High Court clarifies operation of aspects of the GST anti-avoidance provisions
Commissioner of Taxation v Unit Trend Services Pty Ltd  HCA 16
1 May 2013: The High Court has unanimously allowed the Commissioner’s appeal in the Unit Trend dispute, providing important guidance about the application of certain aspects of the GST anti-avoidance provisions in Division 165 of the GST Act.
The dispute arose in the context of a property development project that involved:
- The pre-GST acquisition of land
- Works to construct three apartment towers on the land
- Exercise of a statutory choice to form a GST group
- The subsequent sale in 2004 of two of the (nearly complete) towers to two other members of the GST group (each sale also treated as GST-free pursuant to an agreement that there was a ‘going concern’ supplied)
- Sales to end-purchasers of completed apartments in respect of which the GST liability was calculated by choosing to apply the GST ‘margin scheme’.
The intermediate sale of the two near-complete towers had the effect of uplifting the cost base of the towers, thereby reducing the margin on which the GST on the apartment sales was calculated. Pursuant to this scheme, the taxpayer’s GST liability in respect of the apartment sales was about $21 million less than would have been the case without the intermediate sale of the towers (‘GST benefit’).
The taxpayer challenged the Commissioner’s decision to negate the GST benefit under Subdivision 165-B. Critical to the dispute was s.165-5(1)(b), which had the effect of making the anti-avoidance provisions inapplicable if the GST benefit obtained from a scheme was “…attributable to the making…of a choice, election, application or agreement that is expressly provided for by the GST law…”.
High Court’s decision
The High Court expressly rejected the majority view of the Full Federal Court that s.165-5(1)(b) involves a question of causation and is satisfied if there is ‘some connection’ between the GST benefit obtained and the exercise of a statutory choice, election, application or agreement (‘choice’).
Instead, the High Court held that s.165-5(1)(b) serves to exclude a GST benefit from the general operation of Division 165 only in instances where there is a direct link between that benefit and the relevant choice. The purpose of the provision, the High Court said, is to ensure that the general anti-avoidance provisions of Division 165 do not trump specific provisions which entitle a taxpayer to get a GST benefit by making a particular statutory choice.
The High Court concluded that the GST benefit the taxpayer got from the scheme was not attributable to any of the statutory choices it had made. Rather, the GST benefit was attributable to the commercial election or choice to make the intermediate sale of the near-complete towers when the value of the property had very substantially increased. Accordingly, the Commissioner was entitled to rely on Division 165 to negate the GST benefit.
This is the first time the High Court has ruled on the GST anti-avoidance provisions. The decision provides taxpayers and the ATO with greater clarity about how s.165-5(1)(b) applies and the limited circumstances in which it might quarantine a GST benefit from the operation of the anti-avoidance provisions. Unlike the taxpayer in Unit Trend, however, taxpayers must now also take into account s.165-5(3) (added in 2008) which ensures that Division 165 applies to cases where the scheme was entered into for the purpose of generating the statutory choice to which the GST benefit is attributable.
Contrary to expectations, the High Court found it unnecessary to decide whether the reference in s.165-5(1)(b) to ‘a choice’ includes multiple choices, each expressly authorised by the GST law.
Contact one of our Indirect Tax specialists to discuss the Unit Trend decision and its implications in more detail.