By Michael Evans
The High Court has had its first opportunity to decide a case on the general anti-avoidance rule in Australia’s Goods and Services Tax (GST) law, enacted more than a decade ago. In Commissioner of Taxation v Unit Trend Services Pty Ltd  HCA 16, the High Court unanimously decided that the Commissioner can apply the GST anti-avoidance rule, even when a taxpayer makes specific choices or elections to engage in corporate structures, decisions and deals that are expressly allowed in the law.
The decision confirms that the GST anti-avoidance rule in div 165 of the GST law (and the income tax anti-avoidance rule on which it is based) gives the Commissioner of Tax a broad power to deal with avoidance schemes. Importantly, it confirms that, as intended by parliament, s 165-5(1)(b) of the GST law limits the protection for taxpayers that could arise from such statutory choices, agreements and elections contained in the GST law. This broader approach replaces the narrower ‘choice principle’ that was found to apply in earlier tax anti-avoidance rules such as former s 260 of the Income Tax Assessment Act 1936 (Cth). The ‘choice principle’ as explained in W P Keighery Pty Ltd v Federal Commissioner of Taxation  HCA 2, was that the anti-avoidance rule cannot be interpreted to remove from taxpayers their choices to order their affairs as they saw fit.
What was Unit Trend about?
The Unit Trend case arose from elections, choices and ‘deals’ made by members of the Unit Trend GST group which was involved in property development. These choices by members of the Unit Trend GST group had the effect of reducing the GST liability on the sale of two ‘towers’ of residential apartments being built on the Gold Coast.
After forming the Unit Trend GST group, different members of the Unit Trend GST group were allocated different roles in the property development.
One member of the Unit Trend GST group (Company S) was building the towers. Company S then sold the towers to other members of the Unit Trend GST group, Companies B and M, when the construction was at an advanced stage.
The group members made several elections, choices or deals under the GST law that, in combination, gave Unit Trend a GST benefit by reducing the amount of GST payable on the ultimate sales of individual residential apartments:
- The choice to form the Unit Trend GST group of which Companies S, M and B were members;
- The sale by Company S to Companies B and M was between members of the same GST group and so was excluded from being a taxable supply under s 48-40(2) of the GST law;
- Companies S, B and M agreed to treat these sales as a supply of a going concern under s 38-325 of the GST law, which meant it was free of GST; and
- In making their final sales of the individual residential apartments, Companies B and M elected to apply a special rule called the margin scheme (meaning that GST was payable on the difference between the purchase and sale price, rather than on the sale price alone).
Applying the GST anti-avoidance rule to negate GST benefits
The anti-avoidance rule in div 165 of the GST law operates if a taxpayer (the alleged tax avoider) gets a GST benefit from a scheme and:
- The entity entered into the scheme with the sole or dominant purpose of getting a GST benefit from the scheme; or
- The principal effect of the scheme is that the avoider gets the GST benefit from the scheme, directly or indirectly.
To decide if these purpose or effect tests are satisfied, 12 matters must be objectively considered by the Commissioner (set out in s 165-15 of the GST law).
If the anti-avoidance rule operates, the Commissioner has power to negate the GST benefit (under s 165-40 of the GST law) by making a declaration setting out, either:
- The amount that is (and has been at all times) the avoider’s net amount for a specified tax period that has ended; or
- The amount that is (and has been at all times) the amount of GST on a specified taxable importation that was made by the avoider.
An entity gets a GST benefit, as defined in s 165-10, if:
- An amount that is payable by the entity under the GST law is, or could reasonably be expected to be, smaller than it would be apart from the scheme, or due later in time; or
- An amount that is payable to the entity (e.g., a refund of input tax credits) under the GST law is, or could reasonably be expected to be, larger than it would be apart from the scheme, or be received earlier in time.
The statutory choice provision in the GST anti-avoidance rule
The Unit Trend GST group paid less GST following the choices and elections that it made, that were specifically allowed under the GST law (including forming a group, and selling the towers within the group). The question is, can the anti-avoidance rule apply in this situation?
The High Court answered yes. The Unit Trend case specifically concerns s 165-5(1)(b) of the GST law. This rule sets the following precondition to the Commissioner negating a GST benefit:
the GST benefit is not attributable to the making, by any entity, of a choice, election, application or agreement that is expressly provided for by the GST law.
This rule requires that ‘the GST benefit is not attributable to the making … of a choice’. The High Court focused on the ‘is not attributable’ terminology in its interpretation of the statutory choice saving provision in div 165. This language contrasts with the language in the income tax anti-avoidance rule, s 177C(2) of the Income Tax Assessment Act 1936 (Cth), which provides that a tax benefit that ‘is attributable’ to the making of the choice is not a tax benefit obtained by a taxpayer in connection with a scheme.
There are two parts of the ‘statutory choice saving provisions’ in s 165-5:
- Under s 165-5(1)(b), a precondition to the Commissioner negating a GST benefit is that the GST benefit that an avoider gets from a scheme is not attributable to the making of a choice, election, application or agreement that is expressly provided for by the GST law; and
- Moreover, under s 165-5(3), the GST benefit is not to be attributable to a choice, election, application or agreement of a kind referred to in paragraph 165-5(1)(b) if the scheme was entered into for the sole or dominant purpose of creating a circumstance or state of affairs necessary to enable the choice, election, application or agreement to be made.
Neither of these provisions were a part of the original GST Bill introduced into Parliament on 2 December 1998. Section 165-5(1)(b) was included during the passage of the Bill. Section 165-5(3) was inserted by the Tax Laws Amendment (2008 Measures No 5) Act 2008 with effect to choices and elections made after 9 December 2008.
In Unit Trend, the choices were made before 9 December 2008, so s 165-5(3) did not apply.
In Unit Trend, the High Court explained the inclusion of s 165-5(1)(b) as follows:
The terms of the [supplementary explanatory memorandum] confirm that the mischief at which s 165-5(1)(b) was directed was the possibility that, because of the wide definition of ‘scheme’, Div 165 might bring within its reach a GST benefit, the getting of which is attributable to the making of a choice expressly provided for by the GST Act. It is evident that the insertion of s 165-5(1)(b) was intended to ensure that the GST Act did not contradict itself by allowing the general anti-avoidance provisions of Div 165 to trump specific provisions of the Act which allow an entity to get a GST benefit.
That view is confirmed by s 165-1 of the GST Act. Section 165-1 is an ‘explanatory section’ within the meaning of s 182-10(1) of the GST Act. … When what became s 165-5(1)(b) was added to the GST Bill, s 165-1 was amended to include in the explanation of what Div 165 is about the following:
‘This Division is aimed at artificial or contrived schemes. It is not, for example, intended to apply to:
an exporter electing to have monthly tax periods in order to bring forward the entitlement to input tax credits; …
The GST benefit, the scheme purpose and effect
The Administrative Affairs Tribunal of Australia identified the scheme at issue in the Unit Trend case to include the intra-group sales of the towers. It found that, absent the scheme, Company S would have completed the development of the properties and sold the apartments itself under the margin scheme, rather than on-selling the towers to Companies B and M. It seems that this was the counterfactual — but there was no detailed discussion of whether there was any other alternative. I was left with the impression that the Tribunal considered that the interposition of the intra-group sales was the essence of a scheme and that, without the scheme, the development and sale would have been completed by Company S.
This scheme found by the Tribunal was adopted by the High Court in its analysis. Under this scheme, the amount of GST payable by Unit Trend is less than it would be without the scheme because of the intra-group sales by Company S to Companies B and M. The High Court confirmed the Tribunal’s finding that the GST benefit from the scheme was the benefit obtained as a result of the intermediate sales by Company S to Companies B and M.
The Tribunal found that:
the dominant purpose of those who entered into and carried out the scheme was to secure the GST benefit; and the principal effect of the scheme was the achieving of the GST benefit.
Not attributable to a choice …
In the Full Federal Court, the majority found that the GST benefit was covered by the exclusion contained in s 165-5(1)(b) of the GST law. Bennett and Greenwood JJ approached the issue by posing the question:
Section 165-5(1)(b) asks whether the GST benefit obtained from the scheme is caused in an allocative sense by the choices made by the taxpayer in the sense of belonging to the choices, elections or agreements expressly provided for by the GST law.
The High Court unanimously rejected the Full Federal Court’s view that attribution to a choice is equivalent to a causal link to the choice. In particular, the High Court noted that the terminology in s 165-5(1)(b) was that the GST benefit ‘is not attributable’ to the making of the choice. The Full Federal Court had proceeded on the basis that the taxpayer was spared from the operation of div 165 if the GST benefit was attributable to the making of the choice.
The High Court disagreed:
When s 165-5(1)(a) and (b) are read together, s 165-5(1)(b) may be read exegetically as: ‘the getting of the GST benefit by the avoider from the scheme is not attributable to the making of a choice’, and it can be seen that the ‘non-attribution’ with which s 165-5(1)(b) is concerned is the absence of statutory entitlement to get that GST benefit by the making of a choice authorised by the GST Act. …
On this analysis, the words ‘not attributable to’ in s 165-5(1)(b) do not invite an inquiry as to causality to differentiate the effects of the scheme from the exercise of a statutory choice.
Once the GST benefit from the scheme is identified to arise from the sale by Company S of the properties to Companies B and M, it can be seen that the GST benefit is not attributable to a choice or agreement under the GST law (including the choice to apply the margin scheme). The choices to form a GST group and sale of the towers as a going concern are relieved from GST under specific provisions of the GST law. But, the GST savings arising from those choices are not the GST benefit that is at issue in the scheme.
The final choice, which was the election by Companies B and M to apply the GST margin scheme to the ultimate sale of individual apartments, allowed Companies B and M to access a deduction in determining the value of the goods being sold upon which GST was calculated. This was a GST benefit, as it limited Unit Trust’s GST liability. But this GST benefit was not attributable to the choice of applying the margin scheme. It was a result of the previous intra-group and going concern choices. That is, Unit Trust got this GST benefit because of its earlier intra-group dealings. It would not have got the benefit in applying the margin scheme without these earlier dealings because the margin between the relevant sale and purchase price would not have been as advantageous.
What if there are multiple elections?
In the Full Federal Court, Justice Dowsett (in dissent) noted that:
Unit Trend’s submission seems to be that the GST benefit should be seen as the product of a number of choices expressly provided for by the GST law, and that the benefit is therefore attributable to them collectively.
The High Court found that the GST benefit did not arise from any of the three elections at issue. So, the High Court did not have to decide whether the reference in s 165-5(1)(b) to ‘a choice’ includes multiple choices each expressly authorised by the GST Act.
The question of the effect of multiple choices must be left for later day.
Where does Unit Trend take us?
It is worthwhile to reflect upon the state of the taxation law before the 1981 amendments to introduce the general income tax anti-avoidance rule in pt IVA of the Income Tax Assessment Act 1936 (Cth), replacing former s 260 of that Act.
In Cridland v Federal Commissioner of Taxation  HCA 61, Justice Mason of the High Court (as he then was) explained the former position as follows:
[The choice principle] is not confined to cases in which the Act offers two alternative bases of taxation; it proceeds on the footing that the taxpayer is entitled to create a situation by entry into a transaction which will attract tax consequences for which the Act makes specific provision and that the validity of the transaction is not affected by s 260 merely because the tax consequences which it attracts are advantageous to the taxpayer and he enters into the transaction deliberately with a view to gaining that advantage.
The Unit Trend case confirms that the GST general anti-avoidance rule has removed the ‘choice principle’ as it was found to operate under former s 260 of the Income Tax Assessment Act 1936. The authority of the Commissioner to negate a GST benefit is only constrained where, and to the extent that, the identified tax benefit arises directly from a statutory election or choice provided by the GST law. This is a saving provision that, it seems, will only be applied to protect the taxpayer, where this would be consistent with the policy and object of the provision that grants the choice.
The decision of the High Court confirms the correctness of an earlier AAT case on div 165, VCE v Commissioner of Taxation  AATA 821. In both VCE and Unit Trend, the taxpayers took actions that had advantageous tax consequences and which were entered into ‘deliberately with a view to gaining that advantage’.
The High Court decision in Unit Trend also supports the view that the GST general anti-avoidance rule is focused on the objective purpose or effect of the arrangement and not the motive or subjective purpose of the taxpayer.
Michael Evans is a Senior Fellow (Melbourne Law Masters) at the Melbourne Law School.
AGLC3 Citation: Michael Evans, ‘GST — It’s Not a Matter of Choice: Commissioner of Taxation v Unit Trend Services Pty Ltd’ on Opinions on High (5 July 2013) <http://blogs.unimelb.edu.au/opinionsonhigh/2013/07/05/evans-unittrend/>.