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GST ANTI-AVOIDANCE - DIVISION 165
By Justice Graham Hill[*]
In enacting the Goods and Services Tax (GST) Parliament has opted for a general anti-avoidance provision based upon, but nevertheless different from, that in Pt IVA of the Income Tax Assessment Act 1936. The article looks at the elements that must be established for the GST anti-avoidance provision (Div 165) to apply in the light of the experience with the comparable income tax provision and by reference to a number of arrangements which might, but for Div 165, reduce GST.
Whenever a general anti-avoidance provision is inserted into legislation several philosophical issues inevitably arise. It is useful to outline these at the outset, so that the discussion on Div 165 of A New Tax System (Goods and Services) Act 1999 ("the GST Act") is given some focus.
The first question - it need not detain us long - is whether it is desirable for there to be a general anti-avoidance provision, or whether the problem could be dealt with by careful, and in consequence, lengthy and complex specific provisions. The wholesale sales tax ("WST") legislation, faced with an explosion of sales tax avoidance schemes, first chose to deal with these schemes on a case by case basis. The result was not particularly successful. The streamlined sales tax legislation created, for the first time, a general anti-avoidance provision which replaced the specific avoidance sections.
At the heart of the discussion lies the question whether the courts can be trusted to interpret tax legislation so as to give effect to Treasury policy. The traditional view is that the need for complexity in income tax legislation grew out of a literalistic interpretation by the courts of the statute, and this at a time when there was a general anti-avoidance section (s 260), which, itself, was given a rather narrow interpretation. The more modern view, as espoused, for example, in the initial Ralph Committee Report,[1] is for taxation laws to be expressed, if possible, in broad principles, rather than as detailed rules, each dealing with individual instances, coupled with a general anti-avoidance provision.
The absence of any anti-avoidance section might, on the other hand, give rise to some judicial anti-avoidance doctrine. This was the case in the United Kingdom, where capital gains tax avoidance gave birth to the doctrine of fiscal nullity.[2] Such a doctrine can have no place where there is statutorily enshrined a general anti-avoidance provision, for such a provision sets the parameters of acceptable and unacceptable avoidance.[3] Given the uncertainty which surrounds the judicial doctrine of fiscal nullity, it may be thought preferable to have a general anti-avoidance provision, the terms of which are legislated, than the rather more open-ended model, judicially invented, in the United Kingdom.[4]
Second, there is the obvious distinction between evasion and avoidance, even if, sometimes, this may be a little blurred. My suspicion, time alone will tell, is that a GST is, while highly susceptible to evasion, not quite so easily susceptible to avoidance. The obvious problem is where GST is simply not paid in respect of a taxable supply. The newspapers report that small corner stores threaten here (as indeed elsewhere) not to pay the tax which is properly payable. In Italy, for example, where GST is required to be shown on the invoice, it is an offence for a shopkeeper, or anyone else for that matter, to sell goods or services without a receipt. Shopkeepers chase tourists to ensure that a receipt is handed over, for the GST police apparently enforce this aspect of the law. The total of the receipts will obviously record the liability for the benefit of the revenue. In Australia, we will not be required to record the GST embedded in the retail price, (an amendment to require such a disclosure was proposed and failed) so this avenue for enforcement is not as readily available. Given that the legislation is a highly records-based tax the failure of the amendment is remarkable.
Legislation can not deal easily with evasion, other than to impose penalties upon those who are caught in the act. An anti-avoidance provision is framed to deal with something else - namely - the negation of an arrangement which is legally effective to avoid the tax, but which carries with it something else which the legislature regards as stamping it as avoidance.
Third, there is the fundamental need to do what Kitto J in FC of T v Newton[5] saw as fundamental to the drafting of any anti-avoidance provision, namely that the draftsman:
... take the trouble to analyse his ideas and define his intentions with precision before putting pen to paper.
Vague expressions like tax avoidance may mean different things to different people. It is necessary that the legislature make clear what it is which stamps a particular transaction as tax avoidance.
Fourth, there is the need to ensure that the anti-avoidance section does not become section one of the legislation. What does that mean? It means that the section should not need to be consulted each time any transaction is entered into to ensure whether it applies. It is, ultimately there, not to tax the ordinary transaction, but the extraordinary transaction. That is made clear in the explanation in s 165-1 of the GST Act which states that the Division is:
...to deter schemes to give entities benefits by reducing GST, increasing refunds or altering the timing of payments of GST or refunds...
This Division is aimed at artificial or contrived schemes.
Given the express direction that the courts pay attention to the legislative purpose,[6] and the express significance given to explanatory sections to determine that purpose,[7] that fundamental proposition may well have significance for the future, for it ensures that schemes designed to have other purposes, or, if you like, ordinary business transactions, were not intended to fall within the net which Div 165 sets out to cast.
Closely related to the last matter is the need for the legislature to make clear, if it can, the relationship between the anti-avoidance provision on the one hand, and other provisions on the other. It was this problem which was at the heart of the judicial views of the old s 260. The problem in the context of the Income Tax Assessment Act 1936 ("ITAA36") when s 260 held sway was well illustrated by the Commissioner's early defeat in WP Keighery Pty Ltd v FC of T[8] where the High Court was of the view that to apply s 260 to the facts of that case, one where a taxpayer sought to bring itself into the defined category of public companies to which certain tax advantages attached, was to negate the parliamentary intention that those tax advantages (the non-liability to Div 7 tax on undistributed dividends) should be available to a company which satisfied the tests which parliament set out.
That problem can be simply illustrated by reference to the Democrats' proposed bread amendment, which fortunately was not passed in its initial form.[9] The proposal was that bread was to be GST-free, but only if it contained the ingredients set out in C1 195-1 and in quantities not exceeding the limitation, if any, specified for each ingredient. Assume that a baker had traditionally produced a type of bread which contained vegetable matter of a quantity exceeding the quantity specified in the legislation. Would it be expected that a change in the recipe to reduce the quantity of vegetable matter would be tax avoidance intended to be caught by Div 165. And yet? There would be a course of conduct of which it might not be difficult to conclude that its principal effect was to get the GST benefit as defined - particularly where the discrepancy in the quantity of vegetable matter was very small. An actually enacted example is discussed later in the article (see Part 14.1 below).
Opinions may, well, differ on this question. It is possible to look at both result or purpose in answering it. An outcome of reducing GST, for example, would hardly seem like GST avoidance if it came about accidentally. The ordinary person would expect that before a transaction was categorised as tax avoidance, with attendant penalties, there should be found an element of purpose to reduce tax. I use the expression "reduce tax" and similar expressions, unless otherwise stated, to include, also, increasing refunds or altering the timing of payments of GST or refunds.
On the other hand, there is, perhaps, no real point in penalising an activity which is entered into with a GST reducing purpose but which fails to achieve its purpose. For there is no loss to the revenue, no GST payment has been reduced, no refund made claimable or timing affected.
Nevertheless, it may be concluded that what is at the heart of the ordinary person's definition of tax avoidance is that what is done is done for a particular purpose. Although ordinarily the purpose will be that of the taxpayer, there is no reason to ignore the purpose of some other person, such as an adviser, or scheme promoter, in a particular case. The next question which must interest the drafter is how the purpose is to be established. Unless stated otherwise, reference in legislation to purpose requires what may be referred to as the establishment of subjective purpose. Those who in the past practised income tax when s 26(a) was still law would be familiar with the difficulties which a taxpayer had, in demonstrating what his or her subjective purpose was. And it must be remembered that in a Court or Tribunal it will be the taxpayer who bears the onus of showing a negative.
There is another question where purpose is involved. Should that purpose be the sole purpose, the dominant purpose or just one of a number of purposes? Sole purpose would be too narrow, dominant purpose raises an issue of ambiguity where there are a number of purposes.
For Div 165 to operate there are three key elements which must come together. These are:
1. The existence of a scheme;
2. the obtaining of a GST benefit from the scheme; and
3. the drawing of a conclusion as to either the sole or dominant purpose of an entity getting the GST benefit or the principal effect of the scheme or part being a GST benefit.
Where these three elements coalesce the Commissioner is authorised to negate the GST benefits, make compensatory adjustments and in addition, penalties become payable under s 165-80 of the GST Act.
However, the way I have stated the third element is, perhaps, marginally misleading. For the real question is not so much whether a conclusion could be drawn as to the necessary purpose or effect but whether taking account the matters described in s 165-15 it is "reasonable to conclude" that there is the stipulated purpose or effect.
In some way Div 165 bears similarity both to Pt IVA of the ITAA36 and to Pt 8 of the Sales Tax Assessment Act 1992 ("STAA92"). But there are some differences which need to be explored. Perhaps the most obvious difference is that both the ITAA36 and the STAA92 focus only on purpose in respect of which a conclusion is required to be drawn by reference to objective facts. Under the GST Act, on the other hand, the focus is either on purpose or effect, albeit that a conclusion as to either is required to be drawn from listed facts, although the list includes "any other relevant circumstances". It will be necessary to examine the implications of these differences more carefully.
No case in the context of income tax has and it might be assumed in the context of WST would ever have or have had a problem of finding a scheme. This is not surprising, given the width of the definition. In its widest sense here a scheme may be no more than an implied promise not intended to be enforceable, or, for that matter, a mere proposal. It is, however, hard to see how a proposal not implemented could ever be a GST avoidance scheme.
Schemes that were entered into before 2 December 1998 are excluded from consideration under the Division as a result of an amendment to the Bill as originally drawn. It is possible that this might, in a particular case, raise a question whether a minor variation of an overall plan made after 2 December 1998 should be seen as involving the entering into of a new scheme, especially where the minor variation itself can not be seen as itself producing the GST benefit.
Because of the wide definition of "scheme", particularly as including both an action and a course of conduct, it is obvious that a scheme which involves a course of conduct is capable of being subdivided into actions, which are part of the course of conduct. This definitional problem is likewise to be found in the income tax context, as well as the WST context. Generally it may have little practical significance, for a scheme will only fall within Div 165 if it is one from which the avoider gets or got a GST benefit. It might be thought from the numerous references to "part of the scheme" in the Division that where there can be found a course of conduct, it would be wrong to look at a particular step as being a scheme. However, the decision of the High Court in FC of T v Peabody[10] would most likely be followed so far as it holds that the Commissioner can choose, where there is a course of conduct, that course of conduct, part of that course of conduct, or an individual act being part of that course of conduct, as the relevant scheme, but with two qualifications. First the GST benefit must be "from the scheme" and second as the judgment of the High Court in Peabody points out, there may be a case where the circumstances are incapable of standing on their own without being "robbed of all practical meaning". Precisely what that means is far from clear. Apparently, in these circumstances, part of the scheme could not, of itself, be the scheme. There is a further qualification once the matter goes to court. The Commissioner may be ordered by the court to particularise the scheme (indeed he ordinarily would be). The Commissioner might need leave of the court to depart from these particulars once given, particularly if a taxpayer is able to show prejudice in the Commissioner so doing. However, as the High Court in Peabody points out, ordinarily the Commissioner would be permitted to amend particulars he has given where the interests of justice require that course.
The definition of GST benefit is broken up into four categories. They may be summarised as being:
(a) the payment by an entity of less GST than otherwise;
(b) the payment to an entity of a greater amount than could otherwise be expected to have been payable to that entity;
(c) deferral of a GST liability;
(d) acceleration of a GST payment to the taxpayer.
It may be seen that the definition reflects the underlying concept of the GST as involving both liabilities and credits. The tax advantages are then either reduced liabilities, or increased credits, both being affected by timing.
Each of the four paragraphs contains alternatives - the first deals with actual liability, the second with reasonable expectation concerning that liability. This concept of reasonable expectation was to be found in both the STAA92 and the ITAA36. In Peabody the High Court gave attention to the concept of reasonable expectation in the context of income tax. The Court said:[11]
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.
So, in interpreting the definition of GST benefit it is necessary to make a prediction on rational grounds of the GST which would more probably than not have been payable apart from (that is, but for) the scheme.
In the context of income tax the problem of difficulty has always been that in many cases it can be argued that if the scheme had not been entered into, in fact the taxpayer may have done something else which would not have involved any reduction of income tax coming to the taxpayer as a result of the scheme. The same argument can, presumably, be advanced in the context of the GST. The argument has, so far, not had any success in public litigation in the income tax context. It is unlikely that it would be successful in the GST context. Having regard to s 165-10(3) an entity can get a GST benefit from a scheme even if it could not have engaged economically in any activities of the kind to which the GST legislation applies and that would produce an equivalent effect to the scheme.
In other countries, particularly on introduction, timing advantages have played a considerable role. Acceleration of GST credits resulting in payments before liabilities are incurred is a vital aspect of cash flow management to a business. A taxpayer who is required to finance the GST payment from its supplier, without the ability to obtain a credit is, obviously, as a result of the legislation in a position which is commercially worse than it may be at present with the WST.
Payment of the WST was often delayed by the use of Romalpa clauses,[12] clauses which had the significant commercial effect of ensuring that the wholesaler of the goods was protected in bankruptcy should the retailer become insolvent. But the GST is not predicated on sale, it is predicated upon supply. So, the question, where a Romalpa clause is used, is whether a bailment arrangement, of the kind postulated, involves a supply in the ordinary sense of the word at the time the goods are delivered, and whether the purchase price is attributable to that time, or the later time when payment is made. These questions are answered in the present context by Div 29 of the GST Act which attributes taxable supplies to the tax period in which either the consideration for the supply is received or the issue of an invoice relating to the supply, whichever is sooner. Division 99 of the GST Act, however, permits the taking of a security deposit which is not attributable to a GST period unless forfeited or applied as consideration. It is clear that there is some room for timing advantages here unless Div 165 operates to negate them.
Consistently with the view of the High Court in Peabody the reference to "part of the scheme" is presumably necessary because although the Commissioner can select as the relevant scheme that which is part of an overall scheme, the scheme selected has both to be capable of producing the tax benefit and able to be seen coherently as a scheme in its own right. It may therefore be made up of parts, only some of which produce the relevant benefit.
The original draft Bill took no express account of the fact that a GST benefit would arise each time a taxpayer or creditable person took advantage of a legislative provision which could bring about the result that timing was affected (eg, monthly/quarterly GST accounting) or for that matter converted full GST payability to input taxed status, etc. A comparable exclusion from the net of Pt IVA is to be found in s 177C(2).
The Bill as finally enacted has changed that in two ways. First s 165-1 in stating what the Division is about both emphasised that the Division was aimed at artificial or contrived schemes as well as giving examples of what the Division is not intended to apply to. These examples are:
• an exporter electing to have monthly tax periods in order to bring forward the entitlement to input tax credits; or
• a supplier of child care applying to register under the Childcare Rebate Act 1993 (registration would make the supplies of child care GST - free); or
• a supplier choosing under section 9-25 ...to use the average wholesale price method for working out the taxable value of retail sales of grape wine; or
• a bank having its car fleet serviced earlier than usual, and before 1 July 2000, so that the servicing does not, at least initially, bear the GST.
More importantly, for the stated examples still leave room for questions as to whether other schemes are analogous to them, or differ significantly, the definition of GST benefit was amended to exclude a benefit attributable to the making, by any entity, of a choice, election, application or agreement expressly provided for in the GST Act or nominated legislation. This permits a somewhat limited application of what, in the days of s 260 of the ITAA36, was called the "choice principle". It is obviously of great significance. Every choice which the GST Act at least specifically allows, if otherwise producing a GST benefit, would be capable of being set to nought by an anti-avoidance section which does not take this into account. However, the choice, election, etc has to be one which is expressly provided for in the relevant legislation. This raises an interesting question. The GST Act provides for certain transactions to be GST free. But is the difference between GST taxability and a GST free transaction a choice expressly provided for? It is easy to argue that it is not.
In the STAA92 a tax benefit had to be one which arose "under" the scheme. Under the ITAA36 the benefit had to be "in connection with the scheme". In the GST Act the benefit has to be "from the scheme". Perhaps these three alternative methods of expression are no more than three ways of expressing the one idea. But it is not easy to see why yet a third formulation was trialed. The word "under" implies that the benefit in question be part of the definition of the scheme itself. The tax benefit had to be at least a rationale for the scheme for it serves to define the scheme. The phrase "in connection with", as used in the ITAA36, might be wider. It sufficed if the relevant benefit had some connection with the scheme. It need not be the sole benefit which arises to the parties in connection with the scheme. The word "from" in the GST Act suggests that the benefit must flow from (or out of) the scheme, that is, the scheme must result in the benefit, notwithstanding that the benefit forms no part of the definition of the scheme. It may be wider than the WST formulation, although narrower than the income tax formulation.
All three acts postulate that the Commissioner take into account specified matters in order to see whether it would be reasonable to conclude that some entity entered into or carried out the scheme or part of it with the requisite sole or dominant purpose.
It is important not to lose sight of the fact that the conclusion, whether as to purpose or effect must be a reasonable one. If it were merely fanciful or not based on reason it would not be a reasonable conclusion. In Attorney-General's Department & Anor v Cockcroft[13] Bowen CJ and Beaumont J pointed out that the word "reasonable" is often used (context will be relevant of course) in contradistinction to "irrational, absurd or ridiculous".
There has not, in the context of income tax or the other taxes with similar anti-avoidance provisions, been much discussion on the weight or relevance of the various factors which the legislature has chosen as providing the foundation for the conclusion to be reached. In Peabody, in a passage, while not approved by the High Court, was not criticised either,[14] I said:
In arriving at his conclusion, the Commissioner must have regard to each and every one of the matters referred to in s 177D(b). This does not mean that each of those matters must point to the necessary purpose referred to in s 177D. Some of the matters may point in one direction and others may point in another direction. It is the evaluation of these matters, alone or in combination, some for, some against, that s 177D requires in order to reach the conclusion to which s 177D refers.
On the other hand, there will obviously be cases where each of the matter points, rather unequivocally, to tax avoidance.[15] Some of the matters listed in s 165-15 provide obvious inidicia of avoidance, others less so. Further, there is some overlap. For example, form and substance generally would require regard to be taken to the manner in which the scheme was entered into or carried out. Economic and commercial substance would require consideration, inter alia, of the changes in financial position caused to persons affected by the scheme. But, as the High Court pointed out in FC of T v Spotless Services Ltd,[16] both the time at which a scheme was entered into and the length of the time during which the scheme was carried out will throw light both on matters of form and substance and the manner in which the scheme was entered into or carried out.
The manner in which the scheme was entered into or carried out will often have regard to complexity, although that alone could hardly be a test. Where a simple transaction is carried out with great complexity, one will obviously have cause to ask why. Speaking in the context of income tax, the joint judgment of six of the Justices of the High Court in Spotless said:[17]
"Manner" includes consideration of the way in which and method or procedure by which the particular scheme in question was established.
The words "manner" and "entered into" were said further not to be given a restricted meaning. Nor, presumably should the words "carried out". The dichotomy between "entered" and "carried out" is obviously concerned with, on the one hand, what brings the taxpayer into the scheme and on the other, what is done under it.
Form and substance are probably the most usual indicia of tax avoidance. That appears to have been recognised by the High Court in Spotless.[18] In that case the Federal Court had, by majority, found against the Commissioner because, in essence it was said, that the decision to invest in the Cook Islands by depositing money there at interest which was exempt from tax in Australia, assuming its source was in the Cook Islands, was one made on rational commercial grounds, those being, that the after tax return was greater than would be received if the investment were made, say, in Australia. The suggestion that there is a meaningful dichotomy between commercial and tax considerations in decision making did not find favour with the High Court, which unanimously reversed the Full Federal Court. It is in this context that the joint judgment says:[19]
A taxpayer within the meaning of the Act may have a particular objective or requirement which is to be met or pursued by what, in general terms, would be called a transaction. The "shape" of that transaction need not necessarily take only one form. The adoption of one particular form over another may be influenced by revenue considerations and this, as the Supreme Court of the United States pointed out, is only to be expected. A particular course of action may be, to use a phrase found in the Full Court judgments, both "tax driven" and bear the character of a rational commercial decision. The presence of the latter characteristic does not determine the answer to the question whether, within the meaning of Pt IVA, a person entered into or carried out a "scheme" for the "dominant purpose" of enabling the taxpayer to obtain a "tax benefit".
There is little doubt today that courts tend to look more to substance than form, where the two conflict. Presumably the form of a tax avoidance transaction will be such as to produce the appropriate GST benefit. It is where form and substance conflict that this factor will be of great weight. It is hard to see why the legislature spelt out directly legal rights and obligations on the one hand and economic and commercial substance on the other, because that dichotomy is just what form and substance means.
Legislative purpose is required to be looked at. It is not a factor which featured in Pt IVA. I have some doubt as to its significance. Generally the purpose or object of the GST Act (or for that matter the Customs Act 1901, to the extent that deals with GST) is to raise taxes where there is a taxable supply. No doubt if no revenue is raised, or technically, where there is a GST benefit involving tax payable, or the timing of it, that purpose is to some extent frustrated. But the mere raising of revenue is not the full story. It is a necessary design feature of a value added tax that there be credit given for tax payable on antecedent supplies. Further, the model adopted in the legislation provides for GST free supplies and input taxed supplies where presumably social policy is involved. The prolonged debate about the taxability of food illustrates this. Perhaps if, albeit there is a GST benefit, the scheme is to attract GST free status that policy may count for the taxpayer, rather than against the taxpayer. The provisions of C1 165-5 excluding choices, etc expressly provided for, reinforces this in any case, and probably takes such schemes out of the realm of the Division entirely. Perhaps under this heading regard can be had to the legislative statement that the Division is aimed at artificial and contrived schemes.
Timing is itself relevant to the concept of GST benefit. As already noted, a scheme which either delays payment or advances the time when credits may be received, will be one from which a GST benefit will flow. But here, one may assume, the reference to timing is more likely to be directed to the question when the particular scheme is entered into or carried out. The fact that an act is carried out at a relevant date (that is, pre 1 July 2000) might, if that fact assists in bringing about the tax benefit, be a very relevant matter. The explanation of what the Division is about gives some comfort to the view that such schemes do not give tax benefits as defined.
The period over which the scheme is entered into and carried out is, one might think, an element of timing, rather than a separate factor. It also impacts on form. Generally, the more short lived the scheme, the more likely it might be to lead to the avoidance conclusion.
The effect which the GST Act has in relation to the scheme is, one might think, already caught up in the concept of GST benefit. No scheme will, as noted, produce a GST benefit unless what might reasonably be expected to happen but for the scheme has been considered and compared against the outcome which the scheme produces. If there is no GST benefit, a fortiori the Division will have no operation.
Changes in financial position, whether of the avoider or of some connected entity will be obvious indicia. A scheme with no commercial benefit, merely a tax benefit will often produce no real change in financial position. But there will be occasions where this factor may produce neutral results. A taxpayer who structures an in-house (non-grouped) financier may obviously change the financial situation of particular companies in the group. On the other hand, if there is, as there usually would be, some common ownership, then overall there would be no change in financial situation of the common owner. This might, in a particular case, indicate avoidance.
There is, obviously, a connection between this factor and the nature of the connection which is listed separately. Connected parties generally don't deal with each other at arm's length. Of course the fact that there is some unrelated party interposed in the transaction does not negate the tax avoidance conclusion in all cases. One has only to think of the old GST schemes involving mortgages or options where there was interposed a scheme promoter unconnected with the taxpayer who acted in one sense at arm's length from the taxpayer to see this. What is meant by arm's length dealing has been the subject of a great deal of discussion in the context of income tax and particularly capital gains tax.[20] The present context is not specifically arm's length relationship, it is arm's length dealing. Hence, as Davies J said in Barnsdall, relationship is but a step in the process of reasoning, it is not determinative of there being a non-arm's length dealing. Dealing looks at the way parties behave or conduct themselves. In Furse I said:[21]
What is required in determining whether parties dealt with each other in respect of a particular dealing at arm's length is an assessment whether in respect of that dealing they dealt with each other as arm's length parties would normally do, so that the outcome of their dealing is a matter of real bargaining.
The issue is, in the end one of fact. Lee J in Granby expressed it this way:
... the term ... means, at least, that the parties to a transaction have acted severally and independently in forming their bargain.
Parties with no relationship can, it must be stressed, deal with each other in a non-arm's length way. Where they do, a GST avoidance conclusion will more easily be drawn.
The circumstances, whether surrounding the scheme, or merely any other relevant circumstances, enable the enquiry to be broad ranging. In the original conception of Pt IVA, as has already been noted, subjective purpose was eschewed. This can be assumed to be deliberate.[22] Of Pt IVA, Brennan CJ, Dawson, Toohey, Gaudron, Gummow and Kirby JJ wrote in Spotless:[23]
The eight categories set out in par (b) of s 177D as matters to which regard is to be had "are posited as objective facts". That construction is supported by the employment in s 177D of the phrase "it would be concluded that ...". This phrase also indicates that the conclusion reached, having regard to the matters in par (b), as to the dominant purpose of a person or one of the persons who entered into or carried out the scheme or any part thereof, is the conclusion of a reasonable person. In the present case, the question is whether, having regard, as objective facts, to the matters answering the description in par (b), a reasonable person would conclude that the taxpayers entered into or carried out the scheme for the dominant purpose of enabling the taxpayers to obtain a tax benefit in connection with the scheme.
Subsequent legislation took a different view,[24] but did so expressly. The introduction of "any other relevant circumstance" may bring subjective purpose in by the back door, notwithstanding that actual purpose is nowhere directly mentioned and the legislation still refers to "it is reasonable to conclude". It would be difficult to say that actual subjective purpose was an irrelevant circumstance, assuming subjective state of mind is a "circumstance", and once subjective purpose is introduced, it is hard to see how a conclusion could reasonably be reached which was not consistent with that actual purpose, at least where the subjective purpose is GST avoidance.
There are two possible readings of dominant in connection with purpose. The first looks at the question of relativity to other purposes; the latter rather to a more than 50% dominance. It is the former view which prevailed in the High Court in the context of income tax, and can be expected to prevail here. In Spotless[25] the joint judgment of the High Court commented:
Much turns upon the identification, among various purposes, of that which is "dominant". In its ordinary meaning dominant indicates the purpose which was the ruling, prevailing, or most influential purpose.
In other words, nothing like a 50% significance to a purpose may be required, at least where there are more than two purposes apparent.
Presumably the same can be said of the principal effect. Where there are a number of effects, the question will be which appears to be the principal one, that is to say the one that is most significant. In the legislation as originally drafted in Bill form the test was "a principal effect". The threshold was changed to "the principal effect". Generally that difference may not be great, but one can imagine in the case of a scheme with various effects, that more than one of those could be seen as principal, while no one of them was. That, one may assume is the purpose of the amendment. The fact that the so-called "avoider" may get the GST benefit from the scheme in an indirect way, may be worth noting as well.
Many schemes which may produce a GST benefit may also produce a tax benefit for income tax purposes. It is interesting to speculate about cases where both income tax avoidance and GST avoidance are in equipoise.
There are three possible outcomes which flow once a reasonable conclusion as to purpose or effect has been arrived at. These are the negating of the effect of the scheme, the need to compensate for that negation of benefits and penalty. It is convenient to consider each of these outcomes briefly.
The first outcome is that the Commissioner may make a declaration under s 165-40 of the GST Act. The purpose of the making of a declaration is stated in the legislation to be the negating of a GST benefit which has been obtained from the scheme by the "avoider". That declaration will be a reviewable decision,[26] in the sense that it may become the subject of objection, and if necessary review in the Administrative Appeals Tribunal or appeal to the Federal Court. The Tribunal may, sitting in the shoes of the Commissioner, make the determination. The Court would not have that power.[27]
The determination may stipulate an amount that becomes the net amount, as defined, (that is, the GST liability less the input tax credits attributable to a relevant tax period) for the relevant period or, where relevant, the GST liability on taxable importations. Since net amount may be positive or negative, that is, a taxpayer may be required to pay or on a net basis have a surplus of credits over liability generating a refund, the reversal can reflect the nature of the particular tax benefit obtained, that is to say whether it relates to GST liability or GST credits.
As is the case with the corresponding income tax provision, the Commissioner may make compensatory adjustments where a declaration has been made to negate the GST benefit an entity gets. It seldom happens in the income tax context. However, because the GST depends on a series of debits and credits the need for a compensatory adjustment is greater. Colourfully the legislation refers to the person who may obtain the adjustment as being "the loser", that is the person who gets a GST disadvantage from the scheme - as defined in s 165-45(2). The four situations which are listed as GST disadvantages represent the mirror opposites of those listed as GST benefits. So, for example, if a GST benefit is paying less GST than could reasonably be expected to have been payable, the GST disadvantage will be another person paying more GST than could reasonably be expected to have been payable.
It is interesting to speculate how this would work out in practice. If it be assumed that on a transaction with a consideration of $100, the vendor, who is the winner from the scheme pays $10, but after the declaration that is increased to $15. Then presumably the purchaser, assuming it is registered and in due course pays GST, on a supply will obtain an increased credit of $5 as the loser. But since the purchaser may never have to pay the extra $5 of GST for the goods it buys, the credit it receives may come as a windfall. Of course, much will turn on the terms of the contract between buyer and seller. There may be scope for the development of the doctrine of implied terms in contracts made after the legislation has passed, at least, to imply into a contract made after 1 July 2000 a provision that the purchase price be adjusted if there is a GST increase to the vendor. Would it go without saying?
One of the criteria for the Commissioner to make the compensatory declaration is stated to be, in s 165-45 that the Commissioner consider that it is "fair and reasonable that the loser's GST disadvantage be negated or reduced". Given the fact that the loser may have a windfall, that might be a relevant matter merely to reduce the disadvantage, or indeed not compensate for it at all.
Procedurally the loser may request the Commissioner to make the declaration of compensation, and if this is not granted or not granted adequately, there will be a reviewable GST decision which is the subject of the objection, review or appeal procedure.
The width of the steps which the Commissioner may take in disregarding the scheme for the purpose of the two kinds of declaration is apparent from a reading of s 165-55. However, in exercising his discretion the Commissioner can not act arbitrarily. The ambit of that discretion is circumscribed implicitly (although not explicitly) by the underlying philosophy of the Division which is to ensure, as far as possible, that the end result coincides with what one could reasonably expect would have happened if the scheme had not been entered into or carried out.
The third consequence of Div 165 applying to negate a scheme is that the avoider is required to pay a penalty additionally to the tax which the avoider has to pay. The penalty is double the tax avoided, subject to remission under the TAA.
Six examples will briefly be considered to illustrate how the Division may operate. It is proposed to discuss them in more detail following the stated examples.
A taxpayer now liable to the GST reformulates his or her product so as to bring the supply of that product within the category of GST free transactions. Will Div 165 operate? What if the taxpayer had, prior to the implementation of the GST, sold bread rolls with a sugar coating? After 1 July 2000 the taxpayer removes the sugar coating but gives away little packages of castor sugar to be sprinkled over the rolls if desired.
On 1 April 2000 A, for a consideration of $1 million dollars, purchases an option to acquire all the trading stock of B for $500,000. The option is open to be exercised over a six month period. The stock is worth, it can be assumed $1.5 million. It is reasonable to expect that the option would be exercised before 1 July, but A wishes to avail itself of the choice of deferring the exercise. A exercises the option on 2 July 2000 and pays $500,000. If the option were granted after 1 July 2000 it would presumably constitute a taxable supply as the grant of a right for consideration. However, because the option is granted before 1 July 2000 only the consideration on exercise will be taxed.
X is a pharmacist. He divides his pharmacy into two counters. On one of the counters there are to be sold GST free stock, through company A Pty Ltd. On the back counter company B Pty Ltd sells other products in transactions involving a taxable supply. A Pty Ltd elects to return on a monthly basis. B Pty Ltd accepts the general rule of accounting for 3 month tax periods. The consequence of the scheme will be that A Pty Ltd will receive GST credits on a monthly basis, whereas B Pty Ltd may be able to defer payment of its GST liability up to three months.
A is an airline operating in Australia. B is an accountancy firm which does the audit work for A. They realise that with the advent of the GST A will have to pay B 10% more for the accountancy services. Likewise B will have to pay more (not necessarily 10% more) for air tickets which it purchases both to see clients around Australia and when the partners travel on holiday. B comes up with the idea that A could sell its airline tickets at a 20% discount to B, and B would charge A at charge out rates discounted by 10%. In other words some GST would still continue to be payable, but the two lots of discounts would be calculated to net out, to some extent. The discounts could be varied upwards or downwards as required. However, B does not want to go too far.
A, who has a substantial investment portfolio, but carries on no business, has his accounting work performed by a city accountant. B, on the other hand, carries on a business of investing, but likewise has his accounting/tax work carried out by persons who were formerly employees, but who, to avoid PAYE tax and to split income, have now for some years, operated on a contractual basis through a corporation. The former employees are employees of the corporation which charges a fee to B for the accounting/tax services. A and B are concerned that they will, as and from 1 July 2000, have to pay GST on the accounting/tax services.
Two alternatives arise for consideration. The first is that A and B employ their accounting advisers. This is not favoured by the accountants who are able to split income with their partners or family trust beneficiaries in the present set up. The second alternative is that the accountants be employed by a company in the US (owned directly or indirectly in the same way as the company which contracts with B). When accounting/tax services are required by A or B, they would, by email or fax, contact the US company for the appropriate service when required (practically daily). The US company would contact the Australian professionals in Australia who would email the solution to the problem to a trust company in the US acting as agent for the client, which would then email it to Australia to the client. Other simpler variations may be imagined.
Braytown Motors carries on a business of selling white goods to consumers. It finances its stock by a floor plan arrangement with a financier under which the stock is charged with the money owing on each item. It purchases, say, a refrigerator at $500 + $50 GST. It sells at $1100 GST inclusive. It has been suggested that it alter its retail sales to consumers so that the consumer purchases just Braytown's interest in the stock and then pays out the financier. Under the floor plan agreement Braytown has no personal liability to pay monies advanced under the agreement. The financier has recourse solely to the assets charged.
Product reformulation was the subject of debate in the newspapers at the time the GST Bill was before the Parliament. The response was that this was not the type of scheme which fell within the Division, or at least that it would not be treated as falling within the Division. Why?
If one looks at the Division, there is a scheme. The next question, however, is whether there is a GST benefit from the scheme. It can reasonably be expected that without the reformulation the supply would be GST taxed. With the scheme, which includes the reformulation, the supply is GST free. But s 165-5(aa) excludes as noted earlier, a GST benefit which is attributable to a choice so long as that is a choice expressly provided for. If it is expressly provided for, that is the end of the matter. The explanation for what the Division is about will also help. If it is necessary to go further the answer is murkier. Some of the matters in s 165-15 are perhaps neutral, but not all. The timing of the scheme, if it is entered into before July 1 2000, is a dead give away. There may be no change in the financial position other than to the revenue - except perhaps, a small cost of reformulation; Relevant may be the fact that the only purpose was to attract GST free status.
This kind of scheme was generally thought not to attract the anti-avoidance provisions of the WST - but at least they did not permit subjective purpose to be a relevant circumstance. Perhaps it can be argued that subjective purpose is not a "circumstance" but unless it can be, it is hard to see why a conclusion favourable to the Commissioner would not be drawn, both as to dominant purpose and principal effect.
However, the variant of reformulation, that is to say, the giving away of castor sugar to coat the bun, has a somewhat different feel about it. Yet it is hard to see any analytical difference.
Section 11 of the A New Tax System (Goods and Services Tax Transition) Act 1999 provides to the effect that if the option could reasonably be expected to be exercised on or after 1 July 2000 then there is taken to be a supply made (that is, a taxable supply in this case) on or after that date. Given that the option was intended to be exercised before 1 July 1999 this provision will, on the facts stated, have no application.
But for the operation of Div 165, therefore, there would be a taxable supply (it is assumed A is registered), the supply will obviously be a supply of goods. That supply is for a consideration of $500,0000. Section 9-15(3) will make it clear that as from the commencement of the legislation on 1 July 2000, when calculating the consideration for that supply, the consideration for the supply on the exercise of the right or option will be limited to the additional consideration provided in connection with the exercise of the option.
There is a GST benefit. But for the scheme (which might be either the option agreement or, perhaps more likely, the failure to exercise the option (a unilateral course of conduct)) it may quite reasonably be expected that A would acquire the goods for the full value of $1 million from B. The question is perhaps when. It might be reasonable to expect that this would happen on the date of exercise of option. The GST benefit clearly enough flows from the scheme to B, if there is one.
The effect of the option for A will be both the securing of the supply, and the obtaining of the supply. For B, the effect of the option will be the possibility of sale, and of course, sale for a lower price with a reduced GST liability. The effect of not exercising the option until after 1 July 2000 will be the delaying of the purchase which would have some commercial effect, and the substantial lowering of the GST liability of the vendor. There would be a GST disadvantage to the purchaser in a reduced GST credit when the stock is on-sold. What would be concluded to be the principal effect in these circumstances. What about dominant purpose? Matters such as form versus substance and timing point to the possibility of an adverse conclusion being drawn, particularly if the scheme is taken to be the conduct of not exercising the option until after 1 July 2000.
If Div 165 did have application in these circumstances the scheme would have an adverse effect on the purchaser if entitled to a GST credit. So there is raised the question discussed earlier as to the merits of any compensatory determination. Given that there would really be no loss to the revenue so long as the purchaser is denied a credit, it does not seem likely that Div 165 would be applied in these circumstances. If it was to be applied it would seem grossly unfair that the purchaser's credit was not increased.
This would, but for the explanation of what the Division is about in s 165-1, and the Senate amendments to the definition of tax benefit, be a somewhat difficult case, for pharmacies have operated for income tax purposes on differential counter bases for years - but of course tended to distinguish between prescription only and non-prescription stock, which is not precisely the way the range of GST free transactions work.
As a matter of policy the GST Act proceeds on the basis that you can elect to account on a monthly basis, even if you are not one of the persons whom the Commissioner can force to do so under s 27-15. It somewhat assumes that taxpayers have net liabilities, rather than what may be called gross refunds. The GST benefit arising from the restructuring ("the scheme") is a timing one. There has been accelerated the timing of payment of refunds. It is a consequence of electing for monthly accounting in any event. All that differs here, is the division of supply between taxable supply and GST free supply.
There seems no reason to doubt that this kind of scheme would be excluded from Div 165. It is the fundamental rationale for the amendment made to tax benefits. The ability to elect for monthly accounting is a benefit which is clearly specifically provided for. So, if it matters is grouping. The exclusion from Div 165 may well have also come about by a consideration of the purpose of the GST Act in permitting monthly accounting. But against that would have had to be weighed the question of subjective purpose, if that is a relevant circumstance to be taken into account.
There would also be a question of what might reasonably be expected to have happened had the scheme not have been entered into or carried out. Perhaps there would not have been two companies, perhaps both might have elected to account on a monthly basis, this would be likely if the input credits exceed the net GST payable for the non-GST transactions. It can be seen that there would be quite difficult factual questions which would need to be solved, if this case were to be brought into the GST avoidance net.
It is possible in this type of set-off arrangement that there is an element of evasion, rather than avoidance. It is important to remember that if the scheme does not work there can be no GST benefit, and a fortiori no application of Div 165.
If it be assumed that the set-off arrangement is legally effective to reduce the GST liability there is clearly a scheme. Once the discussions which gave rise to the scheme are known, the conclusion, reasonably to be drawn, will not be too difficult to arrive at. There are, of course, commercial and income tax advantages. This will be so particularly if, as a result of the arrangement, each party is commercially better off, that is, there is a discount factor involved. If the travel is private, there will be no question of compensating the professional accountant for input credits. The problem of entitlement to a compensatory determination will more acutely arise if the travel is not of a private or domestic nature but is acquired in carrying on an enterprise.
The first suggestion that outsourced contracts be brought back in-house is probably unlikely to attract the attention of the Commissioner, if only because for years he has been keen that persons who perform work be treated as employees and subject to PAYE tax. If the Commissioner were concerned, the problem would raise the question whether a scheme altering structure would fall within Div 165.
Wages are outside the GST net - but there could still be a question whether there is a choice, election, etc, not expressly provided for by the GST. If there is, there would in any event be no GST benefit and a fortiori no Div 165 application.
The first question which must be asked in the case of the second alternative is what the position would be anyway if the scheme were implemented. The rules dealing with connection with Australia in s 9-15 may be avoided in a scheme such as this, but they are not the only rules. There is a need, as well, to consider Div 84, which is concerned with bringing into the GST net as taxable supplies some supplies that pass through the gateway of s 9-15. If the supply is solely or partly for the purpose of an enterprise of the recipient of the supply carried on in Australia but not solely for a creditable purpose, the supply is for consideration and the recipient of the supply is registered, or required to be registered, the supply is treated as a taxable supply with the tax being payable by the recipient.
This will be of no concern to A, for A is not carrying on an enterprise. It will be a concern to B, for the supply to B will be a taxable supply, with the GST being payable by B, unless B carries on his enterprise outside Australia.
If the scheme produces no change in the tax payable on B's transactions, that will be the end of the need to consider Div 165 in respect of those transactions. So the accountants who wish to contract with B have to come up with a way through Div 84. Perhaps they can, although the problem becomes even more difficult once it is accepted that B makes taxable supplies and obtains an input credit for the acquisition of supplies from the Accountants. But what is going on here is the use of ever more complex structures to reduce the GST payable by the Information Technology group for non-creditable supplies. It is not hard to predict that the more complex the scheme, the more likely it would be that there would be a finding of dominant purpose or principal effect.
This kind of scheme is suggested by the WST avoidance schemes of the 70s and 80s. For present purposes we may assume the steps taken to be legally effective, not a sham. There could be a question whether, if the supply was to the consumer just of the refrigerator subject to the charge so that you did not trade in refrigerators, the whole of what was paid to the supplier was a creditable acquisition for a creditable purpose. There is also the question whether the amount the customer would have to pay out would constitute consideration to the retailer. Let us not detain ourselves with such questions. Assume that the GST payable by the retailer is reduced, so that there is a GST benefit. Could there be much doubt about the outcome?
The six examples given demonstrate some level of uncertainty about the operation of Div 165, notwithstanding that we are familiar enough with the operation of similar provisions in other legislation. When Pt IVA was introduced, and for that matter when the corresponding provision in the STAA92 was introduced there was likewise uncertainty and a level of concern.
History demonstrated that, at least in the initial period of its operation, Pt IVA was effective. It operated as a deterrent. There were no real Pt IVA cases considered by the courts for a lengthy period. Indeed there has, in the now 18 years Pt IVA has been on the statute books, relatively little court discussion. Uncertainty may operate in favour of the revenue, in that given the sanction of penalty there will be an unwillingness to fight a tax avoidance case. It is said that there are now many income tax schemes involving aggressive tax avoidance being considered by the Commissioner. If that is so the Pt IVA jurisprudence will expand exponentially, unless taxpayers drop out. There is no suggestion that the courts find Pt IVA ineffective, or susceptible to a narrow interpretation. Indeed the contrary may be said.
But, on the other hand, there is a sense that the breadth of a provision such as Div 165, perhaps not applied with the full rigour of the law, but generally only where the smell test is not satisfied, tends to give the Commissioner a discretion to tax, a discretion which may change from Commissioner to Commissioner. That is not desirable. There is a hard line to draw. Time will tell on what side of the line Div 165 falls.
Justice Graham Hill is a Judge of the Federal Court of Australia and Presidential Member of the Administrative Appeals Tribunal. He has had a distinguished legal career. He was previously a Queens Counsel and was also a partner at Parish Patience & McIntyre and Dawson Waldron Solicitors. He has served as Councillor and National President of the Taxation Institute of Australia and Councillor of the Australian Tax Research Foundation. Justice Hill is also currently a Challis lecturer in taxation at the Law School of Sydney University as well as a Patron of the Australasian Tax Teachers Association. He is also Senior Member of the Journal of Australian Taxation’s Advisory Board.
[*] This article is based on a paper presented at the 11th Annual Workshop on the GST, conducted by the Australian Taxation Studies Program of the University of New South Wales, held in Noosa in July 1999.
[1] Review of Business Taxation, A Strong Foundation (1998) 87.
[2] See eg, WT Ramsay Ltd v IRC [1981] UKHL 1; [1982] AC 300.
[3] See John v FC of T (1989) 166 CLR 417.
[4] In defence of the English position, it may be noted that in IRC v McGuckian [1997] UKHL 22; [1997] 3 All ER 817, the House of Lords was at pains to point out that the doctrine was merely an orthodox example of statutory interpretation.
[5] [1957] HCA 99; (1957) 96 CLR 577, 596.
[6] Acts Interpretation Act 1901 (Cth), s 15AA.
[7] The GST Act, s 182-10(2). Legislative purpose is also a factor to be taken into account in determining the entity's purpose under the GST Act, s 165-15.
[8] [1957] HCA 2; (1957) 100 CLR 66.
[9] Schedule 1A now contains in item 27 of the GST Act the case where bread will not be GST free - namely where it is produced "with a sweet filling or coating". This is not exclusive, however, since sandwiches are included among the lists of prepared food which is not GST free.
[10] (1994) 181 CLR 359 ("Peabody").
[11] Ibid 385.
[12] See Aluminium Industrie Vaasen BV v Romalpa Aluminium Ltd [1976] 1 WLR 676.
[13] [1986] FCA 35; (1986) 64 ALR 97, 106.
[14] [1993] FCA 74; (1993) 40 FCR 531, 543; 93 ATC 4104, 4113-4114. It was cited with apparent approval by Sackville J in CC (New South Wales) Pty Limited (in liq) v FC of T 97 ATC 4123, 4147 ("CC Pty Ltd").
[15] CC Pty Ltd 97 ATC 4123, 4147.
[16] [1996] HCA 34; (1996) 186 CLR 404, 420 ("Spotless").
[17] Ibid.
[18] Ibid 416.
[19] Ibid.
[20] See eg, Barnsdall v FC of T 88 ATC 4565, 4568 ("Barnsdall"), Trustee for the Estate of the late AW Furse No 5 Will Trust v FC of T 91 ATC 4007 ("Furse") and Granby Pty Ltd v FC of T 95 ATC 4240, 4243-4244 ("Granby").
[21] Furse 91 ATC 4007, 4015.
[22] See Peabody (1994) 181 CLR 359, 542, and CC Pty Ltd 97 ATC 4123, 4147 (per Sackville J).
[23] Spotless [1996] HCA 34; (1996) 186 CLR 404, 421-422.
[24] See eg, s 67 of the Fringe Benefits Tax Assessment Act 1986.
[25] Spotless [1996] HCA 34; (1996) 186 CLR 404, 416.
[26] See Pt IVC of the Taxation Administration Act 1953 ("TAA").
[27] Fletcher v FC of T 88 ATC 4834.
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URL: http://www.austlii.edu.au/au/journals/JlATax/1999/22.html