observations were not criticised by the Full Court which, for other reasons mentioned below, remitted the Tribunal's decision in respect of Division 165 to the Tribunal for determination according to law.[34] At the time of preparing these reasons, the remitted application has not been decided by the Tribunal.

157. However, to the extent that the Commissioner suggests the ACN case provides support for his approach in the current matter, I am unable to accept the submission. Obviously, each case turns on its own facts. In the ACN case, the Tribunal found the defaced gold bars in respect of which ACN claimed ITCs included gold that had itself been refined by ACN and sold as bullion. I make no observation regarding the validity or otherwise of the Tribunal's comments in ACN, as set out above. However, the case is significantly different to the current matter which did not feature what the Full Court in the ACN case described as a 'surging' turnover of sales amounting to some hundreds of millions of dollars, apparently arising out of the circular and repeated nature of the transactions. Further, as already noted, the scrap gold could have been sold directly to a refiner or export customer rather than to the applicant without substantially impacting upon the efficacy of the scheme.

158. The applicant sought to draw support from the ACN case for a proposition that Division 165 could not apply because the applicant was unaware of the scheme. This was said to arise out of the Full Court remitting the matter to the Tribunal in connection with a denial of procedural fairness, relating to adverse findings the Tribunal made concerning awareness of the scheme by persons associated with the scheme. The Full Court's concern was that those findings may have influenced the Tribunal's decision in relation to its consideration of whether Division 165 applied.

159.

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The applicant would have me leap from that decision to a principle that if an applicant was not aware of the scheme that is fatal to the application of Division 165. In my view, that is a leap too far. I respectfully reject this submission.

Conclusion on Division 165

160. It is plain that the conduct of Manila Exchange was of an artificial nature designed to obtain an advantage from the GST system. There is no other rational explanation for adulteration gold bullion, so it is no longer precious metal, with a resultant reduction in value. It may be that other entities in the chain of transactions were also involved in that nefarious endeavour.

161. There is no evidence that the applicant or its Director were aware of or had dealings with any of the entities in the chain of transactions or their controllers, other than PMMS and Emirates Gold. I accept the Director's evidence that they did not. However, there is nothing in Division 165 to suggest that knowledge of a scheme participant's purpose by an entity that obtained a GST benefit is necessarily a pre-requisite to the application of the Division. Whilst each case must always turn on its own facts, such an approach could reward wilful blindness and may involve departure from the objective nature of the inquiry required under s 165-10.

162. Relying on the ACN case, the applicant submitted that its lack of knowledge of or dealings with entities other than PMMS and Emirates Gold necessarily means that it could not reasonably be concluded that any entity had a dominant purpose of the applicant obtaining ITCs. For the reasons indicated above, I do not accept that proposition.

163. More importantly, there is no evidence that the applicant profited from the scheme, other than through the modest margin it achieved on each transaction. I find that it did not.

164. In those circumstances, I consider it could not reasonably be concluded that the applicant had a dominant purpose of securing ITCs. It did not enjoy any substantial net benefit from obtaining the ITCs because it paid a GST-inclusive price to PMMS. In keeping with the scheme of the GST legislation, the applicant's entitlement to ITCs merely achieved a GST-neutral outcome from a business-to-business transaction.

165. The Commissioner submitted that the applicant's ITCs were the engine that drove the scheme. That it was only because the applicant was able to obtain ITCs that the applicant was able to pay a GST-inclusive price to PMMS which in turn funded the earlier transactions in the chain. In so submitting, the Commissioner sought to draw an analogy with the ACN case. For the reasons indicated above, I respectfully reject the Commissioner's submissions that the ACN case assists the Commissioner in that regard.

166. Further, the same GST-neutral outcome would have been achieved by PMMS selling the scrap gold to an arm's length purchaser, a refinery or an overseas customer. In all three cases, the seller would have been entitled to ITCs on purchase of the scrap gold. In the first two cases the purchaser could be expected to pay a GST-inclusive price as it would be entitled to claim an ITC, and in the third the sale would be GST-free as an export. The seller would, after deducting ITCs, effectively have paid GST on only its value added in the first two cases. In those circumstances, there was no particular imperative for any entity in the chain to secure the applicant's ITC entitlements. The various other scenarios would similarly have funded the purchasing by the entities in the chain.

167. Having regard to these aspects of the operation of the GST law, and looking at the whole of the circumstances surrounding the scheme, including the factors discussed above, I am persuaded the applicant has discharged the burden of proving that it would not be concluded that any entity had a dominant purpose of securing the applicant's ITC entitlements.

168. Similarly, the principal effect of the scheme is, in my view, the non-payment of GST and not the applicant obtaining the ITCs. It is true that the applicant obtaining ITCs is an effect of the scheme and I accept it is not an insignificant effect. But measured against the non-payment of GST by Manila Exchange, and seen its proper context as effectively a GST-neutral return of GST embedded in the price of

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the applicant's business acquisitions, I am unable to accept that the applicant's ITC entitlement is the principal effect of the scheme. I am satisfied that it was not.

169. For the reasons set out above, I am persuaded that Division 165 does not apply in respect of the applicant's transactions in the Second Period. It follows that the applicant has discharged the burden of proving the relevant assessments were excessive.

PENALTIES

170. The applicant was assessed to substantial penalties, including a 75% penalty for intentional disregard of the law in respect of the First Period,[35] TAA, Sch 1, s 284-90(1), item 1. and assessments at a 50% base penalty for recklessness in respect of the Second Period.[36] TAA, Sch 1, s 284-90(1), item 2. The Commissioner also assessed penalties on the alternative basis that it was not reasonably arguable that Division 165 does not apply in respect of both periods.[37] TAA, Sch 1, s 284-160.

171. As I have determined that Division 165 does not apply in respect of either period, penalty assessments cannot be maintained on the footing that it is not reasonably arguable that Division 165 does not apply. Likewise, as I have accepted that the applicant made GST-free supplies in the Second Period, no penalties apply to the extent that as a result there is no shortfall in respect of those transactions.

172. That leaves the 75% penalty for intentional disregard of the law assessed in respect of the First Period. As noted earlier, the Commissioner abandoned its argument that the applicant was not carrying on an enterprise and therefore not entitled to ITCs. To the extent that concession reduces the shortfall for the First Period the penalty would be proportionately reduced. However, I have also considered whether the percentage rate of penalty is appropriate.

173. The applicant engaged a tax agent to prepare its October 2016 activity statement and another to prepare its November 2016 activity statement. Unfortunately, neither were called to give evidence.

174. Against that background, the Commissioner cited comments of Deputy President Frost in Morrison and Commissioner of Taxation as follows:

Clearly, the question that remains unanswered is whether the taxpayers' shortfall amounts resulted from intentional disregard of the law by Mr Gould through his provision to Ralph Gould [the tax agents] of information relating to the taxpayers and which was then included in their tax returns. The question remains unanswered because Mr Gould has not given evidence in these proceedings. And if there is no answer to the question, there is no room for an inference favourable to the taxpayers.[38] [2015] AATA 114 , [131].

175. However, that case is different to the current matter. There, a third party introduced the taxpayers to the arrangement leading to the shortfall for which penalties were assessed, including sham transactions. The third party provided information to the tax agents who prepared the returns and was found to be the agent of the taxpayers. I do not understand the Deputy President's remarks to rise to the level of a principle that there can never be an inference in favour of a taxpayer regarding preparation of returns if the tax agent who prepared the returns does not give evidence in the proceedings.

176. In the current matter, there is no evidence to suggest intentional disregard of the law on the part of the applicant, the Director or either of the tax agents, nor any third party providing false information to the tax agents. Of course, that is not sufficient to discharge the applicant's burden of proving the penalty assessments are excessive. The applicant must positively prove that to succeed.

177. However, the whole tenor of the Director's evidence, which I accept in this regard, was that he was an innocent participant in the series of transactions. He understood that there was no GST on the sale of gold bullion and that the applicant was entitled to ITCs on its purchases of scrap gold for the purpose of making supplies of gold bullion. While the applicant was mistaken in treating its supplies in the First Period as GST-free, it is implicit in that evidence that the applicant did not intentionally disregard the relevant GST law. There is no objective evidence from which a contrary inference could reasonably be drawn.

178.

ATC 9652

The applicant provided copies of the transaction documents to the tax agents to enable the returns to be prepared. It is implicit that the returns were prepared in accordance with the invoices. I have found the Director did not have an intention to disregard the law. From that finding, I infer that the Director did not instruct the tax agents to intentionally disregard the law. As the returns were prepared by registered tax agents, I am satisfied on balance that the tax agents did not take it upon themselves to intentionally disregard the law. It is far more probable that they simply followed the characterisation of the transactions stated in the invoices.

179. In those circumstances, I am satisfied that the assessments of a base penalty amount at 75% for intentional disregard of the law are excessive. Because I have determined that there was no intentional disregard of the law by the applicant or its tax agent, the base penalty amount cannot be more than 50% for recklessness. The assessments should be reduced accordingly. However, in the absence of evidence from those who prepared the returns I have no evidentiary foundation from which to make a finding that the applicant's agents exercised reasonable care or were not reckless.

180. The same difficulty for the applicant attends any consideration of remission of penalties[39] TAA, Sch 1, s 298-20. - I have no basis in evidence to consider whether remission to any extent would be appropriate in the circumstances.[40] Sanctuary Lakes Pty Ltd v Commissioner of Taxation [2013] FCAFC 50 . In particular, there is no evidence that the applicant through the Director or its tax agents engaged at all with the statutory requirements for GST-free supplies of bullion. In the context of repeated, high-value transactions, and special and very specific statutory requirements for GST-free status to apply, in my view it would not be appropriate in those circumstances for the Tribunal to wholly or partly remit the base penalty amount.[41] That circumstance also supports, indeed compels, the conclusion that the applicant has not discharged the burden of proving it or its agents were not reckless as to the application of the GST law.

181. Accordingly, the applicant has not discharged the burden of proving the assessments are excessive on the basis that the power to remit should have been exercised to any extent in its favour.

DISPOSITION OF THE APPLICATIONS FOR REVIEW

182. Matters of quantum are not in issue in respect of the assessments of net amounts in this case. The case was conducted on the basis that characterisation of the transactions and the application or otherwise of Division 165 would determine the outcomes in respect of the assessments of primary tax. The penalty tax assessments are tied to those outcomes. It is therefore not necessary for me to make findings on quantum.

183. However, a number of assessments, re-assessments and alternative assessments of primary tax and penalties are the subject of the objection decisions. I could make orders that cover all those circumstances but that would be without the benefit of submissions from or confirmation by the parties that such orders would properly give effect to the conclusions I have reached as set out above. In the circumstances, I consider the prudent and better course is to set aside the objection decisions and remit them to the Commissioner for reconsideration in accordance with the conclusions set out in these reasons.

184. I conclude by recording my appreciation of the detailed and helpful submissions provided by counsel for both parties and their professionalism in the conduct of this matter.



Footnotes

[1] Commissioner’s Statement of Facts, Issues and Contentions, [1].
[2] Applicant’s Statement of Facts, Issues and Contentions, [1].
[3] To avoid repetition, I refer to gold bars that are ‘ precious metal ’ as so defined as ‘ bullion ’ or ‘ gold bullion’ . I refer to gold bars that are not, or are no longer, precious metal as ‘ scrap gold’ .
[4] For part of the period under review, as discussed below, the applicant says its supplies were of scrap gold and were GST-free as export sales rather than supplies of gold bullion.
[5] Objection decision dated 25 January 2019.
[6] Objection decision dated 21 October 2019.
[7] Objection decision dated 21 October 2019.
[8] As noted below, in the course of the review, the Commissioner abandoned the argument that the applicant was not carrying on an enterprise. Instead, the Commissioner submitted that the applicant’s supplies in the First Period were taxable supplies, not GST-free supplies as the applicant maintained.
[9] All legislative references in this section of these reasons are to the GST Act.
[10] Section 165-5.
[11] It is clear that in s 1305 a ‘ book ’ includes an invoice: Corporations Act 2001 , s 9.
[12] Montgomery Wools Pty Ltd as trustee for Montgomery Wools Pty Ltd Superannuation Fund and Commissioner of Taxation [2012] AATA 61 , [70]; Confidential and Commissioner of Taxation [2013] AATA 112 , [450]; A & C Sliwa Pty Ltd and Commissioner of Taxation [2011] AATA 390 , [60].
[13] [2013] AATA 127 .
[14] [2018] FCAFC 212 .
[15] [2018] FCAFC 212 , [72].
[16] [2018] FCAFC 212 , [4].
[17] [2020] FCAFC 150 , [41].
[18] See generally: Imperial Bottleshops Pty Ltd v Commissioner of Taxation (1991) 22 ATR 148; Federal Commissioner of Taxation v Cassaniti [2018] FCAFC 212 .
[19] Federal Commissioner of Taxation v Cassaniti [2018] FCAFC 212 , [88].
[20] See, in this regard, s 38-385 of the GST Act as outlined at [18] above.
[21] Sterling Guardian Pty Ltd v Federal Commissioner of Taxation 2005 ATC 4796 ; Saga Holidays Ltd v Commissioner of Taxation (2005) 149 FCR 41 ; ATS Pacific v Commissioner of Taxation (2014) 219 FCR 302 .
[22] [2020] AATA 3008 , [2].
[23] Respondent’s Outline of Closing Submissions dated 6 August 2021, [104].
[24] Respondent’s Outline of Closing Submissions dated 6 August 2021, [113].
[25] Where the Tribunal accepts the Commissioner’s submissions on the application of the ordinary provisions, it is not strictly necessary for the Tribunal to consider the application of Division 165, but it may do so. However, as the Commissioner’s case became that the applicant’s supplies were taxable supplies, to give effect to that position may have required the Tribunal to consider whether to make a fresh Division 165 declaration. That is because the Division 165 declaration in its terms negated the applicant’s ITCs. However, no submissions were made in relation to this at the hearing. In those circumstances, and also as this matter is in the Small Business Taxation Division with the requirement for the Tribunal’s decision and reasons to be published within 28 days of the hearing, it is not appropriate or practicable to state an alternative conclusion on the application of Division 165.
[26] Australian Trade Commission v Goodman Fielder Industries Ltd [1992] 36 FCR 517 , [523].
[27] Companhia Votorantum de Celulose e Papel v Anti-Dumping Authority (1996) 71 FCR 80 ; cited in Expo-Trade Pty Ltd v Minister of State for Justice & Customs [2003] FCA 1421 , [24]-[25].
[28] Henty v Bainbridge-Hawker (1963) 36 ALJR 354 , 356 .
[29] Objection decision dated 21 October 2019, [16].
[30] Transcript of interview on 20 September 2017, p 103, ln 36 – p 104, ln 9.
[31] The conclusion that the applicant obtained title to the scrap gold before it was exported may also be supported by Rule 1 in s 23 of the Sale of Goods Act 1923 (NSW). However, neither party made submissions in respect of this provision.
[32] [2020] FCAFC 190 .
[33] [2020] FCAFC 190 , [123].
[34] At the time of preparing these reasons, the remitted application has not been decided by the Tribunal.
[35] TAA, Sch 1, s 284-90(1), item 1.
[36] TAA, Sch 1, s 284-90(1), item 2.
[37] TAA, Sch 1, s 284-160.
[38] [2015] AATA 114 , [131].
[39] TAA, Sch 1, s 298-20.
[40] Sanctuary Lakes Pty Ltd v Commissioner of Taxation [2013] FCAFC 50 .
[41] That circumstance also supports, indeed compels, the conclusion that the applicant has not discharged the burden of proving it or its agents were not reckless as to the application of the GST law.

 

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