On 17 August 2012, the Full Federal Court ruled in favour of the taxpayer in Unit Trend Services Pty Ltd v Commissioner of Taxation [2012] FCAFC 112, holding that the taxpayer’s elections did not contravene the anti-avoidance provisions of the A New Tax System (Goods and Services Tax) Act 1999 (“GST Act”).

The Full Federal Court’s decision deals with when the anti-avoidance provisions in Division 165 of the GST Act will be excluded from applying because the “GST benefit” is “attributable to a choice, election, application or agreement” that is expressly provided for by the GST law.

The Full Federal Court’s decision also concerns the application of certain legislative instruments in relation to “an approved valuation” for the purposes of the margin scheme under Division 75 of the GST Act.

Background

In 2004, Simnat Pty Ltd (“Simnat”) sold a partially constructed residential tower to each of Blesford Pty Ltd (“Blesford”) and Mooreville Investments Pty Ltd (“Mooreville”). Both towers were on a block of land purchased by Simnat prior to 1 July 2000, were sold for their market value as at the date of sale and were transferred as GST-free supplies of going concerns. Blesford and Mooreville completed any apartment sales previously entered into by Simnat and continued the process of selling the remaining units to third party purchasers.

Unit Trend Services Pty Ltd (the “Taxpayer”), as nominated representative member of the GST group that included Simnat, Blesford and Mooreville, chose to apply the margin scheme when calculating its GST liability for the supply of the units in the two towers to third party purchasers. The margin was calculated as the difference between the purchase prices paid by Blesford and Mooreville to Simnat and the value of the end sales to third party purchasers (applying an apportionment of the acquisition price to each unit).

The Commissioner claimed that the Taxpayer had obtained a “GST benefit” (as defined in section 165-10(1) of the GST Act) of approximately $21 million by its actions and made an anti-avoidance declaration under the GST Act negating that “GST benefit”.

The Commissioner also claimed that the Taxpayer had incorrectly calculated the applicable margin in applying the margin scheme.

The anti-avoidance provisions

In a 2:1 decision, the Full Federal Court found that, but for the making of the choice or election to transfer the towers as GST-free supplies in conformity with the GST Act, a GST liability would have arisen by reason of the settlement of the transfer of each tower. Accordingly, the Court held that the anti-avoidance provisions did not apply.

The Commissioner contended that the Taxpayer obtained a GST benefit from a scheme involving the transferring of the towers by Simnat to Blesford and Mooreville in a manner which did not attract GST so that the margins (and correspondingly, the GST) that were calculated on the end sales to the third party purchasers were smaller than the margins that would otherwise have applied had Simnat completed the sales.

At first instance, the Administrative Appeals Tribunal (“AAT”) held that legislation that amended the GST Act (“Amending Legislation”) resulted in no GST benefit arising from 17 March 2005 from the transfer of the towers to Blesford and Mooreville. This was because the calculation of the margin from that date would be calculated on the same basis regardless of whether Blesford/Mooreville or Simnat had supplied the units. Further, regarding the sale of units by Blesford and Mooreville on their own behalf, the AAT accepted the Taxpayer’s submissions that the towers were transferred to Blesford and Mooreville for asset protection purposes and not for the purpose of getting a GST benefit from a scheme. The AAT accordingly held that the anti-avoidance provisions only applied to the sales of the units up until and including 16 March 2005 and only in respect of those sales that were completed by Blesford and Mooreville on Simnat’s behalf.

On appeal, the Taxpayer argued that any GST benefit from the identified scheme was attributable to the making of a choice expressly provided for by the GST law, which (under section 165-5(1)(b) of the GST Act) therefore excluded the operation of Division 165. As an aside, the Taxpayer did not dispute that the Commissioner had identified a scheme for the purposes of Division 165.

On this point, the Commissioner contended that the GST benefit arose out of a combination of factors including the transfer of ownership of the towers to Blesford and Mooreville and sales by those companies under the margin scheme contracts. The Commissioner relied on Walters v Federal Commissioner of Taxation [2007] FCA 1270, a Full Federal Court decision which concerned the construction of the phrase “attributable to” in the context of section 177C(2)(a) of the 1936 Act to argue that, where a GST benefit arises as a result of more than a mere election, section 165-5(1)(b) does not apply.

The Full Federal Court upheld the ruling of the AAT that, for the purposes of section 165-5(1)(b), the notion of “attributable to” means that the GST benefit must be explained by a choice, election, application or agreement in the sense of an “allocative concept” in which “the GST benefit belongs to or is directly explained by that choice or election, etc”. However, the Full Federal Court overturned the decision of the AAT and held that, on the facts, the GST benefit that derived from the scheme was “answerable to, explained by or belong[ed] to” the choices or elections made by the Taxpayer.

In arriving at this conclusion, the majority expressly sought to apply a purposive approach in interpreting section 165-5(1)(b) and considered that the statutory context required a narrower construction of the words “attributable to” than the approach that had been applied in other cases (e.g. legislation with wider beneficial aims such as conferring rights and entitlements to compensation). The majority held that section 165-5(1)(b) is not “a broadly based enabling provision” of the kind found in those cases and distinguished the construction of the words “attributable to” in those cases by construing the statutory purpose of section 165-5(1)(b) as being to exclude the operation of the anti-avoidance division in order to:

“preserve the entitlement to and effect of the specific legislative options, choices, elections etc. expressly provided for under a GST law giving rise to benefits that might otherwise be defeated by an unintended operation of Division 165.”

The calculation of the margin

The Taxpayer claimed that, for the period from 17 March 2005 to 30 November 2005, there was no legislative instrument in place prescribing the requirements for an approved valuation for the margin scheme that applied to end purchaser transactions. Accordingly, the Taxpayer argued that the relevant provisions of the GST Act could not operate and either no GST was payable on the transactions or that the amount of the GST should have been calculated in accordance with Blesford and Mooreville’s GST inclusive market value of their relevant interest at the time of their acquisition of that interest. The Full Federal Court upheld the AAT’s finding that, under Schedule 6 of the Amending Legislation, legislative instruments that were in existence as at 17 March 2005 apply to approved valuations after that date, notwithstanding that their express provision may only provide that they apply to acquisitions made prior to 1 July 2000.