GST margin scheme and avoidance appeals partly allowed Print E-mail

In a majority two-to-one decision, the Full Federal Court has partially allowed both the taxpayer's appeal and Commissioner's cross-appeal from a 2010 decision of the AAT in which it was found that the taxpayer was entitled to use the margin scheme for some acquisitions of property, but did not have approved valuations for others, and that the GST anti-avoidance provisions did not apply: Unit Trend Services Pty Ltd v FCT [2012] FCAFC 112 (Full Federal Court, Dowsett, Bennett and Greenwood JJ, 17 August 2012).

Background

The taxpayer was the representative member of a GST group, which develops commercial and residential properties. In December 1998, one of the companies within the group purchased land and commenced construction of three residential towers. During 2003 and 2004, the taxpayer made a decision to transfer partly completed towers from that entity to two related companies. The taxpayer applied the margin scheme in calculating its GST liability on the sale of the residential units, using the purchase price paid by the two related entities to the original entity as the consideration for the acquisition.

The Commissioner originally increased the GST liability by some $21m on the basis of an incorrect application of the margin scheme, and imposed some $5m in shortfall penalties.

At first instance, in AAT Case [2010] AATA 497, the AAT held that the taxpayer was entitled to use the margin scheme for settlements of sales on or before 16 March 2005, but did not have approved valuations for settlements of sales after that date - albeit the AAT allowed the taxpayer time to obtain such approved valuations. At the same time, the AAT held that the GST anti-avoidance provisions did not apply to negate any GST benefits obtained from using the margin scheme in respect of supplies made on or before 16 March 2005, and also in respect of supplies made by the two related companies.

Decision

The majority of the Full Federal Court found that for supplies made on and after 17 March 2005, the margin was to be calculated under s 75-11(2) of the GST Act as the two related companies acquired their respective interests as members of the same GST group. As a result, the margin was to be calculated as being the excess of the supply price over an approved valuation for supplies on and after 17 March 2005, on the basis of the requirements in MSV2000/2, MSV2005/1 and MSV2005/3.

The majority then found that in relation to the application of the GST anti-avoidance provisions, for all settlements up to and including 16 March 2005, Div 165 did not operate because it was excluded as the GST benefit on the end purchaser transactions was attributable to relevant choices made by the taxpayer. In doing so the majority considered the following matters:

  • whether a GST benefit was obtained by an entity from a scheme that was "attributable to" the making by an entity of a choice, election, etc expressly provided for by the GST law;
  • the notion of "attributable to" in the context of the GST Act;
  • whether the GST benefit should be attributable to the relevant choices or attributable to the scheme; and
  • the choices embodied in a particular scheme giving rise to a GST benefit.

Dissenting, Dowsett J held that the appeal and cross-appeal should be dismissed.

Finally, the majority found that the imposition of shortfall penalties ought to be set aside, and that the matter be remitted to the Commissioner with a direction to allow the objection. However, the Court ordered that having regard to the reasons for its judgment, the parties be directed within seven days to propose orders for the disposition of the appeal and cross-appeal by lodging relevant draft orders.

 

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