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CASE 14/2006

Members:
SA Forgie DP

Tribunal:
Administrative Appeals Tribunal

MEDIA NEUTRAL CITATION: [2006] AATA 821

Decision date: 26 September 2006

SA Forgie (Deputy President)

1. Under the provisions of A New Tax System (Goods and Services Tax) Act 1999 (GST Act), the applicant, VCE, claimed an input tax credit of $70,000 in the tax period 1 to 30 April 2003 (April tax period). It did so after it entered an agreement to purchase a property for $770,000 payable over an approximately 15 year period (Agreement). Ownership of the property will vest in VCE on payment of the final payment on 30 June 2018. The respondent, the Commissioner of Taxation (Commissioner), disallowed VCE's claim under the anti-avoidance provisions in Division 165 of the GST Act. As a consequence, the Commissioner made a debit adjustment of $70,000 to VCE's net amount so that the net amount for the April tax period changed from $70,000 to $0. He also imposed a penalty of $35,000. I have decided that the Commissioner was correct and have affirmed the Commissioner's decision dated 15 March 2005.

The issues

2. In deciding this matter, I must consider:

  • • whether the anti-avoidance provisions in Division 165 of the GST Act disallow the input tax credit of $70,000 claimed by VCE; and
  • • if so, whether the penalty on the shortfall amount of $70,000 was properly imposed at the rate of 50%.

Legislative framework

General scheme regarding GST: imposition of GST

3. With the commencement of the GST Act on 1 July 2000, a Goods and Services Tax (GST) became payable on taxable supplies and taxable importations.[1] s 7-1 In the following paragraphs, I summarise the scheme in only the broadest terms and omit the many qualifications that apply to the general principles. In this case, for example, only a "taxable supply" is relevant. In the language of the GST Act, there is:

"… a taxable supply if:

  • (a) you make the supply for consideration; and

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  • (b) the supply is made in the course or furtherance of an enterprise that you carry on; and
  • (c) the supply is connected with Australia; and
  • (d) you are registered or required to be registered.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed."[2] s 9-5

4. A "supply" means "… any form of supply whatsoever."[3] s 9-10(1) Without limiting the breadth of that meaning, ss 9-10(2)(d) and (e) provide that:

"… supply includes …:

  • (d) a grant, assignment or surrender of real property;
  • (e) a creation, grant, transfer, assignment or surrender of any right".

Whether the act constituting supply is lawful or not is irrelevant.[4] s 9-10(3)

5. Section 9-20 is concerned with the meaning of an "enterprise". In so far as it is relevant, it provides:

  • "(1) An enterprise is an activity, or series of activities, done:
    • (a) in the form of a business; or
    • (b) in the form of an adventure or concern in the nature of trade; or
    • (c) on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property; or
    • (d) …
    • (e) …
    • (f) …
    • (g) …"

The fact that the activities of an entity are limited to making supplies to members of the entity does not prevent those activities from being in the form of a business or in the form of an adventure or concern in the nature of trade.[5] s 9-20(3)

6. Section 9-25 provides for the occasions on which a supply of goods is connected with Australia. In particular, s 9-25(4) provides that:

"A supply of real property is connected with Australia if the real property, or the land to which the real property relates, is in Australia."

7. "Consideration" is also defined in wide terms. In so far as it is relevant, it:

"… includes:

  • (a) any payment, or any act or forbearance, in connection with a supply of anything; and
  • (b) any payment, or any act or forbearance, in response to or for the inducement of a supply of anything.
  • (2) It does not matter whether the payment, act or forbearance was voluntary, or whether it was by the recipient of the supply."[6] s 9-15

8. Part 2-5 is concerned with registration. A person is required to be registered under the GST Act if carrying on an enterprise and the person's annual turnover meets the registration turnover threshold.[7] s 23-5 In the case of a person other than a non-profit body and in the absence of regulations increasing it, the registration turnover threshold is $50,000.[8] s 23-15(1) A person may be registered if carrying on an enterprise, or intending to carry on an enterprise from a particular date, whether or not the turnover is above or below the registration turnover threshold.[9] s 23-10

9. Section 9-30 provides for supplies that are GST-free or input taxed. A supply is GST-free if it is either GST-free under Division 38 or under a provision of another piece of legislation or it is a supply of a right to receive a supply that would be GST-free.[10] s 9-30(1) A supply is input taxed if it is either input taxed under Division 40 or another piece of legislation or it is a supply of a right to receive a supply that would be input taxed.[11] s 9-30(2) Particular provision is made for supplies that would be both GST-free and input taxed but they are not relevant in this matter.[12] s 9-30(3) Nor are the special rules relating to taxable supplies.[13] s 9-39

10. The amount of GST on a taxable supply is an amount that is 10% of the value of the taxable supply.[14] s 9-70 Putting aside the taxable supply of a luxury car, the value of a taxable supply is:

"(1) The value of a * taxable supply is as follows:

Price   × 10
11

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where:

price is the sum of:

  • (a) so far as the * consideration for the supply is consideration expressed as an amount of * money-the amount (without any discount for the amount of GST (if any) payable on the supply); and
  • (b) so far as the consideration is not consideration expressed as an amount of money-the * GST inclusive market value of that consideration.

Example: You make a taxable supply by selling a car for $22,000 in the course of carrying on an enterprise.
  The value of the supply is:
  $22,000   × 10 = $20,000
  11

The GST on the supply is therefore $2,000 (i.e. 10% of $20,000)."[15] s 9-75

In so far as the consideration for the supply is consideration expressed as an amount of money and in the simplest case, the "price" in that equation is the amount without any discount for the amount of any GST payable on the supply.[16] s 9-75

11. Division 29 is concerned with attribution to tax periods be it attribution of GST on taxable supplies, input tax credits or adjustments. In so far as the attribution of GST is concerned for a person accounting on a cash basis, s 29-5(2) applies. If all of the consideration is received for a taxable supply, the GST on the supply is attributable to that tax period.[17] s 29-5(2)(a) If, in a tax period, part of the consideration is received, GST on the supply is attributable to that tax period but only to the extent that consideration is received in that tax period.[18] s 29-5(2)(b) If none is received, no GST on the supply is attributable to that tax period.[19] s 29-5(2)(c)

General scheme regarding GST: input tax credits

12. A person is entitled to an input tax credit when making creditable acquisitions. A creditable acquisition is made when a person acquires anything solely or partly for a creditable purpose, the supply of the thing to that person is a taxable supply, the person is liable to provide consideration for the supply and the person is registered or required to be registered.[20] s 11-5 "An acquisition is any form of acquisition whatsoever."[21] s 11-10(1) Without limiting that meaning, the word "acquisition" includes "an acceptance of a grant, assignment or surrender of real property".[22] s 11-10(2)(d)

13. A person acquires a thing for a "creditable purpose" to the extent that person acquires it in carrying on that person's enterprise.[23] s 11-15(1) A person does not acquire a thing for a creditable purpose to the extent that the acquisition relates to making supplies that would be input taxed or the acquisition is of a private or domestic nature. The GST Act qualifies these provisions but the qualifications are not relevant in this case.

14. A person is entitled to the input tax credit for any creditable acquisition that the person makes.[24] s 11-20 Section 11-25 provides that:

"The amount of the input tax credit for a creditable acquisition is an amount equal to the GST payable on the supply of the thing acquired. However, the amount of the input tax credit is reduced if the acquisition is only partly creditable."

Acquisitions that are partly creditable are provided for in s 11-30. They will be of that character if they are either made for a purpose that is only a creditable purpose in part or if the person making the acquisition provides, or is liable to provide, only part of the consideration for the acquisition.

General scheme regarding GST: working out the net amount that is payable by or to a person

15. A net amount is worked out in respect of each person who, for the purposes of this case, is registered. The net amount becomes the amount that is payable either by the person to the Commonwealth or by the Commonwealth to the person for that tax period.[25] s 17-1 The tax period is generally a three month period unless a person elects to have one month tax periods or the Commissioner determines otherwise under Division 27 of Part 2.6: s 27-5. The "net amount" for a tax period is worked out by deducting input tax credits from the GST.[26] s 17-5(1) The net amount may be increased or decreased if there are any adjustments.[27] s 17-5(2) Payment of any net amount of GST that a person owes must be paid in accordance with Division 33 of Part 2-6. If the net amount is less than zero, the Commissioner must, on behalf of the Commonwealth, pay that amount in accordance with the terms of Division 35 to the person on lodging a GST return.[28] ss 35-5 and 35-10

16. 

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Division 29 of Part 2-6 specifies the tax periods to which a person's taxable supplies, creditable acquisitions, creditable importations and adjustments are attributable.[29] A person who is registered or required to be registered must give the Commissioner a GST return for each tax period within the time specified in: ss 31-5, 31-8 and 31-10. In so far as it is relevant to this case, s 29-5(1) provides that the GST payable by a person on a taxable supply is attributable to the tax period in which any of the consideration is received for the supply.[30] s 29-5(1) In the simplest case, the input tax credit to which a person is entitled for a creditable acquisition is attributable to the tax period in which the person provides any of the consideration for the acquisition.[31] s 29-10(1)(a) If, before a person provides any of the consideration, an invoice is issued in relation to the acquisition, the input tax credit is attributable to the tax period in which the invoice is issued.[32] s 29-10(1)(b) If a person accounts on a cash basis, the attribution of input tax credit is different. In relation to a person who pays part only of the consideration for a creditable acquisition in a tax period, the input tax credit for the acquisition is attributable to that tax period but only to the extent that the person provided the consideration in that tax period.[33] s 29-10(2)(b)

Anti-avoidance provisions in relation to the GST scheme

17. Division 165 of Part 4-7 is headed "Anti-avoidance" and its object:

"… is to deter schemes to give entities benefits by reducing GST, increasing refunds or altering the timing of payment of GST or refunds.

If the dominant purpose or principal effect of a scheme is to give an entity such a benefit, the Commissioner may negate the benefit an entity gets from the scheme by declaring how much GST or refund would have been payable, and when it would have been payable, apart from the scheme.

This Division is aimed at artificial or contrived schemes. …"[34] s 165-1

An "entity" is defined in wide terms to mean, among others, an individual or a body corporate.[35] ss 195-1 and 184-1

18. Division 165 of Part 4-7 of the GST Act operates if:

  • "(a) an entity (the avoider) gets or got a GST benefit from a scheme; and
  • (b) 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, the wine tax law or the luxury car tax law; and
  • (c) taking account of the matters described in section 165-15, it is reasonable to conclude that either:
    • (i) an entity that (whether alone or with others) entered into or carried out the scheme, or part of the scheme, did so with the sole or dominant purpose of that entity or another entity getting a GST benefit from the scheme; or
    • (ii) the principal effect of the scheme, or part of the scheme, is that the avoider gets the GST benefit from the scheme directly or indirectly; and
  • (d) the scheme:
    • (i) is a scheme that has been or is entered into on or after 2 December 1998; or
    • (ii) is a scheme that has been or is carried out or commenced on or after that day (other than a scheme that was entered into before that day).
  • (2) It does not matter whether the scheme, or any part of the scheme, was entered into or carried out inside or outside Australia."[36] s 165-5(1)-(2)

19. Section 165-10 sets out the occasions on which an entity "gets a GST benefit from a scheme". That occurs if:

  • "(a) an amount that is payable by an entity under this Act apart from this Division is, or could reasonably be expected to be, smaller than it would be apart from the scheme or a part of the scheme;
  • (b) an amount that is payable to the entity under this Act apart from this Division is, or could reasonably be expected to be, larger than it would be apart from the scheme or a part of the scheme; or
  • (c) all or part of an amount that is payable by the entity under this Act apart from this Division is, or could reasonably be expected to be, payable later than it would have been apart from the scheme or a part of the scheme; or
  • (d) all or part of an amount that is payable to the entity under this Act apart from this Division is, or could reasonably be expected to be, payable earlier than it would have

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    been apart from the scheme or part of the scheme."[37] s 165-10

20. Section 165-10(3) is directed to circumstances in which a GST benefit may arise even if there is no economic alternative available to the entity. It provides:

"An entity can get a GST benefit from a scheme even if the entity or entities that entered into or carried out the scheme, or part of the scheme, could not have engaged economically in any activities:

  • (a) of the kind to which this Act applies; and
  • (b) that would produce an effect equivalent (except in terms of this Act) to the effect of the scheme or part of the scheme;

other than the activities involved in entering into or carrying out the scheme or part of the scheme."

21. A "scheme" is:

  • "(a) any arrangement, agreement, understanding, promise or undertaking:
    • (i) whether it is express or implied; and
    • (ii) whether or not it is, or is intended to be, enforceable by legal proceedings; or
  • (b) any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise."[38] s 165-10(2)

22. Parliament has set out the matters that are to be taken into account in considering an entity's purpose in entering into or carrying out the scheme from which the entity "got a GST benefit, and the effect of the scheme".[39] s 165-15(1) Those matters are:

  • "(a) the manner in which the scheme was entered into or carried out;
  • (b) the form and substance of the scheme, including:
    • (i) the legal rights and obligations involved in the scheme; and
    • (ii) the economic and commercial substance of the scheme; and
  • (c) the purpose or object of this Act, the Customs Act 1901 (so far as it is relevant to this Act) and any relevant provision of this Act or that Act (whether the purpose or object is stated expressly or not);
  • (d) the timing of the scheme;
  • (e) the period over which the scheme was entered into and carried out;
  • (f) the effect that this Act would have in relation to the scheme apart from this Division;
  • (g) any change in the avoider's financial position that has resulted, or may reasonably be expected to result, from the scheme;
  • (h) any change that has resulted, or may reasonably be expected to result, from the scheme in the financial position of an entity (a connected entity) that has or had a connection or dealing with the avoider, whether the connection or dealing is or was of a family, business or other nature;
  • (i) any other consequence for the avoider or a connected entity of the scheme having been entered into or carried out;
  • (j) the nature of the connection between the avoider and a connected entity, including the question whether the dealing is or was at arm's length;
  • (k) the circumstances surrounding the scheme;
  • (l) any other relevant circumstances."[40] s 165-15(1). Section 165-15(2) provides that s 165-15(1) “… applies in relation to consideration of an entity’s purpose in entering into or carrying out a part of a scheme from which the avoider gets or got a GST benefit, and the effect of part of the scheme, as if the part were itself the scheme from which the avoider gets or got the GST benefit.”

23. Once it has been decided that there is a scheme that comes within s 165-5, s 165-40 provides, in so far as it is relevant, that:

"For the purposes of negating a GST benefit the avoider mentioned in section 165-5 gets or got from the scheme, the Commissioner may make a declaration stating either or both of the following:

  • (a) the amount that is (and has been at all times) the avoider's net amount for a specified tax period that has ended;
  • (b) …"

Once made, a declaration has effect according to its terms. This means, for example, that any refund will be determined under Division 35 of the GST Act by reference to the net amount rather than by reference to the formula GST minus input tax credits that would have applied but for Division 165.[41] s 165-50

Background

24. The parties were in agreement on many aspects of the facts forming the background to this case. I have made findings on fact in light of that but, where indicated, I have done so on

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the basis of the evidence of one of the shareholders in VCE. I will refer to him as SHI

25. In 1997 SH1 purchased land on which there was a residential dwelling (the Property). He purchased it for approximately $130,000 and initially lived in it. During 1996, he made enquiries bout converting the Property so that it could be used as a medical centre. He obtained approval from the relevant local Council on 21 February 1997 and made the necessary modifications to the Property in accordance with that approval.[42] Exhibit A, Attachment SH1-1 On 29 October 1997, SH1 leased the Property to a medical practitioner for a period of three years beginning on 1 January 1998. Under the lease, the medical practitioner could make any modifications to the internal structure that he thought necessary to ensure that it was suitable for his purposes.

26. On 1 July 2000, SH1 was registered for the purposes of the GST Act. He elected to account for GST on a cash basis.[43] Exhibit A, Attachment SH1-2

27. SH1 and the medical practitioner renewed the lease for a further period of three years commencing on 1 January 2001 with options to renew for four further three year periods.[44] T documents, 34-39 The medical practitioner agreed to pay annual rental for the Property of $16,500 plus GST. Rent of $1,375 plus GST was payable calendar monthly in advance.

28. SH1 married SH2 on 9 September 2001. VCE was incorporated under the Corporations Act 2001 on 11 April 2003. It has A class shares, held by SH1, and B class shares, held by SH2. SH1 is, and has been, VCE's sole director. On the basis of his evidence, I find that he made all of VCE's decisions. The director is authorised to determine the extent to which dividends may be paid to either or both classes of shares. VCE's primary object is to acquire investments and to generate wealth for its shareholders.

29. On 15 April 2003, VCE established its own bank account.[45] Exhibit A, Attachment SH1-3 Since 11 April 2003, VCE has been registered for the purposes of the GST Act.[46] Exhibit A, Attachment SH1-4 It has elected to account for GST on an accruals basis.

30. As at 25 April 2003, there was a mortgage to Aussie Home Loans[47] Transcript, 45 over the Property. SH1 was the mortgagor and the mortgage secured a loan of approximately $100,000. On that day,[48] The contract is dated 25 April 2002 but it is common ground that it should have been dated 25 April 2003. VCE and SH1 agreed that VCE would purchase the Property for $770,000.[49] Agreement, cll 1 and 2: T documents, 42-45 That purchase price included any GST payable under the GST Act in the event that any supply made under or in connection with the Agreement was a taxable supply.[50] Agreement, cl 6 VCE agreed to pay the purchase price in the following instalments:

  • • a deposit of $550 on the signing of the Agreement;
  • • an amount of $11,000 on 30 June 2008;
  • • a payment of $11,000 on 30 June 2013; and
  • • the balance of the purchase price ($747,450) on 30 June 2018.[51] Agreement, cl 3

31. Until the final payment of the purchase price, ownership of the Property would remain with SH1 and be free from all encumbrances whatsoever.[52] Agreement, cl 5 Stamp duty would not become payable until settlement and transfer of the Property from SH1 to VCE in 2018. Possession and enjoyment, on the other hand, would pass to VCE on execution of the Agreement.[53] Agreement, cl 4 On 25 April 2003, SH1 issued a tax invoice stating that the total amount payable under the Agreement was $770,000 and the GST was $70,000 as well as making an adjustment for the deposit of $550 paid on that day.

32. After the Agreement between VCE and SH1 on 25 April 2003, SH1 continued to make the repayments under the mortgage he had entered as mortgagor. The mortgage continued as before showing him as the mortgagor. The medical practitioner continued to pay monthly rental to SH1 in the form of cheques made out to SH1.[54] Transcript, 38 SH1 paid the rental into a bank account in the name of VCE.[55] Exhibit A, Attachment SH1-8

33. On or about 21 May 2003, VCE lodged its first Business Activity Statement (BAS) and that was for the April tax period. It showed capital purchases of $770,000 and claimed an entitlement to an input tax credit of $70,000.

34. On 23 July 2003, SH1 added VCE to the certificate of currency for the insurance of the Property.

35. On 7 January 2004, SH1 entered a Deed of Renewal and Variation with the medical practitioner. In that way, VCE was substituted for SH1 as the lessor of the Property. VCE leased the Property to the medical practitioner for a term of three years commencing on 1 January 2004. The medical practitioner agreed to pay monthly rental of $1,500 plus GST.

36. 

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On 19 February 2004, the mortgagee was formally notified of the sale of the Property to VCE.

37. In a notice dated 30 November 2004, the Commissioner made a declaration stating that VCE's net amount for the April tax period was nil. He made that declaration under s 165-40.[56] T documents, 118 After reviewing VCE's Business Activity Statement (BAS) for the April tax period, the Commissioner notified VCE that its BAS would be reduced to nil. The amount that VCE needed to pay because of the revision was $70,000 and a penalty amount of $35,000 together with the General Interest Charge (GIC) would apply. A Notice of Assessment and a Notice of Assessment of Administrative Penalty followed on 7 December 2004.

38. There is no dispute between the parties that, but for the operation of Division 165 of the GST Act:

  • • VCE would be entitled to input tax credits of $70,000 under Division 11 in the April tax quarter in respect of the acquisition of the Property; and
  • • SH1 would be liable to pay GST amounting to $70,000 in 2018.

Consideration

39. If the provisions of Division 165 are to take effect so that the Commissioner may negate what would otherwise be the effect of the GST Act upon the transaction between SH1 and VCE, each of the four criteria specified in s 165-5 must be satisfied. There is no doubt that the fourth, specified in s 165-5(1)(d), is satisfied in that all relevant events occurred after 2 December 1998. The parties do not agree about the application of the first three and I will consider each in turn.

The first criterion: Did VCE get a GST benefit from a scheme?

40. I have already set out the definition of a "scheme" from s 165-10(2). It has been defined in terms that are, for the purposes of this case, not materially different from those used in s 177A(1) of the Income Tax Assessment Act 1936 (ITA Act). Section 177A defines the word for the purposes of the anti-avoidance provisions set out in Part IVA of that legislation. If Part IVA is applicable, the Commissioner may disallow amounts that would otherwise be allowed as deductions from assessable income under the ITA Act. The pivotal section in Part IVA is s 177D which sets out the criteria that must exist before Part IVA is applicable. The first is that there be a "scheme"[57] s 177D and that term is defined in s 177A of the ITA Act. The second is that a taxpayer has obtained, or would but for s 177F, obtain a tax benefit.[58] s 177D(a) Section 177C specifies when a person has obtained a tax benefit. The third is, in effect, that a reference to a scheme's being carried on for a particular purpose, is a reference to the dominant purpose. That is the effect of reading s 177D(b) with s 177A(5).

41. Division 270 of Schedule 2F of the ITA Act is also concerned with anti-avoidance provisions. It provides that a trust may be prevented from making any use of deductions, or the full use of deductions, in an income year if a scheme to take advantage of the deductions exists. The word "scheme" had the same meaning as it is given in s 177A(1).[59] ITA Act, Schedule 2F, s 272-140 In Re Eldersmede Pty Ltd and Ors and Commissioner of Taxation[60] [2004] AATA 710 at [49]-[59] (Eldersmede), I was a member of a Tribunal that analysed the ordinary meanings of the words that are used to define the word "scheme" as used in s 270-10(1) of Division 270. In Eldersmede, we said:

  • "50. The definition of 'scheme' is cast very broadly but it is cast in two distinct groups. The ordinary meanings of the words given in the Shorter Oxford English Dictionary (5th edition, 2002) and The Macquarie Dictionary (2nd edition, 1991) chosen in the first group (i.e.'any agreement, arrangement, understanding, promise or undertaking …') carry with them the notion of something that has been planned or settled upon. In the case of an 'agreement, arrangement … [or] understanding', the ordinary meanings carry with them the notion of a plan or settlement between two parties or among more. The ordinary meanings of the words 'promise or undertaking' carry with them the notion of a commitment, assurance or a pledge that could be given either unilaterally by a person or mutually between two persons. Again, there is the notion of something that has been planned or settled upon.
  • 51. The second group of words chosen to define 'scheme' (i.e. 'any scheme, plan, proposal, action, course of action or course of conduct') is more eclectic. It is in this

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    group that the word is defined by reference to itself. Of that word, Mason J said, citing Clowes v Federal Commissioner of Taxation (1954) 91 CLR 209 at 225 per Kitto J, all that it '… requires is that there should be 'some programme, or plan of action".' (Australian Softwood Forests Pty Ltd v Attorney-General (N.S.W.) ex relatione Corporate Affairs Commission (1980-81) 148 CLR 121 at 129). In Investment and Merchant Finance Corporation Ltd v Federal Commissioner of Taxation (1970) 120 CLR 177 at 189, Windeyer J considered the concept of profit arising from the carrying on or carrying out of any profit-making 'undertaking or scheme'. He said that this presupposes activities which are 'co-ordinated by plan and purpose'. The word 'plan' carries with it the notion of a scheme. In referring to a scheme or plan that is put forward, the word 'proposal' refers to the step before there is a scheme or a plan. By way of contrast, the word 'action' denotes a thing that has been done or a deed. 'Conduct' may refer to '… Leadership, command … Direction, management; handling; …' or '… Manner of conducting oneself or one's life; behaviour …' (The New Shorter Oxford English Dictionary, 1993). In doing so, it may refer to things or deeds that have been done or to a direction that can be gleaned from those things or deeds.
  • 52. The word 'course' is used in both the expressions 'course of action" and "course of conduct'. In so far as they are relevant, its ordinary meanings include '… 2. Onward movement in a particular path … 12. fig. The continuous … succession (of events); progress onward or through successive stages …' (The New Shorter Oxford English Dictionary, 1993). It may also be a '… 7. a particular manner of proceeding: try another course with him. 8. a systemised or prescribed series: a course of studies, lectures, medical treatments, etc. …' (Macquarie Dictionary, 3rd edition, 1997). Taken with the ordinary meanings of the words 'action' and 'conduct', the expressions 'course of action' and 'course of conduct' then refer to those things or deeds that have been done that have about them some progression towards an objective or set of objectives. Whether or not all or any of those objectives are achieved is not to the point provided there is a progression."

42. As for the meaning of the word "scheme" which is itself used as part of its own definition, we referred to a number of cases.[61] Re Eldersmede Pty Ltd and Ors and Commissioner of Taxation [2004] AATA 710 at [53]-[55] I will refer to only one as it is representative of the various, but consistent, views expressed by the various judges. That is the case of Steinberg v Federal Commissioner of Taxation.[62] (1975-76) 134 CLR 640 ; 7 ALR 491 Section 26(a) of the ITA Act had provided that the assessable income of a taxpayer included "… profit arising from the sale by the taxpayer of any property acquired by him for the purpose of profit-making by sale, or from the carrying on or carrying out of any profit-making under-taking or scheme". Gibbs J said:

"… Schemes may be precise or vague; every detail may be arranged in advance, or the working out of the plan may be left for decision in the light of circumstances as they arise. It is no objection to a plan that it allows room for manoeuvre. When property is bought with the purpose of making a profit in the easiest or most advantageous way that may present itself, and the taxpayer adopts 'one of the many alternatives' that his plan leaves open, thereby returning himself a profit, he will rightly be said to be carrying out a profit-making scheme: cf. Premier Automatic Ticket Issuers Ltd. v. Federal Commissioner of Taxation (1933) 50 CLR 268, at p 300; Buckland v. Commissioner of Taxation (1960) 34 ALJR, at p 62; (1960) ALR, at pp 602-603; 12 ATD, at p 169."[63] (1975-76) 134 CLR 640; 7 ALR 491 at 700; 508

43. In Eldersmede, we went on to conclude that all the authorities that have considered the meaning of the word "scheme" in a variety of contexts, not just that of s 177A(1) and found that:

"The cases illustrate a common approach whether the form of words has been to examine events that have occurred in connection with a scheme or carrying on a scheme or simply in relation to a scheme without more. That common approach has been first to adopt the ordinary meaning of the word 'scheme' …. In defining the word 'scheme' for the purposes of Division 270 of Schedule 2F, Parliament has chosen a range

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of words denoting among their ordinary meanings not only actions and deeds and plans to undertake them but also the direction that can be gleaned from actions and deeds."[64] [2004] AATA 710 at [58]

44. If that be the correct approach to adopt in relation to the interpretation of "scheme" in s 165-5(1)(a) of the GST Act, it would mean that all actions and deeds need to be examined together with the direction that can be gleaned from them to determine whether there is a scheme of the sort described in s 165-10(2). It does not mean that the purpose, be it dominant or otherwise, behind those matters is taken into account. Dr Orow submitted that a "scheme" is not defined by reference to its content or effect alone. Regard should also be had to its purpose so that a scheme will only have the principal effect of enabling a person such as VCE to obtain a GST benefit where the relevant dominant purpose was to produce the proscribed principal effect. This is consistent with the policy behind Division 165 to attack artificial and contrived schemes. It is also consistent with principles of statutory interpretation for, unless purpose were relevant in assessing the effect of a scheme, there would never be a case within s 165-5(1)(c)(i) that is not also within s 165-5(1)(c)(ii). In any given case, it would be necessary to consider only the effect of the particular scheme. Parliament could not have intended to deny GST benefits and to impose substantial penalties as a result of participation in certain schemes where the circumstances are such that the relevant taxpayer obtained a GST benefit unintentionally or fortuitously.

45. Dr Orow relied on a passage from the judgment of the Full Court of the Federal Court in
Federal Commissioner of Taxation v Consolidated Press Holdings Limited (No 1):[65] (1999) 99 ATC 4945

"… a scheme is not defined by its content alone. The word, in its ordinary meaning and its statutory definition still connotes purpose, a purpose not to be defined merely by effect. …"[66] (1999) 99 ATC 4945 at 4,986

He also relied on a passage from the High Court's judgment dismissing an appeal from the Full Court's judgment:

"… The reference in sub-par (ii) to effect does not require the element of purpose to be discarded. In particular, it does not require that any scheme which produces a substantial consequence which is any respect the same as a consequence of a dividend stripping scheme is within the sub-paragraph. …"[67] Federal Commissioner of Taxation v Consolidated Press Holdings Ltd (2001) 2001 ATC 4343 at 4,367

46. In order to understand these passages, it is necessary to understand their context. The broader context is that of Part IVA of the ITA Act. Section 177E that is concerned with the stripping of company profits. If the criteria set out in the four paragraphs of s 177E(1) are complied with, a scheme is taken to be a scheme to which Part IVA applies and, for the purposes of s 177F, the taxpayer is taken to have obtained a tax benefit, determined in accordance with ss 177F(1)(f) and (g), in connection with the scheme. In summary, the first criterion set out in s 177E(1)(a) is that, as a result of a scheme in relation to a company that is by way of, or in the nature of, dividend stripping or substantially having that effect, any property of the company is disposed of. The Commissioner had argued that s 177E operated independently of ss 177C and 177D and that there was no requirement that of the operation of s 177E(1)(a) that there be an objective sole or dominant purpose of tax avoidance.

47. The High Court said of s 177E:

"… The Full Court considered that s 177E was intended to apply only to schemes which can be said to have the dominant purpose of tax avoidance; the required tax avoidance purpose ordinarily being that of enabling the vendor shareholders to receive profits of the target company in a substantially tax-free form, thereby avoiding tax that would or might be payable if the target company's profits were distributed to shareholders by way of dividends. Hill J may not have intended anything different from what was said by the Full Court. If there is a difference, the formulation of the Full Court is to be preferred, being consistent with the scheme of Pt IVA, and s 177A(5) in particular."[68] (2001) 2001 ATC 4343 at 4,366 (footnote omitted)

Later in its judgment, it said:

"… If it is intended to assert that s 177E has a meaning unaffected by its context, the assertion is wrong. If 'dividend stripping scheme' were a term of art with a defined or definable literal meaning that could be identified separately from the context in

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which it appears, then it might be possible to construe and apply s 177E uninfluenced by notions of tax avoidance. But the expression does not have such a meaning. In framing s 177E, the legislature has adopted the language of tax avoidance, and it has place s 177E in Pt IVA, for a reason related to the necessity to supplement, in a particular respect, the general anti-avoidance provisions. This is not an example of a statutory provision in respect of which a purposive construction is merely an available choice; such a construction is necessary."[69] (2001) 2001 ATC 4343 at 4,366-4,367

48. What is important to notice is that the High Court was not considering the meaning to be given to the word "scheme" as it is defined in s 177A(1) and referred to in s 177D. Instead, it was considering the place of s 177E in the scheme of Part IVA. Section 177E is directed to bringing certain schemes within the compass of Part IVA and to determining that a taxpayer has obtained a tax benefit and its amount. In doing so, it had to be read with the provisions of ss 177D(b) and 177A(5) requiring regard to be had to the scheme's dominant purpose. That is not the case when regard is being had merely to the very first question raised by s 177D i.e. is there something that comes within the definition of a "scheme" at all? Only once that question has been answered, is it necessary to go on to look at purpose.

49. That brings me back to s 165-5(1)(a) of the GST Act and the definition of "scheme" in s 165-10(2). Parliament has chosen to define the words in terms that have been the subject of previous judicial consideration. It has done so in legislation that, like Division 165, is also directed towards ensuring that the tax burden is borne by those who should properly carry it by not permitting them to take advantage of schemes contrived to their avoiding it.[70] Peabody v Commissioner of Taxation 93 ATC 4104 ; (1993) 40 FCR 531; (1993) 112 ALR 247 and C.C. (New South Wales) Pty Limited (In Liquidation) v Commissioner of Taxation (1997) 97 ATC 4123 , both of which preceded the enactment of the GST Act. Previous judicial consideration has favoured a broad interpretation. The authorities summarised in the extract from Eldersmede indicate that no consideration need be given to a person's purpose in entering or carrying out a scheme when considering whether there is a scheme at all. The High Court's judgment in Federal Commissioner of Taxation v Consolidated Press Holdings Ltd does not alter that for it was not looking at that threshold question but at a subsequent question requiring resolution of the dominant purpose test.

50. It seems to me that I should adopt the same approach and simply consider whether there was a scheme without reference to purpose until I consider s 165-5(1)(c). As I have mentioned, Dr Orow submits that this would mean that there would never be a case within the scope of s 165-5(1)(c)(i) which is not also within the scope of s 165-5(1)(c)(ii) because it would only ever be necessary to consider the effect of the scheme. I do not agree that this would be so. The fact that an entity gets a GST benefit from a scheme within the meaning of s 165-5(1)(a) when read with s 165-10 does not mean that the entity either entered it or carried it with the sole or dominant purpose of its, or another entity's, getting that GST benefit or that the principal effect of the scheme is the avoider's getting the GST benefit. In the first place, the focus in s 165-5(1)(c)(ii) is upon the avoider and any GST benefit the avoider gets whereas the focus of s 165-5(1)(c)(i) is upon an entity's getting a GST benefit. On their face, and there is no need to decide the issue in this case, the entity referred to in these sections need not be the same entity. In the second place, even if reference is being made to the same entity, consideration of an entity's sole or dominant purpose may well lead to a different result from that reached when considering the principal effect of the scheme. Purpose and effect do not always coincide be it in the context of s 165-5(c) or otherwise.

51. In view of the events that I have found and that are set out above,[71] [24] to [38] I am satisfied that the there was a scheme. Although the parties agree that there was a scheme, I think that I need to identify its scope. For the purposes of s 165-5(1)(a), it is necessary to identify the scheme from which an entity gets or got a GST benefit. Without knowing what falls within the scheme, it is not possible to weigh up what would, or could reasonably be expected to have happened apart from that scheme. That is a task that must be undertaken for the purposes of s 165-10(1)(b).

52. The scheme, I find, begins with the incorporation of VCE on 11 April 2003 and its registration five days later for the purposes of the GST Act when it elected to account for GST on an accruals basis. It assumes that the

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Property is leased to a medical practitioner and includes the Agreement for the sale and purchase of the Property executed on 25 April 2003. It extends to SH1's giving VCE a tax invoice in April 2003 and entails SH1's continuing to service and retain the mortgage and VCE's being substituted as the lessor of the Property to the medical practitioner. The same events can equally be described as a scheme, plan, course of action or course of conduct. Whichever description is chosen, the events constitute a scheme within the meaning of that term as defined s 165-10(2).

53. The consequence of the scheme for SH1 is that GST on the supply, being the grant, assignment or surrender of the Property subject to various conditions in the Agreement, GST became attributable to the April tax period. As SH1 accounted on a cash basis, it only became attributable to that period to the extent of $550 he received under the Agreement. That is the consequence of s 29-5(2)(b) because it provides that if, in a tax period, part of the consideration is received, GST on the supply is attributable to that tax period but only to the extent that consideration is received in that tax period.[72] s 29-5(2)(b) GST on the full amount of the consideration to be paid by VCE under the Agreement would be attributable to the tax periods in which it was paid by VCE.

54. That brings me to the second part of the criterion specified in s 165-5(1)(a) i.e. whether VCE "gets or got a GST benefit from a scheme". That depends not on the interpretation of words such as "from" a scheme. Instead, it depends on whether or not an amount that is payable by or to an entity under the GST Act is an amount that meets one of the four descriptions in s 165-10(1). Those four descriptions are drafted in terms of whether the amount payable "is" of the description or whether it "could reasonably be expected to be" of the description. Therefore, s 165-10(1)(b) is drafted in terms of an amount that is payable to an entity under the GST Act apart from Division 165. It provides that an entity gets a GST benefit from a scheme if that amount either:

  • • "… is … larger than it would be apart from the scheme or a part of the scheme"; or
  • • "… or could reasonably be expected to be, larger than it would be apart from the scheme or a part of the scheme."

55. On behalf of VCE, Dr Orow of counsel submitted that the test prescribed to determine whether there is a GST benefit is made to depend on, and requires, the making of an alternative hypothesis or to postulate what would or might reasonably be expected to have happened if the particular scheme had not been entered or carried out. He described this approach as "the counterfactual"[73] Applicant’s Submissions at [42] and noted that none had been put forward on behalf of the Commissioner. Dr Orow put forward several "counterfactuals": VCE did not acquire the Property; it acquired and paid for the Property in full using borrowed money in April 2003; it acquired title to the Property in April 2003 with borrowed funds but either made an election to account on a cash basis or did not register for GST purposes; and VCE insists on the application of the going concern exemption under s 38-325. Any "counterfactual" that is put forward must be sufficiently reliable before it can be regarded as reasonable. "[T] he alternative postulate is equivalent in economic terms to the notion of opportunity cost being the next best alternative forgone,"[74] Applicant’s Submissions at [47] he submitted.

56. Dr Orow analysed each "counterfactual" he had put forward to demonstrate that each was insufficiently reliable to be regarded as reasonable. They are:

  • (a) VCE did not acquire the Property;
  • (b) VCE acquired the Property at market value in 2003 and paid for it in full using borrowed money;
  • (c) VCE acquired the Property as above but elected to account on a cash basis;
  • (d) VCE acquired the Property as above but did not register for GST purposes; and
  • (e) VCE insists upon the application of the going concern exemption under s 38-325.

57. Dr Orow submitted that none is sufficiently reliable for it to be regarded as reasonable. He gave detailed reasons for each of his "counterfactuals". Taking (a) and (b) as representative examples, Dr Orow submitted in relation to (a):

  • • VCE was brought into existence to provide a secure and independent source of

    ATC 199

    income for SH2 and any children SH1 and SH2 might have;
  • • SH1 was concerned about his liability to third parties in relation to the Property and that public liability insurance might not eliminate the risk to his assets should there be a claim;
  • • the transfer of the Property to SH2 would not have managed the risk because it would have simply shifted the risk from him to her; and
  • • SH1 wanted to provide an independent source of income for his family and reduce his liability to income tax through income streaming.

In relation to "counterfactual" (b), Dr Orow submitted:

  • • it was more cost effective to pay a higher price deferred to the future rather than having to raise finance at the time of acquisition; and
  • • the use of finance would have resulted in a negatively geared investment in that interest obligations would have exceeded rental income. VCE would not have had the funds to pay the excess. The loss that VCE would have incurred would not be available to offset against SH1's income.

58. Mr Pagone QC submitted that there were only two possibilities that could have occurred. The first was that there was no sale by SH1 to VCE. The second was that there was a sale but a sale upon terms that did not produce a GST benefit of $70,000 but, rather, a GST benefit of a lesser amount. It is reasonable to predict, Mr Pagone continued, that SH1 would not have sold the Property to VCE because the advantages on which he relies would make no sense without the fiscal benefits flowing from the sale in the way in which it was effected. An outright sale of the Property is contrary to the evidence. If it is not, Mr Pagone submitted in the alternative, a sale would have taken place for its market value in 2003. That would have been, say, $300,000 in light of the valuation report of the Australian Valuation Office valuing the Property at that time between $220,000 and $250,000. SH1 would have had to pay GST of $27,273 and VCE would have received a GST credit of the same amount.

59. Dr Orow and Mr Pagone both drew my attention to the judgment of the High Court in
Federal Commissioner of Taxation v Peabody,[75] (1994) 181 CLR 359 ; 94 ATC 4663 ; 123 ALR 451 in which it said in considering s 177C(1)(a) of the ITA Act:

"… 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."[76] Footnote omitted. (1994) 181 CLR 359 ; 94 ATC 4663 ; 123 ALR 451 at 385; 4,671; 461 That passage relates to the Court’s consideration of s 177C(1)(a) of the ITA Act. It is in similar terms to those in s 165-10(1)(b) of the GST Act in providing for the purposes of Part IVA of the ITA Act that: “… a reference … to the obtaining by a taxpayer of a tax benefit in connection with a scheme shall be read as a reference to: (a) an amount not being included in the assessable income of the taxpayer of a year of income where that amount would have been included, or might reasonably be expected to have been included, in the assessable income of the taxpayer of that year of income if the scheme had not been entered into or carried out….”

60. I have difficulty with Dr Orow's submission. It puts forward reasons for rejecting each of his "counterfactuals" and yet I am required by s 165-10(1)(b) to look at what would be, or what could reasonably be expected to be, the position apart from the scheme. If I were to accept his submission, I would be left with the conclusion that none of the "counterfactuals" was relevant. That would then lead to the further conclusion that the scheme itself was the only course that could be regarded as reasonable. That is not what s 165-10(1)(b) requires of me. It requires me to look at what would, or could reasonably be expected to be, the case " apart from the scheme" (emphasis added). That is to say, it requires me to look at it "aside" from the scheme or "separately … [or] independently"[77] Chambers 21st Century Dictionary, 1999, reprinted 2004, Chambers (Chambers) from it.

61. In a case such as this, I feel unable to make a finding as to what would have happened apart from the scheme. That leaves me to predict what could reasonably be expected to have happened apart from the scheme. Even putting the scheme aside, there are some facts that remain constant. They are that SH1 owned the Property that he had converted for use as a medical practice and that was leased to a medical practitioner. He is the sole director of VCE in which he and his wife are equal shareholders, albeit of different classes. VCE's primary object is to acquire investments and to generate wealth for its shareholders. This matter is more doubtful and I will return to it later. For the moment, I will assume that SH1 was concerned about his liability to those who injured themselves on the Property.

62. Given those facts, it is reasonable to expect that SH1 might not have sold the Property to VCE or at all. That is a course of

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action that it is reasonable to expect could have been followed. Clearly, SH1 would not have achieved any part of his object of providing an independent source of income for his family and reducing his liability to income tax through income streaming. It is not unrealistic to expect that he could have addressed his risk by increasing his insurance cover on the Property and his object in that regard could have been addressed. That would not have had the effect of giving VCE a GST benefit at all and so it could reasonably be expected that the GST benefit from the scheme would be larger than it would have been apart from the scheme.

63. A second course of action might have been to sell the Property to VCE at a price that equated with market value in 2003 and that was payable at, or shortly after, the time of the Agreement. The price would have been more in the region of $220,000 to $250,000. That would have led to a GST credit between $20,000 and $22,727. Either figure, as well as those in between, are less than the GST benefit of $70,000 that it did receive apart from Division 165. On the evidence, I am not satisfied that this course could reasonably be expected to occur apart from the scheme. It addressed SH1's personal insurance risk but did not address his object of providing an independent source of income for his family and reducing his liability to income tax through income streaming. Furthermore, it would have placed VCE, a company with few assets, in significant debt. It would have to service that debt from the lease payments. At the same time, SH1 would have had to pay GST of $70,000. It is not a course that it is reasonable to expect that SH1 would have followed.

The second criterion: Was the GST benefit attributable to VCE's making an election that is expressly provided for by the GST Act?

64. The second criterion is found in s 165-5(1)(b). It is to the effect that, if the GST benefit was attributable to VCE's making an election expressly provided for by the GST Act, Division 165 will not operate. All four criteria in s 165-5 must be fulfilled for that to happen. Dr Orow submitted that VCE's entitlement to input tax credits derive, in whole or in part, by reason of its election to register for GST purposes. VCE was not required to register as its turnover was in the region of $17,000 per annum. Section 23-5 required an annual turnover of $50,000 before it required registration. Mr Pagone focused on VCE's decision to account on an accruals basis and rejected any argument that the GST benefit could be attributable to that decision.

65. I will begin with the meaning of the expression "attributable to". Of those that are relevant, the ordinary meanings of the word "attribute", of which "attributable" is the adjective, include "…to think of it as being …caused by them or it…."[78] Chambers That suggests a causative connection between the GST benefit and the choice or election. In a different context, that was the approach adopted by the majority of the High Court last year. That was the context of considering whether an injury arose out of or was attributable to his defence service within the meaning of s 70(5) the Veterans' Entitlements Act 1986. Of attributability, the majority said:

"… A causal link or a causal connexion is capable of satisfying a test of attributability without any qualifications conveyed by such terms as sole, dominant, direct or proximate."[79] Roncevich v Repatriation (2005) 222 CLR 115; 79 ALJR 1366; 218 ALR 733 at 126, 1373 and 742; [27]

66. Also in 2005, the Full Court of the High Court considered the concept of attribution in similar terms but in the context of the ITA Act. Section 160ZK(5)(b) sets out one of the criteria that must be satisfied if a rebatable dividend adjustment is to arise in relation to a share. One of those criteria is to the effect that the whole or part of the distribution could be reasonably attributable to the profits that were derived by the company before the holder acquired that share. The Court said:

"… several points should be noted. The first is that para (b) presents a question of characterisation of an amount which is the whole or a part of the distribution made by a company to the holder of the … share, as identified in para (a). Secondly, para (b) presents an inquiry as to the existence of a sufficient link between that whole or part of the distribution and profits derived by the company before a specified event (acquisition of the … share). Thirdly, that link may be described in terms of necessary causation but, as with all questions of causality, the starting point is the identification of the purpose (here the

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legislative purpose) to which the question is directed. Fourthly, here, the legislative purpose of s 160ZK(5) is to ensure that a capital loss not be claimed where the result of the course of action described in the subsection is that there has been no economic loss to the taxpayer. Finally, the criterion of linkage in para (b), an attribution that is reasonable, is to be read and applied accordingly."[80] Commissioner of Taxation (Cth) v Sun Alliance Investments Pty Ltd (in Liq) 2005 ATC 4955 ; (2005) 222 ALR 286; 80 ALJR 202 at 304; [77] (footnotes omitted)

The provisions in s 165-5(1)(b) and its context provided by the GST Act lead to my adopting a similar interpretation. To satisfy s 165-5(1)(b), there must be no causal connection between the GST benefit and the making of any choice, election, application or agreement expressly provided for by the GST law.[81] The “GST law” comprises the GST Act and other legislation specified in the definition of that term in s 195-1.

67. In this case, the causal link that s 165-5(1)(b) requires me to look at is that between the GST benefit and any choice or election that provided for by the GST law. Dr Orow focused on VCE's choosing or electing to register for GST purposes. The ordinary meanings of the word "choice" includes "…the right, power or responsibility to choose …".[82] Chambers To "choose" is "… to take or select (one or more things or persons) from a larger number, according to one's own preference or judgement. 2 to decide; to think fit …".[83] Chambers An "election" is the "… act of electing or choosing …".[84] Chambers On its face, the word "expressly" means "… 1 clearly and definitely. 2 particularly or specifically …".[85] Chambers The ordinary meaning of the word "provide" when used in the context of the expression "provide for" something means "… to specify it as a requirement, or enable it to be done."[86] Chambers

68. If s 165-5(1)(b) is to be interpreted according to these ordinary meanings, the criterion it specifies is that the GST benefit is not attributable to any entity's selecting some thing or some course of action that is clearly, definitely or specifically specified as a requirement, or enabled, by a GST law, wine tax law or luxury car tax law. That does not mean that the GST law must necessarily use express words to provide for that choice or election. That is one way but a GST law may also expressly provide for a choice or an election if that choice or election is "… is plainly, clearly or explicitly indicated …"[87] Donnelly v Edelsten (1992) 109 ALR 651 at 656 by that law. Determining whether there is such an indication requires an analysis of the purpose and structure of the law concerned and the inter-relationship of its various provisions.

69. I have summarised the scheme of the GST Act above. Section 23-5 of the GST Act imposes an obligation when it requires a person to be registered if a person is carrying on an enterprise and the person's turnover meets the registration turnover threshold. It expressly does so. Section 23-10 gives a person the power or right to choose whether to be registered under the GST Act if that person carries on an enterprise or intends to do so. The power or right imposes a corresponding liability or duty upon the Commissioner to register the person.[88] s 25-5 Again, it does so in express terms. It follows that, in electing to apply for registration, VCE has made an election that is expressly provided for by GST law.

70. Registration does not of itself give a GST benefit to an entity. It, or the requirement that an entity be registered, is an essential first step before any of the scheme for the imposition of GST or the crediting of tax inputs can come into play. Once an entity applies for registration and the Commissioner complies with his obligation or duty to register it, s 25-10 determines the date of effect of the registration. The fact of registration is relevant in determining whether a person has made a taxable supply or a creditable acquisition. Without registration, or being required to be registered, there can be neither. There is clearly a causal link between the operation of the scheme and registration.

71. Is that a causal link of the sort that is contemplated by s 165-5(1)(b)? The answer to that question is found by referring to principles of statutory interpretation. Parliament is presumed "… to enact sense and not nonsense."[89] Hall v Jones (1942) 42 SR (NSW) 203 at 208 per Jordan CJ at 414 per Griffit Consistent with that, all words are presumed to have meaning and effect[90] Commonwealth v Baume (1905) 2 CLR 405 at 414 per Griffith CJ; Beckwith v R (1976) 12 ALR 333 at 337 per Gibbs J although, on occasion, it may be impossible to give full and accurate meaning to every word.[91] Brisbane City Council v Attorney-General (Qld) (1908) 5 CLR 695 at 720 per O’Connor J Their meaning must be divined from the words themselves, the particular context in which they are used and the context of the Act as a whole. As stated by Mason and Wilson JJ in
Cooper Brookes (Wollongong) Pty Ltd v Federal Commissioner of Taxation:[92] (1981) 147 CLR 297 ; 35 ALR 151

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"… The fundamental object of statutory construction in every case is to ascertain the legislative intention by reference to the language of the instrument viewed as a whole. But in performing that task the courts look to the operation of the statute according to its terms and to legitimate aids to construction."[93] (1981) 147 CLR 297 ; 35 ALR 151 at 320; 169-170

72. This is at the heart of one of the points made by the High Court in Commissioner of Taxation (Cth) v Sun Alliance Investments Pty Ltd that I have set out above. The Court speaks of "necessary causation". Working out what is meant by the necessary causation must start with the identification of the purpose behind Parliament's requiring that the GST benefit be not attributable to the making of a choice or election that is expressly provided for by the GST law.

73. The object of the GST Act is to prescribe the circumstances in which a person is liable to pay GST, the circumstances in which a person is refunded GST and the manner in which those matters are to be determined. In providing for refunds, the underpinning principle of ss 11-1 to 11-99 is that a person is entitled to input tax credits for creditable acquisitions. That is to say, a person is entitled to "… the amount of the GST payable on the supply of the thing acquired. …".[94] s 11-25 While not making any reference to the time at which the GST is payable on the supply, the clear intention is that a person claiming an input tax credit on the acquisition of the thing cannot claim more than is payable on the supply of that same thing.

74. Section 165-1, which sets out Division 165's object, is telling. It begins with the statement that its object "… is to deter schemes to give entities benefits by reducing GST, increasing refunds or altering the timing of payment of GST or refund." It is inherent in the statement that Parliament intends that the obligation to pay GST and the privilege of obtaining input tax credits fall according to the general scheme under the GST Act. It would be inconsistent with that object if it were to provide that a person could sidestep the obligation or take advantage of the privilege simply by being a participant in the scheme. That is to say, if the fact of registration were of itself to be regarded as a causal link of a type that excludes the operation of the anti-avoidance provisions, those provisions would always be excluded. That would follow from the fact that a GST benefit would always be attributable to registration and so to a choice or election provided for by the GST law. It would never be the case that it would not be attributable. Consequently, the criterion specified by s 165-5(1)(b) could never be met. Without satisfaction of one of the four criteria in s 165-5, Division 165 could never operate. Without the operation of Division 165, the anti-avoidance provisions enacted by Parliament would be all but ineffectual as would the legislation's object to impose GST.

75. In order to avoid this outcome, the "necessary causation" between the GST benefit and a choice or election specifically provided for under the GST Act must be something other than a person's choice or election to become subject to the GST regime. Therefore, a decision to register for the purposes of the GST Act cannot be properly characterised as being something to which the GST benefit can be attributable within the meaning of s 165-5(1)(b). Even if I am incorrect in that conclusion, I am not satisfied that it is VCE's choice or election to register that gives it the GST benefit. Certainly, registration entitles it to claim an input tax credit and so get a GST benefit but s 165-5(1)(b) is not looking simply to the fact of getting a GST benefit of any sort. Section 165-5(1)(b) refers to " the GST benefit" (emphasis added). That is the particular GST benefit that VCE was given. That is the GST benefit of $70,000. Although VCE would never have been given a GST benefit at all without registration, the particular GST benefit it was given under the GST Act was attributable to the Agreement it reached with SH1. In particular, it was attributable to the decision to defer consideration payable for the Property and to issue a Tax Invoice for the whole amount shortly after the date of the Agreement. That means that the GST benefit is not attributable to a choice or election provided for by the GST Act. Section 165-5(1)(b) is satisfied if consideration is given to VCE's registration.

76. What of VCE's election to account on an accruals basis? This is not a choice or election that is provided for by the GST Act even though a choice or election to account on a cash

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basis is provided for.[95] A choice or election to account on a cash basis is provided for in the sense that the circumstances in which a person may choose to account on a cash basis are specified in Division 29B of the GST Act. As that is the case, VCE's decision to account in that way means that there can never be a causal link of the sort contemplated by s 165-5(1)(b). That provision looks only at the causal link between the GST benefit and the choice or election that is expressly provided for by the GST law. In the absence of the GST Act's providing for VCE to account on an accruals basis, the GST benefit obtained by VCE cannot be attributable to its choice or election. Section 165(1)(b) is satisfied.

77. In case I am incorrect in my analysis, I have also looked at the matter on the basis that the choice or election to account on an accruals basis is provided for by the GST Act. My conclusion is the same. The GST benefit is certainly larger than it would have been had VCE accounted on a cash basis. That is not the consequence of the accounting method but of the terms of the Agreement and the decision to issue a Tax Invoice for the full amount. The Agreement effectively provided for deferred payment of the consideration. Had the full amount of the consideration been paid at the time of the Agreement, the GST benefit would have been the same whether VCE was accounting on an accruals basis or on a cash basis. Had SH1 not issued a Tax Invoice for the full amount of the consideration but limited it to the $550 then due and payable under the Agreement, a GST benefit of a lesser amount would have been given to VCE. Choices or elections of that sort have been made by SH1, acting on his own behalf or as director of VCE, and have led to the particular GST benefit given to VCE. They are not choices or elections provided for by the GST Act. Therefore, the GST benefit given to VCE is not attributable to the making of a choice or election that is expressly provide for by the GST Act. Section 165-5(1)(b) is satisfied.

The third criterion: Did SH1 or VCE, either alone or together, enter or carry out the scheme with the sole or dominant purpose of getting a GST benefit from the scheme?

General principles

78. The third criterion can be satisfied by either one of two courses. I am concerned only with the first. It is found in s 165-5(1)(c)(i) and is to the effect that "an entity" entered the scheme with the "sole or dominant purpose" of "that entity or another entity getting a GST benefit from the scheme". The first thing to notice about the provision is that the focus in s 165-5(1)(c) is upon " the scheme" (emphasis added). In choosing the definite article, Parliament intends that the scheme to be considered is the scheme identified in s 165-5(1)(a) as the scheme under which "an entity (the avoider) gets or got a benefit". Its intention is apparent also in the opening words of s 165-15(1) which expressly identify the purpose under consideration as "… an entity's purpose in entering into or carrying out the scheme from which the avoider got a GST benefit " (emphasis added). By way of contrast, it has chosen to use an indefinite article in identifying the "entity" whose purpose is under consideration. It has chosen to describe it as " an entity" (emphasis added). That means that the purpose may be that of the entity described as the "avoider" in s 165-5(1)(a) or it may be that of another entity altogether. The only proviso limiting the range of entities whose "sole or dominant purpose" must be considered is that the entity, either alone or with others, entered or carried out the scheme or part of the scheme.

79. In view of the findings that I have already made, the entities whose purpose is under consideration are SH1 and VCE. Both entered or carried out the scheme I have identified. I must consider whether either of them, did so with the sole or dominant purpose of getting a GST benefit from the scheme for him or itself or, given that the purpose can be that "another entity" get a GST benefit and the breadth of the definition of "entity", whether either of them did so for the purpose of a completely different entity's getting a GST benefit.

80. What is meant by a "sole purpose" is clear. As to the meaning of a "dominant purpose", I have turned to the authorities that considered the meaning of that term in s 177D(b) of the ITA Act. I have done that even though I recognise that there are differences as well as similarities between the sole or dominant purpose tests set out in Part IVA and Division 165. Both are similar in that neither s 165-5(1)(c)(i) nor s 177D(b) sets out the entire test. Section 177D(b) must be read with s 177A(5) in order to understand the meaning of

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"purpose" and s 165-5(1)(c)(i) must be read with s 165-15(1) to understand the matters that must be taken into account. There are slight differences of expression between the two. Section 177D(b) is drafted in terms of whether "it would be concluded" that a person entered into or carried out the scheme for the "purpose of enabling the relevant taxpayer to obtain a tax benefit". The "purpose", s 177A(5) explains, is the "dominant purpose". Section 165-5(1)(c) is drafted in terms of whether "it is reasonable to conclude" that an entity entered into or carried out the scheme "with the sole or dominant purpose of that entity or another entity getting a GST benefit from the scheme".

81. In considering s 177D(b), the majority of the High Court in
Commissioner of Taxation v Spotless Services Limited[96] (1996) 186 CLR 404 ; 96 ATC 5201 ; 141 ALR 92 (Spotless) said of a "dominant purpose":

"… a reasonable person would conclude that the taxpayers in entering into and carrying out the particular scheme had, as their most influential and prevailing or ruling purpose, and thus their dominant purpose, the obtaining thereby of a tax benefit, in the statutory sense."[97] 96 ATC 5201 ; (1996) 186 CLR 404 ; 141 ALR 92 at 423; 102-103

In looking at the particular circumstances of the case, the High Court observed:

"… It is true that the taxpayers were concerned with obtaining what was regarded as adequate security for an investment made 'off-shore'. However, the circumstance that the Midland Letter of Credit afforded the necessary assurance to the taxpayers does not detract from the conclusion that, viewed objectively, it was the obtaining of the tax benefit which directed the taxpayers in taking steps they otherwise would not have taken by entering the scheme."[98] 96 ATC 5201 ; (1996) 186 CLR 404 ; 141 ALR 92 at 423; 102-103

82. In deciding the sole or dominant purpose, the matters set out in s 165-15(1) "… are to be taken into account …". On their face, the words appear to be mandatory and to apply equally to the Tribunal as well as to the Commissioner. Section 177(b) is drafted in terms of reaching a conclusion "having regard to" the eight matters it specifies. Gummow and Haynes JJ in
Federal Commissioner of Taxation v Hart[99] 2004 ATC 4599 ; (2004) 217 CLR 216 ; 206 ALR 207 (Hart) concluded that the matters specified in s 177D(b) had to be taken into account.[100] 2004 ATC 4599 ; (2004) 217 CLR 216 ; 206 ALR 207 at 245; 227 Section 165-15(1) has chosen even more direct language in introducing the twelve matters that "are to be taken into account". In light of that and of the High Court's interpretation, I have concluded that I must have regard to all of the matters specified in s 165-15(1).

83. With the possible exception of ss 165-15(k) and (l),[101] see [22] the matters identified in s 165-15 as matters to be taken into account are expressed in objective terms and are not linked to any entity's intention or purpose. In taking this approach, s 165-15 again reflects 177D(b) of Part IVA in relation to avoidance schemes. In relation to s 177D(b), Gummow and Haynes JJ in Hart said:

"… That provision requires the drawing of a conclusion about purpose from the eight identified objective matters; it does not require, or even permit, any inquiry into the subjective motives of the relevant taxpayers or others who entered into or carried out the scheme or any part of it."[102] 2004 ATC 4599 ; (2004) 217 CLR 216 ; 206 ALR 207 at 243; 226

84. In the earlier case of Spotless, the majority of the High Court had explained why this is so:

"The eight categories set out in par (b) of s 177D as matters to which regard is to be had 'are posited 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. …"[103] 96 ATC 5201 ; (1996) 186 CLR 404 ; 141 ALR 92 at 422-423; 102 (footnotes omitted)

85. In Hart, Their Honours also set out the manner in which that objective conclusion is to drawn:

"In the present matters, the respondents would obtain a tax benefit if, in the terms of s 177C(1)(b), had the scheme not been entered into or carried out, the deductions 'might reasonably be expected not to have been allowable'. When that is read with s 177D(b) it becomes apparent that the inquiry directed by Pt IVA requires comparison between the scheme in question and an alternative postulate. To draw a conclusion about purpose from eight matters identified in s 177D(b) will require consideration of

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what other possibilities existed. To say, as Hill J did, that 'the manner in which the scheme was formulated and thus entered into or carried out is certainly explicable only by the taxation consequences' assumes that there were other ways in which the borrowing of moneys for two purposes (one private and the other income producing) might have been effected. And it further assumes that those other ways of borrowing would have had less advantageous taxation consequences."[104] 2004 ATC 4599 ; (2004) 217 CLR 216 ; 206 ALR 207 at 243-244; 226; [66]

86. Is an entity's subjective opinion entirely irrelevant? In
Macquarie Finance Limited v Federal Commissioner of Taxation[105] (2005) 2005 ATC 4829 ; 225 ALR 694 (Macquarie Finance), Hely J said of Part IV of the ITA Act:

"… the Part IVA enquiry is driven by objective considerations. Evidence of the subjective motives of persons who entered into or carried out the scheme … is irrelevant, nor is it material to enquire whether or not the participants in the scheme would have proceeded with it had they appreciated that a deduction for the interest payments was not available. The conclusion as to purpose is to be drawn from the eight objective matters listed in s 177D(b). …"[106] (2005) 2005 ATC 4829 ; 225 ALR 694 at 4,872-4,873; 747; [212]

87. In his judgment in Macquarie Finance, French J did not consider it necessary to consider the application of Part IVA. Had he considered it necessary, he continued, he would have decided that Part IV would not have applied for the reasons set out in the judgment of Hely J.[107] (2005) 2005 ATC 4829 ; 225 ALR 694 at 4,833; 697; [5] Three months later, French J set out his own analysis of the requirements of s 177D(b) without reference to Macquarie Bank and concluded:

"It does not follow from the irrelevance of the subjective state of mind of the taxpayer that objective factors, tending to indicate that a particular purpose was subjectively held by a person, may not also be relevant to the determination of the objective purpose which could be inferred by a reasonable person."[108] Calder v Federal Commissioner of Taxation (2005) 2005 ATC 5050 ; 226 ALR 643 at 5,072; 669; [96]

88. Dr Orow floated the possibility that the requirement in ss 165-15(1)(k) and (l) provide the basis for an argument that the subjective state of mind of SH1 in his personal capacity and as director of VCE is relevant. He then rejected that possibility on the basis that a state of mind is not a "circumstance". I am not so sure that it cannot be. This was not a matter that was addressed by the High Court or the Federal Court in relation to s 177D(b) as that section does not have any "catch-all" provision of that sort.

89. The Federal Court has considered the word "circumstances" in contexts other than taxation related legislation. It has held that some regard may be had to a person's subjective intentions. This was the case in
Federal Commissioner of Taxation v Arklay,[109] 89 ATC 4563 ; (1989) 85 ALR 368 in which the Full Court of the Federal Court considered the provisions of the ITA Act allowing an "eligible person" to deduct amounts contributed to a qualifying superannuation fund during the year. A person is not an "eligible person" where "circumstances existed by reason of which it was reasonable to expect" the superannuation benefits would be provided for the person on retirement or for dependants of that person in the event of death.[110] ITA Act, s 82AAS(2)(a) The Full Court said:

"We are of the opinion that the phrase with which we are concerned in the context of s 82AAS of the Act requires a determination whether or not circumstances exist by reason of which the decision-maker is able to expect on reasonable grounds that superannuation benefits would be provided as stipulated in the section. That test is an objective one. However, in applying the test the decision-maker, in considering the circumstances, should have regard to any relevant matters concerning the taxpayer personally. Put another way our understanding of the meaning of the expression is one which involves the application of an objective test, but, as one of the concomitant elements of that test, the subjective intentions of the taxpayer may be relevant.

An example of an objective test which nevertheless accommodates the subjective intentions of a particular person is to be found under the Social Security Act 1947 (Cth); cf the decision of the Full Court of this court in Secretary, Department of Social Security v Copping (1987) 73 ALR 343 at 348 and see Dineen v Secretary, Department of Social Security (Federal Court of

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Australia, Woodward J, 6 December 1988, unreported)."[111] (1989) 85 ALR 368 at 372

In the context of a consideration of whether a person had suffered "a substantial change in circumstances beyond the person's control" within the meaning of s 739A(7) of the Social Security Act 1991, Mansfield J said:

"In identifying eligible events or matters as potentially falling within the description 'change in circumstances', in my view there is no clear or useful line necessarily to be drawn between a person's expectations and objective events. …"[112] Secretary, Department of Social Security v Secara (1998) 28 AAR 385; 51 ALD 481 at 397; 493

90. On the basis of these cases, it would seem that the "circumstances" referred to in ss 165-15(1)(k) and (l) may include those pertaining to SH1 and VCE and may even include their intentions. Those intentions may not determine the matter. They are but two of the twelve matters that must be taken into account in deciding the question posed by s 165-5(1)(c): is it "reasonable to conclude that … an entity… entered into or carried out the scheme … with the sole or dominant purpose of that entity or another entity getting a GST benefit from the scheme"? That is a question that must be resolved not on the basis of any entity's subjective intentions but on the basis of whether, to use the words of the majority in Spotless, "… a reasonable person would conclude that the taxpayers in entering into and carrying out the particular scheme had, as their most influential and prevailing or ruling purpose, and thus their dominant purpose, the obtaining thereby of a tax benefit, in the statutory sense."[113] 96 ATC 5201 ; (1996) 186 CLR 404 ; 141 ALR 92 at 423; 102-103

91. The requirement that all of the matters in s 165-15(1) are to be taken into account does not mean that all of them must point to the same conclusion, whatever it may be. In relation to s 177D(b), the Full Court of the Federal Court said in Calder:

"Hill J said in Peabody v Federal Commissioner of Taxation … (Ryan and Cooper JJ agreeing) that it is necessary to have regard to each of the matters referred to in s 177D(b). This does not mean that each must point to the necessary purpose. Some may point one way, others another way:

'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.'

All eight must be considered - Federal Commissioner of Taxation v Hart … per Gummow and Hayne JJ at 244 [70]. But as Callinan J said of the eight factors in the same case (at 261 [92]):

'It is not necessary of course that every one of them be relevant to every scheme. Indeed the presence or overwhelming weight of one factor alone may of itself in an appropriate case be of such significance as to expose a relevant dominant purpose.'"[114] (2005) 2005 ATC 5050 at 5,071

92. In view of the similarity in construction between s 165-15(1) and s 177D(b), it seems to me that I should adopt the same approach in considering deciding the question posed by s 165-5(1)(c) in this case i.e. is it reasonable to conclude that SH1 or VCE entered into or carried out the scheme with the sole or dominant purpose of either of them getting a GST benefit from the scheme.

Section 165-15(1)(a): "The manner in which the scheme was entered into or carried out"

93. Section 165-15(1)(a) is drafted in the same terms as s 177D(b) of the ITA Act. Of that latter section, the High Court said in Spotless:

"… In the context in which they appear in par (i), the terms… 'manner' includes consideration of the way in which and method or procedure by which the particular scheme in question was established. …"[115] 96 ATC 5201 ; (1996) 186 CLR 404 ; 141 ALR 92 at 420; 101

This accords with the ordinary meaning of the word "manner" as "… The way in which something is done or happens …".

94. I have already identified the elements of the scheme. Consideration of the way in which the scheme happened or was done, and so the manner in which it was entered or carried out, takes me back to the actions of SH1. On the basis of his own evidence, I find that he was the moving force in all aspects of the scheme. On the basis of his evidence, both written and oral, I find that he made all of the decisions that put the scheme in place. As its sole director, he made all of the decisions affecting VCE.[116] T documents, 73 and, as to the payment of dividends, see Exhibit A at [22] As the owner of the Property, he made all of the decisions in relation to it. In those capacities, he

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made decisions ranging from the incorporation of VCE and its registration for the purposes of the GST Act to the sale of the Property to VCE and the manner in which that sale was transacted and the purchase price paid.

95. I find that SH1 did not go to the market to ascertain whether there was any person prepared to purchase the Property on the terms that he offered to VCE.[117] Transcript, 57 SH1 gave no consideration to the financial impact of the scheme other than to know that he could service the mortgage out of his normal income.[118] Transcript, 57 He did not ask for any advice or carry out any research as to those who would be responsible for public interest liability under the Agreement.[119] T documents, 74

96. The Agreement provided for the immediate payment of $550 but provided for deferred payment of the remaining $769,450 of the purchase price. It provided for three payments spread over a fifteen year period with the major payment of $747,450 being the last payment on 30 June 2018. Despite that lengthy period and despite the size of the final payment, the Agreement made no provision for VCE's defaulting on the payment. Furthermore, it made no provision for the payment of interest on the deferred consideration. I will come back to this aspect but, for the moment, I am looking only at the manner in which the scheme was entered and carried out. Despite not receiving any interest on the deferred sums of consideration, SH1 continued to pay interest on the mortgage over the Property. That mortgage remained in his name and so the responsibility for those payments remained his.[120] Exhibit A at [37] There is some doubt as to when SH1 notified the mortgagee. In his written evidence, he said that he did not notify the mortgagee of the sale until 19 February 2004.[121] Exhibit A at [37] In cross-examination, he thought he might have done so on 3 April 2003. He had a diary note of a telephone call he had made to it on 3 April 2003. His note read "Aussie 131333 no problem" and he also had a telephone record confirming that a call was made to the mortgagee on that day.[122] Exhibit A, Attachment SH1-7 Whether SH1 did speak with the mortgagee earlier or not, there is no evidence that it gave its formal consent to the sale as would be expected.

97. No immediate arrangements were made to insure VCE's insurable interest that it obtained as a result of entering the Agreement. Its name was not added to the insurance policy until 23 July 2003 when SH1 contacted the insurance company.[123] Exhibit 2 and Transcript, 31

98. In neither of his capacities did SH1 advise the medical practitioner of the sale of the Property. The medical practitioner continued to pay the rent to SH1 in his personal capacity. SH1 deposited the rental payments in VCE's account and I accept his evidence that the one occasion on which the payment was deposited in his account was due to the bank's error and that it was corrected.[124] Exhibit A at [42] The medical practitioner knew nothing of any oral assignment of the lease from SH1 to VCE.

Section 165-15(1)(b): "the form and substance of the scheme"

99. Section 165-5(1)(b) requires consideration of the form and substance of the scheme including the legal rights and obligations it involves and its economic and commercial substance.

100. In form, the scheme was an Agreement for the sale and purchase of the Property on terms that entitled VCE, to claim an immediate input tax credit of $70,000. In substance, the fact that the Agreement deferred a significant portion of the payment of the consideration for a lengthy period left SH1 with the legal title. VCE was not required to pay interest on any part of the consideration that remained outstanding over that fifteen year period. As SH1 did not have to pay stamp duty until settlement day some fifteen years hence and as VCE had only to pay $550 immediately with payment of the vast bulk of the outstanding balance not payable until settlement day, VCE was able to claim from the Commissioner a sum of $70,000 immediately for an outgoing of a few hundred dollars. It did so in circumstances in which there are no obvious arrangements made for the manner in which VCE will pay the balance of the consideration. I will return to that later in these reasons.

101. Under the scheme, SH1 retained legal ownership of the Property but VCE acquired an equitable interest in it when they entered the Agreement. Each had an insurable interest in the property.[125] Insurance Contracts Act 1984 , s 49 Having regard to the lease to the medical practitioner and its renewal,[126] T documents, 34-39 and 50-52 I find that SH1 did not have any power under the lease to direct what was done with and to the Property on a day to day basis. Despite that, he

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would continue to have a duty to third parties to ensure that the Property was fit for the purposes for which he let it to the medical practitioner i.e. as medical consulting rooms. He retained that duty as the owner of the Property and the Agreement did not alter his liability to third parties. SH1 and the medical practitioner each remained liable to be sued should a person be injured on the Property.

102. SH1 and SH2 own all of the shares issued by VCE. Dr Orow drew my attention to a passage from the judgment of Sackville J in
Federal Commissioner v Mochkin[127] (2003) 2003 ATC 4272 to support his submission that ownership of an entity to which an asset is transferred does not necessarily result in a disconformity between the form and substance of a transaction. Sackville J said in that case:

"There was no disconformity between the form and substance of the scheme. The corporate vehicles were essential to achieve the Taxpayer's commercial objectives of avoiding exposure to personal liability. …"[128] (2003) 2003 ATC 4272 at 4287; [89]

His Honour went on to explain how that occurred in that case. It does not happen in this case because SH1 did not avoid personal liability. As he remained the owner of the Property, his liability remained the same during the fifteen year course of the scheme. There is a disconformity in this case between the form of the scheme and its substance.

103. This disconformity is further exaggerated when regard is had to the consideration provided for in the Agreement. SH1 said in his statement that he and VCE estimated the current market value and allowed for an increase in that value of the fifteen year term of the contract. That fifteen year term approximated the length of time remaining on SH1's mortgage. SH1 said that he had made various calculations he said that he had prepared in April 2003. In doing so, he had made various assumptions regarding the then current value of the Property on the open market according to whether the purchaser wished to negatively gear and having regard to the then current mortgage rate as well as to the CPA rate of return. They were $309,000, $261,461.54 and $226,600 respectively.[129] Exhibit A, Attachment SH1-5 The negatively geared rate was shown as 5.50, the current mortgage rate as 6.50 and the CPA rate as 7.50. The rate of return multiplier for payment in 15 years was 2.96 for negative gearing and 4.47 for the current mortgage rate. SH1 then calculated a sale value based on a negatively geared price, on a mortgage rate and on a CPA long term rate of return. The average of the estimated sales values was $987,051.93 and the average based on the value determined using CPA long term rate was $841,839.51.[130] Exhibit A, Attachment SH1-5

104. Mr Russell Parrington is a Registered Valuer under the Valuation of Land Act 1960 (Vic) and a Specialist Retail Valuer as defined in the Retail Leases Act 2003. He had reviewed a report by the Australian Valuation Office (AVO) dated 18 March 2004. The Report valued the Property on 25 April 2003 as between $220,000 and $250,000 and as at 25 April 2018 as between $460,000 and $520,000.[131] T documents, 55-60 Mr Parrington also read a copy of the Agreement and the lease as well as a letter by Mr Mel Trevethick to the Australian Taxation Office dated 31 March 2004. Mr Trevethick is a Senior Valuer with the AVO and he had commented that the Agreement was not a comprehensive contract of sale. It did not, for example, provide for the payment of rates and taxes on the Property during the term of the Agreement. The present value of the instalment payments using a current mortgage interest rate was $263,123.[132] T documents, 61 That resembled the value range of the Property on 25 April 2003. Mr Trevethick's conclusion about the Agreement was that:

"The instalment arrangement is not typical of a terms contract sale. A normal terms contract requires the purchaser to make regular payments usually monthly etc. so that the Vendor has a constant cash flow throughout the term of the contract.

Under this terms contract of sale the vendor is totally exposed, that is, he is receiving totally disproportionate instalment payments compared to the value of the property. On the other hand the purchaser is entitled to receive all rents from the property for a poultry initial $550 deposit and two $11,000 instalment payments. This means that the purchaser can receive the rent for 15 years and two months for the total payment of $22,550!

Overall the contract of sale is not commercially defensible and is considered

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totally out of whack with normal commercial practice.

We understand the Vendor and the Purchaser are connected and if so this would account for the unrealistic terms (to the vendor) of the contract of sale.

In summary the contract is not considered commercially realistic and the payment/instalment arrangements are also not considered commercially realistic."[133] T documents, 62

105. Mr Parrington made no comment about Mr Trevethick's valuation of the Property in April 2003. Instead, he considered only whether the price paid by SH1 in instalments is reasonable.[134] Exhibit B, [14] He had reviewed SH1's methodology and found it reasonable on the basis that the rental income stream would continue for the term of the contract. Using Mr Trevethick's present value figure of $263,123 and applying to it a capital appreciation rate of 7.5% over 15 years, the value is $778,580. Mr Parrington considered the figure of 7.5% to be reasonable as the median house price in Melbourne had risen at an annual rate of 9.4% between 1966 and 2004.[135] Exhibit B, [21]

106. Whether the price that was calculated on correct assumptions or not, the fact remains that the Agreement does not represent a transaction that made any sense whether in a commercial or domestic context. SH1 continues to bear the cost of the Property at least in so far as payment of the mortgage is concerned. At the same time, he does not have the benefit of the income stream unless he decides, as VCE's sole director, to direct that stream to him. If he decides to do that, VCE is left without funds to invest and to pay the instalments when they fall due under the Agreement.

Section 165-15(1)(c): "the purpose of object of this Act … and any relevant provision of this Act (whether the purpose or object is stated expressly or not)

107. I have set out the purpose of the GST Act above. It is apparent from the structure and provisions of the GST Act as a whole that it presupposes that, as a general rule, there will be payment of GST in specified instances and, again in specified instances, refund of that GST. That is clear from the particular provisions of Division 11 and, in particular, ss 11-1 and 11-5. Section 11-1 states that a person is entitled to an input tax credit for creditable acquisitions. A creditable acquisition must meet four criteria, one of which being that it is a taxable supply. That is the effect of s 11-5. Now, it may be that there is no precise marrying of the time at which the GST is attributable on the taxable supply and the timing of the input tax credit. That is the effect of Division 29, which is concerned with attribution of GST on taxable supplies and of input tax credits to tax periods. It is clear from Division 29 that the timing is dependent in part on the choice of accounting methods. The choice of different accounting methods by the person paying GST on the taxable supply and the person claiming an input tax credit does not of itself mean that there will be a significant discrepancy between the payment of the GST and the refund as a result of the claiming of the input tax credit. A significant discrepancy may occur, however, because of the timing of the payment of the consideration and the timing of the delivery of an invoice. Section 165-1 expressly states that Division 165 is intended to deter schemes that give entities benefits by altering the timing of the payment of GST or of refunds. It must be read with s 165-5(1)(b) that, in effect, ensures that Division 165 does not apply to benefits that are attributable to the operation of the GST Act itself.

108. Alteration of the timing of the payment of GST and payment of a refund is precisely what has happened here. It has altered it to the extent that payment of the bulk of the GST is deferred for some fifteen years but it is immediately refundable. This results not from the attribution provisions of Division 29 themselves but from the application of those provisions to the scheme.

Section 165-15(1)(d): "the timing of the scheme"

109. What is meant by the "timing of the scheme" is a little unclear. It could mean the time at which it was put in place or it could mean the time at which its elements were put in place. I will look at it in both ways.

110. Looking at it in the first way, all of its major elements came together in April 2003 and so some nineteen months after SH1 and SH2 were married on 9 September 2001. If I look at it in the second way, I look to the time at which and within which its major elements

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occurred. The major elements included the incorporation of VCE with SH1 as its sole director and half owner of its shares, its registering for the purposes of GST, its entering an Agreement to purchase the Property from SH1, its paying the deposit and SH1's giving it an invoice for the whole of the consideration. Indeed, all of the major elements were in place in a period of less than three weeks.

Section 165-15(1)(e): "the period over which the scheme was entered into and carried out"

111. The scheme began in 2003 and could not be said to be carried out until settlement of the sale occurs. Under the Agreement, that is 30 June 2018 and so a little over fifteen years from the date it was entered. Whether that settlement day will arrive is unclear on the evidence. Certainly, SH1 says that it will and that VCE will not renege on its obligations. The Agreement itself raises a question whether the obligation will ever arise and that follows from cl 14, which reads:

"The Vendor's Statement required by section 32(1) of the Sale of Land Act 1962 shall be provided by the vendor and will form part of this contract. Should such not be provided before settlement day or be provided and contain information not acceptable to the Purchaser the Purchaser retains full right without prejudice to any other rights under this agreement to terminate this agreement without recourse from the Vendor."[136] T documents, 45

There is no evidence that SH1 gave a Vendor's Statement to VCE. On its face, cl 14 would enable SH1 to relieve VCE of its obligations under the Agreement by simply not giving the Vendor's Statement to it.

112. An examination of s 32(1) of the Sale of Land Act 1962 shows that this would not necessarily be so. Section 32(1) requires the Vendor's Statement to be given to a purchaser before the signing of a contract for the sale of land. It must contain the information set out in s 32(2). Where a vendor fails to supply all of the required information or supplies false information, it may be possible for a purchaser to rescind the contract if it has been entered on the basis of that information at any time before accepting title to the land and becoming entitled to possession or to the receipt of rents and profits. That is the effect of s 32(5) but it is subject to the qualification in s 32(7). The purchaser may not rescind the contract if the court is satisfied that the vendor has acted honestly and reasonably and ought fairly be excused for the contravention and that the purchaser is substantially in as a good a position as if all the relevant provisions of s 32 had been complied with. The qualification is found in s 32(7).

113. The provisions of s 32 cannot be excluded, modified or restricted by any provision in a contract for the sale of land. Any provision that purports to do so is void and of no effect.[137] Sale of Land Act 1962 , s32(8) That would raise a question over the validity of cl 14 of the Agreement as it appears to modify the operation of s 32. The broader question, though, relates to who would question its validity anyway. SH1 is the vendor and he is the sole director of VCE. If VCE chooses to rely on cl 14 should it be the case that SH1 has not given a Vendor's Statement to VCE, it will be up to SH1 as VCE's sole director to decide whether to terminate the Agreement. That would mean that it would never have to pay the final amount of consideration, or part of it, under the Agreement.

114. Given that I do not know whether SH1 gave VCE a Vendor's Statement, the conclusion that I have reached in the previous paragraph must be in the realm of speculation and I do not rely on it. What is not speculative is that it is open to SH1 to never enforce payment of the purchase price or that part which is then due and payable. This is so even though cl 7 of the Agreement provides that the Vendor may, without prejudice to his other rights, cancel the agreement and sue VCE for damages.

Section 165-15(1)(f): "the effect that the GST Act would have in relation to the scheme apart from this Division"

115. Putting Division 165 to one side, the effect of the scheme is that VCE would be entitled to an immediate payment of input tax credit of $70,000 from the Commissioner whereas SH1 could defer all but $50 of the $70,000 of GST that would otherwise be payable. That is because $50 is the amount of GST payable on the deposit i.e. 10% of 10/11ths of $550.[138] see [10]

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Section 165-15(1)(g): "any change in the avoider's financial position that has resulted, or may reasonably be expected to result, from the scheme"

116. I am satisfied that VCE's financial position would be substantially improved as a result of the scheme. As an immediate result of the scheme, it has gained $70,000 less, perhaps, $550, which it might have paid as a deposit. I say "might have paid" because I am not clear whether it paid it, SH1 paid it or, if he did, whether it is shown in its accounts as debt to SH1.

Section 165-15(1)(h): "any change that has resulted, or may reasonably be expected to result, from the scheme in the financial position of an entity (a connected entity) that has or had a connection or dealing with the avoider, whether the connection or dealing is or was of a family, business or other nature"

117. SH1 is an entity that has had a dealing with the avoider, VCE. His income is expected to reduce because he has diverted the rental income from the Property to VCE. As the sole director, he can direct the use that is made of VCE's funds as he will. Those funds would include the rental payments as well as the input tax credit of $70,000.

Section 165-15(1)(i): "any other consequence for the avoider or connected entity of the scheme having been entered into or carried out"

118. SH1 will become liable to pay GST whenever he receives part payment of the consideration. I have already referred to the $50 he was liable to pay on receiving the deposit. He will be liable to pay a further $1,000 when he receives the part payment of $11,000 in 2008 and a further $1,000 when he receives the next part payment of $11,000 in 2013. That will mean that, by the time that the final amount of consideration, being $747,450, is due for payment on 30 June 2018, SH1 will have paid GST amounting to $2,050. The remaining sum of $67,950 will be payable in respect of GST on 30 June 2018. By that time, SH1 will have had the benefit of not having had to borrow the money to pay the GST at or some short time after the Agreement was entered. He will have had the benefit of not having to pay interest. Although he will have known the full amount of the GST ultimately payable, he will not have had to pay interest on it as it does not become payable until he receives the cash in hand. That is a result of his choosing to account on a cash basis. It is an outcome that favours SH1 as the net present value of money in 2003 in the hand is significantly greater than the same amount promised for payment five and ten years, let alone fifteen, years later. In the meantime, VCE will have had the advantage of being able to use the $70,000 paid as a refund by the Commissioner.

Section 165-15(1)(j): "the nature of the connection between the avoider and a connected entity, including the question whether the dealing is or was at arm's length"

119. I am satisfied that there is a close connection between SH1 and VCE in that SH1 is its sole director and owner of half of its shares. As to whether the dealing was at arm's length, Dr Orow drew my attention to the passage from [111] of PS LA 2005/24 entitled "Application of General Anti-Avoidance Rules" that reads:

"… many dealings which would be decidedly odd between strangers may be entirely explicable between family members."

120. The passage needs to be read in its context. It refers to the criterion in s 165-15(1)(j). It reads in part:

  • "110. … This factor requires the circumstances that parties are not dealing with each other at arm's length in connection with the scheme to be taken into account. For example, a transaction having the form of a loss-making transaction when only the taxpayer's position is considered may not produce a loss in substance if an associate of the taxpayer makes a corresponding non-taxable gain. … Conversely, in some cases this factor may permit consideration of offsetting liabilities incurred by associates as a result of the scheme to demonstrate absence of the relevant purpose.
  • 111. This factor requires attention to be paid to the existence of any family relationship between the taxpayer and the persons who are affected in any way by the scheme. This could assist a taxpayer in some cases. Many dealings which would be decidedly odd

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    between strangers may be entirely explicable between family members. For example, a businessman who gives assets to strangers for less than they are worth may be subject to suspicion but a gift to his family could stand in a different light. Of course, it would be a different matter again if the family members do not benefit in substance from the arrangement."

121. It is clear that the whole scheme must be considered. It includes an Agreement that does impose liabilities and duties that may be enforced at law and in equity as Dr Orow submits. For all that, though, it is the same person on each side of the Agreement, SH1, who makes that decision. He is both the vendor and the sole director of the purchaser. It cannot be said to be an Agreement entered by parties who are at arm's length from each other.

122. On the material that is available, it is outside the range of normal commercial dealings. The time between the date of the Agreement and the date of settlement is unusually lengthy. Dr Orow submitted that the period enabled VCE to generate finance to pay for the Property. That suggests an unduly generous vendor but SH1's evidence is that the purchase price has been adjusted to take account of the delayed consideration. In the meantime, SH1 does not have access to the monies from the sale, or any significant part of it, for a lengthy period of time. Assuming VCE does not default on the interim payments, he cannot take advantage of any other offer he might receive in the next eighteen years to sell the Property. He does not receive the lease payments from the Property and yet continues to pay the mortgage.

123. Looking at the arrangement from VCE's point of view, it appears that it has committed itself to purchase a property at a significantly higher price than it could have acquired it on the current market in 2003[139] This is consistent with the evidence of Mr Parrington. . At the same time, it has acquired a large future liability but, for the reasons that I have given above, it is open to question whether it would ever be required to meet that liability. If VCE were required to meet that liability, it may have difficulty meeting its liability to pay $769,450 without assistance. The assistance that it could expect from SH1 is reduced because he is no longer the recipient of the lease payments from the medical practitioner. VCE will gain the benefit of the lease payments' being paid into its account. Those payments will accumulate over time. If invested on a term deposit, the interest will compound but, unless there is a significant increase in interest rates or the rent is significantly increased, it may be difficult for it to grow to an amount that covers the balance of the purchase price. It could be that the rental money is invested in something other than a term deposit but it is difficult to predict its rate of return and so difficult to have confidence that VCE would be able to meet the final payment in 2018.

Section 165-15(1)(k): "the circumstances surrounding the scheme"

124. On the basis of his own evidence, I find that SH1did not formally notify the mortgagee of the Property of its sale until 19 February 2004.[140] Exhibit A at [37] He did not do so because he continued to own the Property and to be responsible for the mortgage payments. SH1 was not sure whether he had notified the mortgagee earlier on 3 April 2003 informally as he had written a note "Aussie 131333 no problem". In the absence of any further evidence and SH1's state of uncertainty, I am not satisfied that he formally notified the mortgagee of the sale that took place later that month.

125. SH1 delayed two months in adding VCE's name to the insurance policy. He did that on 23 July 2003.

Section 165-15(1)(l): "any other relevant circumstances"

126. One of the "other relevant circumstances" relates to SH1's views on why he did what he did. One of those views relates to SH1's view as to his exposure to public liability after he entered the Agreement with VCE. SH1 said in his statement that he was concerned about his "legal exposure as the owner and landlord of the Property to third parties in the event of injury that may occur on the Property."[141] Exhibit A at [19] Furthermore, he was concerned that the public liability insurance he held in respect of the Property would be inadequate to meet any claim that might be made. His concern extended to the possibility that his insurer might refuse to meet a claim and so exposing him to personal liability for the full amount. If he were to transfer the Property to

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his wife, he said, she would then be exposed to the risks that he was trying to avoid.

127. In giving oral evidence, SH1 said that his concern regarding third party liability focused not on the medical practitioner's being injured but on his patients' or on trespassers' being injured on the Property. His concern arose from what he had read in the media. He linked it to his potential liability as a landlord and his responsibilities under the lease of the Property to the medical practitioner. He did not link it to his status as the owner of the Property. When asked whether he thought about the possibility of his being sued because he was the owner, he replied that he thought that he would gain protection if he could separate his responsibilities as a landlord. Despite his view, he continued to be named on the certificate of currency of insurance. His insurable interest is that of an owner. This had come about after he had explained the situation to the insurance company. The insurance company, he said, had suggested that both he and VCE be covered. He trusted their suggestion and did not question it.[142] Transcript, 25 and 26

128. Mr Pagone drew his attention to his statement in which he had said that he did not add VCE's name to the certificate of currency until 23 July 2003 because VCE did not own the Property and there was no immediate need for insurance.[143] Exhibit A at [36] SH1 saw nothing contradictory between his oral evidence and his statement. Instead, he read them as composite statements[144] Transcript, 25 or regarded his evidence as expanding upon his statement.[145] Transcript, 29 To his mind, he has now avoided personal legal exposure and is confident that he has shifted his responsibility to VCE.[146] Transcript, 26 and 27 Although confident of that, he had shifted his responsibility to VCE, he decided to err on the side of caution because he could not be 100% confident that he would be fully protected from any claim.[147] Transcript, 27 Despite thinking that he had shifted his responsibility to VCE and that it would be exposed to litigation if something went wrong, he thought that there was no need to obtain insurance in its name as VCE had few assets at the time. If proceedings were instituted, SH1 saw his financial loss as negligible in that it would be confined to the small amount of cash held by VCE at the time.[148] Transcript, 28 The timing of his approaching the insurance company to add VCE to the certificate of insurance was determined by the request made by Australian Taxation Office (ATO) for copies of current insurance policies. SH1 thought "'Well, right, okay, I will show to you I am serious about this transaction.' So … [he] went ahead and updated it and provided the details."[149] Transcript, 33 He had not included this information in his statement as he had not seen it as important.[150] Transcript, 33

129. SH1 said that he had provided for VCE's default in the Agreement but had not provided for it to pay any money to make good any default. He said that he had not done so as VCE did not intend to default. If it did, he would be able to force VCE to complete the Agreement. SH1 had not turned his mind to the manner in which VCE might complete the Agreement.

130. SH1 said that he considered that his shifting an investment property into a company meant that he and his family would be enriched by the benefits of that company. The ATO was, in his view, focusing only on what he was surrendering as an individual and no more.[151] Transcript, 42-43 It could not "… seem to grasp the concept that the benefits that the company was acquiring were going to be flowing back to … [me] financially."[152] Transcript, 43

Is it reasonable to conclude that an entity entered into, or carried out the scheme with the sole or dominant purpose of its or another entity's getting a GST benefit from the scheme?

131. Dr Orow submitted that the Agreement represented an ordinary commercial or family dealing. VCE was established in order to facilitate the sale of an income producing asset. Had the sale of the Property never taken place, there would have been no need to have established VCE at all. The purpose of the arrangement was to limit taxation on the rent received from the medical practitioner at the rate of 30%, stream all of the income to SH2 and limit SH1's exposure to public liability. The higher price was justified by reference to VCE's not having to obtain finance or to pay regular interest payments.

132. The reasons that are put forward appear, on the evidence, to be internally inconsistent. The inconsistency arises from the fact that the sale is intended to benefit SH1 and his wife and yet continues to leave SH1 exposed to the public liability he wants to avoid

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and, if SH2 is to receive any benefit, leaves VCE without funds to meet its liabilities to pay parts of the consideration in 2008, 2013 and 2018. Despite SH1's assurance that VCE will not default on the Agreement, there is nothing in that Agreement that binds the parties to complete the Agreement. SH1's delay in adding VCE's name to the certificate of insurance and to notify the mortgagee tends to suggest that the Agreement is all about form but not about substance. His delay in transferring the lease to VCE seven or eight months after the Agreement tends to do the same. This tendency is not allayed by the fact that VCE had its own bank account or that SH1 paid the rent into VCE's bank account before the formal transfer. It is not allayed by SH1's claim that he wanted to avoid incurring additional fees when a new lease was due to be negotiated within a few months of the Agreement. The commercial benefits to either SH1 or his family or VCE are questionable. SH1 acknowledged that he had not assessed the effect of the scheme on any claim he might have previously had to claim the mortgage payments as tax deductions.

133. Taking all of the criteria specified in s 165-15(1), I am satisfied that it is reasonable to conclude that both VCE and SH1, or either of them, entered, or carried out the scheme with the sole or dominant purpose of its getting a GST benefit under the scheme.

Should the scheme be disregarded?

134. Section 165-40 is framed so that the Commissioner " may make a declaration" (emphasis added). The use of the word "may" is consistent with a conclusion that the Commissioner has a discretion whether he did so or not and is consistent with the GST Act.[153] Acts Interpretation Act 1901 , s 33(2A). This is not a case in which, in the context in which the power is given in the Act, “may” must be read as “must”: see discussion by Finn J in Gribbles Pathology (Victoria) Pty Ltd v Minister for Health and Aged Care (2000) 106 FCR 1 . What decision should he have made?

135. I must first consider the limits of the discretion that are given by s 165-40. Gleeson CJ, Gaudron and Hayne JJ said in
Coal and Allied Operations Pty Ltd v Australian Industrial Relations Commission:[154] (2000) 203 CLR 194 ; 174 ALR 585

"'Discretion' is a notion that 'signifies a number of different legal concepts' …. In general terms, it refers to a decision-making process in which 'no one [consideration] and no combination of [considerations] is necessarily determinative of the result' …. Rather, the decision-maker is allowed some latitude as to choice of the decision to be made …. The latitude may be considerable as, for example, where the relevant considerations are confined only by the subject matter and object of the legislation which confers the discretion. On the other hand, it may be quite narrow where, for example, the decision-maker is required to make a particular decision if he or she forms a particular opinion or value judgment."[155] (2000) 203 CLR 194 ; 174 ALR 585 at 205;591-592 ; [19] (omitting footnotes) and see also Drake v Minister for Immigration and Ethnic Affairs (1979) 24 ALR 577 ; 2 ALD 60 at 590; 70 per Bowen CJ and Deane J and 602; 80 per Smithers J

136. The discretion given by s 165-40 is not confined by the terms in which it is given. If there are any constraints upon its latitude, they are to be found in the subject matter and object of the Act as well as its underlying policy.[156] Alexandra Private Geriatric Hospital Pty Ltd v Blewett (1984) 2 FCR 368; 56 ALR 265 at 375; 272 I have already set out the objects of the GST Act as well as summarised the manner in which it is to operate. The burden of GST is intended to fall according to its terms which are framed on the basis of there being a commercial transaction of some type. That is apparent from the requirement in s 9-5(a) that a supply must be for consideration before it becomes a taxable supply. It is equally clear that the GST Act is not intended to be a source of bounty. An input tax credit is dependent on there having been, among other matters, a taxable supply. There is an assumption that there will be some correlation between payment of GST and an input tax credit. After all, the consideration paid, or to be paid, for the goods or services will generally include that burden. The person supplying the goods or services will pay the GST to the Commissioner but the price will include GST. In practical terms, the input tax credit effectively lightens the burden for the person who acquires the goods or services. It does so by allowing that person to claim the amount, or part of it, from the Commissioner. An input tax credit does not represent some sort of bounty that the Commissioner bestows upon a person. It is more appropriately regarded as an alleviation of the burden that a person has borne in paying the price of the goods and services.

137. In this case, the burden and its alleviation have not fallen as the GST Act intended. It has not done so because of a scheme embarked upon by SH1 acting both for himself and for VCE. SH1 would have me accept that the consequences under the GST Act are incidental to his intention to provide for his family through VCE and to protect himself from damages claims in relation to the Property.

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I do not accept that. Instead, I find that he set out on a deliberate course of action that had the acquisition of a substantial input tax credit with minimal outlay as one of its central aims. His actions in April 2003 were all directed to that end. SH1's subsequent actions in adding VCE to the insurance policy, in advising the mortgagee of the sale and transferring the lease to VCE do not dissuade me from that view. The window was then in place but the substance remained of an Agreement for the sale of the Property at an inflated price over a lengthy term without adequate means to enforce it against a purchaser of uncertain means. That was inconsistent with SH1's intention to provide for his family. His retention of the ownership over that lengthy period was inconsistent with his stated intention to avoid liability in respect of the Property.

138. Had the scheme not been entered, there are two possible outcomes. One is that the GST and the input tax credits would have mirrored each other. SH1 would have paid $50 GST. On that view, I am satisfied that the discretion under s 165-40 should be exercised on the basis that VCE had not made an election to account on an accruals basis but had made a decision to account on a cash basis. In doing so, I rely on the power given by s 165-55. Had that been so, VCE would have had an input tax credit of $50 as it would, under s 11-25, have been an amount equal to the GST payable on the supply. That is the position in which it should be placed as a result of the declaration. Therefore, on the first view, I consider that VCE's net amount for the April tax period should be minus $50 as a result of deducting the input tax credit from a zero amount of GST payable by VCE. That would have entitled VCE to a refund of $50.

139. A second view is open. That view is that the sale of the Property would never have occurred at all. That is a view I can take by relying on s 165-55(1) to treat an event that has occurred (the sale) as not having occurred. That would leave VCE with an input tax credit of zero and a net amount of zero. It would not have been entitled to a refund of any amount from the Commissioner.

140. Which of these views is the correct view is open to some conjecture but I prefer the second. I do so on the basis that the first view fails to achieve what SH1 said that he set out to do. It fails to do so in the same way that the scheme failed to achieve what he said it set out to do. As a way in which to organise a person's personal affairs and to provide for a family, it makes little sense. Its failure to achieve its purposes and its lack of sense persuades me that the second is the preferable view. Therefore, I will affirm the Commissioner's decision in relation to Division 165.

Penalty

141. VCE is liable to an administrative penalty in the circumstances of this case if it got "a scheme benefit from a scheme"[157] Taxation Administration Act 1953 (TA Act), Schedule 1, s 284-145(1)(a) and:

  • "(b) having regard to any relevant matters, it is reasonable to conclude that:
  • (i) any entity (that alone or with others) entered into or carried out the scheme, or part of it, did so with the sole or dominant purpose of that entity or another entity getting a scheme benefit from the scheme"[158] TA Act, Schedule 1, s 284-145(1)(b)

142. I have already concluded that both SH1 and VCE, or either of them, entered the scheme with the sole or dominant purpose of VCE's getting a GST benefit under the scheme. Is that GST benefit a scheme benefit? Again in the circumstances of this case, VCE:

"… gets a scheme benefit from a scheme if:

  • (a) …
  • (b) an amount that the Commissioner must pay or credit to the entity under a taxation law for an accounting period is, or could reasonably be expected to be, more than it would be apart from the scheme or a part of the scheme."[159] TA Act, Schedule 1, s 284-150(1)(b)

A "taxation law" includes any "… Act of which the Commissioner has the general administration (other than an Act prescribed for the purposes of this paragraph)."[160] TA Act, s 2(1) In view of my conclusion regarding VCE's getting a GST benefit, it follows that it has also gained a scheme benefit.

143. The amount of the penalty is worked out in Schedule 1 of the TA Act under s 284-160 in the case of a scheme. If the base penalty amount is not increased under s 284-220 or reduced under s 284-225, that is the amount of the penalty.[161] TA Act, s 284-155(1) The "base penalty amount" in relation to a scheme under s 284-145(1) is:

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    "(i) 50% of your scheme shortfall amount; or
  • (ii) 25% of your scheme shortfall amount if it is reasonably arguable that the adjustment provision does not apply".[162] TA Act, s 284-160(a)

The "scheme shortfall amount" is an amount that an entity would, apart from an adjustment provision such as the GST Act, have got under the scheme.[163] TA Act, s 284-150(2)

144. These administrative penalty provisions form part of Division 284. For the purposes of that Division, s 284-15(1) provides that:

"A matter is reasonably arguable if it would be concluded in the circumstances, having regard to the relevant authorities, that what is argued for is about as likely to be correct as incorrect, or is more likely to be correct than incorrect."

The "authorities" include a taxation law, material for the purpose of s 15AB of the Acts Interpretation Act 1901, a decision of a court, Board of Review or this Tribunal and a public ruling within the meaning of Part IVAAA.[164] TA Act, s 284-15(3)

145. This provision is similar, but not identical, to that in s 222C(1) of the ITA Act. It provides that, for the purposes of Part VII of that legislation, "the correctness of the treatment of the application of the law … is reasonably arguable if, having regard to the relevant authorities and the matter in relation to which the law is applied …, it would be concluded that what is argued for is about as likely as not correct." There is a significant difference between the two in that the test under s 284-15(1) is that what is argued for "is as likely to be correct as incorrect" whereas s 222C(1) refers to the correctness of the treatment of the application of a law is "about as likely as not correct". The word "about" has been omitted for the purposes of the penalty provisions under the GST Act but is its omission significant?

146. Hill J considered this provision in
Walstern Pty Ltd v Federal Commissioner of Taxation.[165] (2003) 2003 ATC 5076 Of the word "about" he said:

"… The word 'about' indicates the need for balancing the two arguments, with the consequence that there must be room for it to be argued which of the two positions is correct so that on balance the taxpayer's argument can objectively be said to be one that while wrong could be argued on rational grounds to be right."[166] (2003) 2003 ATC 5076 at 5,095

Despite the omission of the word "about" from s 284-15(1), it seems to me that this correctly reflects the meaning it is intended to have. The section is intended to engage a decision-maker in balancing the taxpayer's argument against that found to be the correct argument. A decision-maker is intended to conduct that test in an objective fashion. That is underlined by the reference in the opening words of the section that "it would be concluded" that what is argued for is as likely to be correct as incorrect, or is more likely to be correct than incorrect. As Hill J said:

"… the two arguments … will be finely balanced. The case must thus be one where reasonable minds could differ as to which view, that of the taxpayer or that ultimately adopted by the Commissioner was correct. There must, in other words, be room for a real and rational difference of opinion between the two views such that while the taxpayer's view is ultimately seen as wrong it is nevertheless 'about' as likely to be correct as the correct view. A question of judgment is involved."[167] (2003) 2003 ATC 5076 at 5,095

147. His Honour also pointed to the steps to be taken in reaching a conclusion as to whether a matter is reasonably arguable:

  • "2. The decision-maker considering the penalty must first determine what the argument is which supports the taxpayer's claim.
  • 3. That person will already have formed the view that the claim is wrong, otherwise the issue of penalty could not have arisen. Hence the decision-maker at this point will need to compare the taxpayer's argument with the argument which is considered to be the correct argument.
  • 4. The decision-maker must then determine whether the taxpayer's argument, although considered wrong, is about as likely as not correct, when regard is had to 'the authorities'."[168] (2003) 2003 ATC 5076 at 5,095

148. Hill J's judgement was considered and applied in
Pridecraft Pty Ltd v Federal Commissioner of Taxation[169] (2004) 213 ALR 450 by the Full Court. It did so in the context of a case that had revolved around the application of s 177D(b) of

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the ITA Act. The test in that section provides for an objective test to determine an entity's dominant purpose. Sackville J, with whom Ryan and Sundberg JJ concurred, said in the circumstances of that case that it was "… fair to say that there was room for a rational argument that, viewed objectively, Spotlight's dominant purpose in entering the Pt IVA scheme was not to obtain a tax benefit."[170] (2004) 213 ALR 450 at 477

149. In the course of these reasons, I have pointed to the arguments put on behalf of VCE to support its contention that it should not be regarded as coming within the provisions of Division 165. They focused on the dominant purpose in entering the scheme. The argument that I consider is correct leads to a conclusion that the dominant purpose was that of getting a GST benefit under the scheme.

150. Dr Orow referred to VCE's taking reasonable care in preparing the Business Activity Statement (BAS) and submitted that the penalty should be remitted in full as a result. That is not a relevant consideration in the context of s 284-15(1). It imposes a penalty by virtue of its terms and care in the preparation of a BAS is not part of those terms.

151. On behalf of VCE, Dr Orow pointed to private rulings to support VCE's argument. No reference is made in s 284-15(3) to private rulings. Part 5-5 of the TA Act is concerned with rulings. It specifies common rules for rulings in Division 357 and goes on to deal separately with public rulings, private rulings and oral rulings in Divisions 358, 359 and 360 respectively. At first sight, therefore, the omission of any reference to private rulings in s 284-15(3) to private rulings would seem to be a deliberate omission and to suggest that no regard may be had to them.

152. This view is confirmed when regard is had to the nature of private rulings. The Commissioner may make a private ruling on the way in which the Commissioner considers a provision applies, or would apply, to a person or a scheme.[171] TA Act, s 359-5(1) A private ruling binds the Commissioner if it applies to a person and that person relies on it.[172] TA Act, s 357-60(1) In so far as that person is concerned, there is no time limit imposed on relying on it unless that limit is found in the taxation law.[173] TA Act, s 357-60(2) A private ruling may specify the time for which it applies and if it does not specify a time at which it ceases to apply, it ceases to apply at the end of the income tax year or accounting period in which it started to apply.[174] TA Act, s 359-25 Provision is made for circumstances in which more than one ruling, of any type, apply to a person and the rulings are inconsistent.[175] s 357-75 It is apparent, therefore, that private rulings are intended to have a very narrow compass. The Commissioner is not bound to apply any part of the ruling to the circumstances of a person other than the person who applied for the ruling. Its nature is indeed private and I do not consider it an authority to which I may have regard in making a decision under s 284-145(1) of the TA Act.

153. There were no Australian authorities considering Division 165 of the GST Act when SH1 and VCE established the scheme. There was a New Zealand authority,
Ch'elle Properties (NZ) Ltd v Commissioner of Inland Revenue.[176] [2004] 3 NZLR 274 It had considered anti-avoidance provisions in relation to a transaction exploiting differences in the timing for payment and the delivery of an invoice. Dr Orow submitted that a person should not be expected to know overseas' authority and, in any event, sought to distinguish it. SH1 is in a position where he could be expected to have some knowledge of GST but it does not follow that he would necessarily know about such an authority. Whether he would necessarily know about it or not is not to the point. The question is whether VCE's argument is about as likely as not correct, when regard is had to the authorities and not whether SH1 or VCE knew about those authorities. In any event and whether he knew about them or not, at the time that SH1 and VCE established the scheme, there had been a number of cases in the Australian courts considering Part IVA of the ITA Act. It is clear from the scheme of Division 165 that it is built on principles that are very similar to those found in Part IVA. Those principles give a clear indication that VCE's argument would not be upheld. There was a lack of conformity between the form and substance of the scheme. It failed to achieve SH1's stated intention to eliminate his exposure to negligence claims in relation to the Property or to provide for his family. No provision was made for the manner in which VCE would finance the purchase price. All pointed against a finding that the dominant purpose would be found to be other than to obtain a GST benefit. Even if a person were not

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familiar with Part IVA of the ITA Act, it is apparent from the scheme of the GST Act that there is meant to be some degree of conformity between the GST that is paid on a taxable supply and the input tax credit on that taxable supply. That also indicates that VCE's argument would not be upheld. This is not a case in which it could be said that reasonable minds would differ on the likely outcome when the matter came to be considered.

154. Taking all of these matters into account, I am not satisfied that VCE's argument in support of the scheme is about as likely as not correct, when regard is had to the authorities. Therefore, the appropriate "base penalty amount" in relation to a scheme under s 284-145(1) is 50% of VCE's scheme shortfall amount.

155. Provision is made in the TA Act to increase the penalty under s 284-220 or reduce it under s 284-225. Neither party made any submissions regarding these provisions and so I do not propose to consider them.

156. For the reasons I have given, I have affirmed the Commissioner's decision dated 15 March 2005.

Footnotes

[1] s 7-1
[2] s 9-5
[3] s 9-10(1)
[4] s 9-10(3)
[5] s 9-20(3)
[6] s 9-15
[7] s 23-5
[8] s 23-15(1)
[9] s 23-10
[10] s 9-30(1)
[11] s 9-30(2)
[12] s 9-30(3)
[13] s 9-39
[14] s 9-70
[15] s 9-75
[16] s 9-75
[17] s 29-5(2)(a)
[18] s 29-5(2)(b)
[19] s 29-5(2)(c)
[20] s 11-5
[21] s 11-10(1)
[22] s 11-10(2)(d)
[23] s 11-15(1)
[24] s 11-20
[25] s 17-1 The tax period is generally a three month period unless a person elects to have one month tax periods or the Commissioner determines otherwise under Division 27 of Part 2.6: s 27-5.
[26] s 17-5(1)
[27] s 17-5(2)
[28] ss 35-5 and 35-10
[29] A person who is registered or required to be registered must give the Commissioner a GST return for each tax period within the time specified in: ss 31-5, 31-8 and 31-10.
[30] s 29-5(1)
[31] s 29-10(1)(a)
[32] s 29-10(1)(b)
[33] s 29-10(2)(b)
[34] s 165-1
[35] ss 195-1 and 184-1
[36] s 165-5(1)-(2)
[37] s 165-10
[38] s 165-10(2)
[39] s 165-15(1)
[40] s 165-15(1). Section 165-15(2) provides that s 165-15(1) “… applies in relation to consideration of an entity’s purpose in entering into or carrying out a part of a scheme from which the avoider gets or got a GST benefit, and the effect of part of the scheme, as if the part were itself the scheme from which the avoider gets or got the GST benefit.”
[41] s 165-50
[42] Exhibit A, Attachment SH1-1
[43] Exhibit A, Attachment SH1-2
[44] T documents, 34-39
[45] Exhibit A, Attachment SH1-3
[46] Exhibit A, Attachment SH1-4
[47] Transcript, 45
[48] The contract is dated 25 April 2002 but it is common ground that it should have been dated 25 April 2003.
[49] Agreement, cll 1 and 2: T documents, 42-45
[50] Agreement, cl 6
[51] Agreement, cl 3
[52] Agreement, cl 5
[53] Agreement, cl 4
[54] Transcript, 38
[55] Exhibit A, Attachment SH1-8
[56] T documents, 118
[57] s 177D
[58] s 177D(a)
[59] ITA Act, Schedule 2F, s 272-140
[60] [2004] AATA 710 at [49]-[59]
[61] Re Eldersmede Pty Ltd and Ors and Commissioner of Taxation [2004] AATA 710 at [53]-[55]
[62] (1975-76) 134 CLR 640 ; 7 ALR 491
[63] (1975-76) 134 CLR 640; 7 ALR 491 at 700; 508
[64] [2004] AATA 710 at [58]
[65] (1999) 99 ATC 4945
[66] (1999) 99 ATC 4945 at 4,986
[67] Federal Commissioner of Taxation v Consolidated Press Holdings Ltd (2001) 2001 ATC 4343 at 4,367
[68] (2001) 2001 ATC 4343 at 4,366 (footnote omitted)
[69] (2001) 2001 ATC 4343 at 4,366-4,367
[70] Peabody v Commissioner of Taxation 93 ATC 4104 ; (1993) 40 FCR 531; (1993) 112 ALR 247 and C.C. (New South Wales) Pty Limited (In Liquidation) v Commissioner of Taxation (1997) 97 ATC 4123 , both of which preceded the enactment of the GST Act.
[71] [24] to [38]
[72] s 29-5(2)(b)
[73] Applicant’s Submissions at [42]
[74] Applicant’s Submissions at [47]
[75] (1994) 181 CLR 359 ; 94 ATC 4663 ; 123 ALR 451
[76] Footnote omitted. (1994) 181 CLR 359 ; 94 ATC 4663 ; 123 ALR 451 at 385; 4,671; 461 That passage relates to the Court’s consideration of s 177C(1)(a) of the ITA Act. It is in similar terms to those in s 165-10(1)(b) of the GST Act in providing for the purposes of Part IVA of the ITA Act that: “… a reference … to the obtaining by a taxpayer of a tax benefit in connection with a scheme shall be read as a reference to: (a) an amount not being included in the assessable income of the taxpayer of a year of income where that amount would have been included, or might reasonably be expected to have been included, in the assessable income of the taxpayer of that year of income if the scheme had not been entered into or carried out….”
[77] Chambers 21st Century Dictionary, 1999, reprinted 2004, Chambers (Chambers)
[78] Chambers
[79] Roncevich v Repatriation (2005) 222 CLR 115; 79 ALJR 1366; 218 ALR 733 at 126, 1373 and 742; [27]
[80] Commissioner of Taxation (Cth) v Sun Alliance Investments Pty Ltd (in Liq) 2005 ATC 4955 ; (2005) 222 ALR 286; 80 ALJR 202 at 304; [77] (footnotes omitted)
[81] The “GST law” comprises the GST Act and other legislation specified in the definition of that term in s 195-1.
[82] Chambers
[83] Chambers
[84] Chambers
[85] Chambers
[86] Chambers
[87] Donnelly v Edelsten (1992) 109 ALR 651 at 656
[88] s 25-5
[89] Hall v Jones (1942) 42 SR (NSW) 203 at 208 per Jordan CJ at 414 per Griffit
[90] Commonwealth v Baume (1905) 2 CLR 405 at 414 per Griffith CJ; Beckwith v R (1976) 12 ALR 333 at 337 per Gibbs J
[91] Brisbane City Council v Attorney-General (Qld) (1908) 5 CLR 695 at 720 per O’Connor J
[92] (1981) 147 CLR 297 ; 35 ALR 151
[93] (1981) 147 CLR 297 ; 35 ALR 151 at 320; 169-170
[94] s 11-25
[95] A choice or election to account on a cash basis is provided for in the sense that the circumstances in which a person may choose to account on a cash basis are specified in Division 29B of the GST Act.
[96] (1996) 186 CLR 404 ; 96 ATC 5201 ; 141 ALR 92
[97] 96 ATC 5201 ; (1996) 186 CLR 404 ; 141 ALR 92 at 423; 102-103
[98] 96 ATC 5201 ; (1996) 186 CLR 404 ; 141 ALR 92 at 423; 102-103
[99] 2004 ATC 4599 ; (2004) 217 CLR 216 ; 206 ALR 207
[100] 2004 ATC 4599 ; (2004) 217 CLR 216 ; 206 ALR 207 at 245; 227
[101] see [22]
[102] 2004 ATC 4599 ; (2004) 217 CLR 216 ; 206 ALR 207 at 243; 226
[103] 96 ATC 5201 ; (1996) 186 CLR 404 ; 141 ALR 92 at 422-423; 102 (footnotes omitted)
[104] 2004 ATC 4599 ; (2004) 217 CLR 216 ; 206 ALR 207 at 243-244; 226; [66]
[105] (2005) 2005 ATC 4829 ; 225 ALR 694
[106] (2005) 2005 ATC 4829 ; 225 ALR 694 at 4,872-4,873; 747; [212]
[107] (2005) 2005 ATC 4829 ; 225 ALR 694 at 4,833; 697; [5]
[108] Calder v Federal Commissioner of Taxation (2005) 2005 ATC 5050 ; 226 ALR 643 at 5,072; 669; [96]
[109] 89 ATC 4563 ; (1989) 85 ALR 368
[110] ITA Act, s 82AAS(2)(a)
[111] (1989) 85 ALR 368 at 372
[112] Secretary, Department of Social Security v Secara (1998) 28 AAR 385; 51 ALD 481 at 397; 493
[113] 96 ATC 5201 ; (1996) 186 CLR 404 ; 141 ALR 92 at 423; 102-103
[114] (2005) 2005 ATC 5050 at 5,071
[115] 96 ATC 5201 ; (1996) 186 CLR 404 ; 141 ALR 92 at 420; 101
[116] T documents, 73 and, as to the payment of dividends, see Exhibit A at [22]
[117] Transcript, 57
[118] Transcript, 57
[119] T documents, 74
[120] Exhibit A at [37]
[121] Exhibit A at [37]
[122] Exhibit A, Attachment SH1-7
[123] Exhibit 2 and Transcript, 31
[124] Exhibit A at [42]
[125] Insurance Contracts Act 1984 , s 49
[126] T documents, 34-39 and 50-52
[127] (2003) 2003 ATC 4272
[128] (2003) 2003 ATC 4272 at 4287; [89]
[129] Exhibit A, Attachment SH1-5
[130] Exhibit A, Attachment SH1-5
[131] T documents, 55-60
[132] T documents, 61
[133] T documents, 62
[134] Exhibit B, [14]
[135] Exhibit B, [21]
[136] T documents, 45
[137] Sale of Land Act 1962 , s32(8)
[138] see [10]
[139] This is consistent with the evidence of Mr Parrington.
[140] Exhibit A at [37]
[141] Exhibit A at [19]
[142] Transcript, 25 and 26
[143] Exhibit A at [36]
[144] Transcript, 25
[145] Transcript, 29
[146] Transcript, 26 and 27
[147] Transcript, 27
[148] Transcript, 28
[149] Transcript, 33
[150] Transcript, 33
[151] Transcript, 42-43
[152] Transcript, 43
[153] Acts Interpretation Act 1901 , s 33(2A). This is not a case in which, in the context in which the power is given in the Act, “may” must be read as “must”: see discussion by Finn J in Gribbles Pathology (Victoria) Pty Ltd v Minister for Health and Aged Care (2000) 106 FCR 1 .
[154] (2000) 203 CLR 194 ; 174 ALR 585
[155] (2000) 203 CLR 194 ; 174 ALR 585 at 205;591-592 ; [19] (omitting footnotes) and see also Drake v Minister for Immigration and Ethnic Affairs (1979) 24 ALR 577 ; 2 ALD 60 at 590; 70 per Bowen CJ and Deane J and 602; 80 per Smithers J
[156] Alexandra Private Geriatric Hospital Pty Ltd v Blewett (1984) 2 FCR 368; 56 ALR 265 at 375; 272
[157] Taxation Administration Act 1953 (TA Act), Schedule 1, s 284-145(1)(a)
[158] TA Act, Schedule 1, s 284-145(1)(b)
[159] TA Act, Schedule 1, s 284-150(1)(b)
[160] TA Act, s 2(1)
[161] TA Act, s 284-155(1)
[162] TA Act, s 284-160(a)
[163] TA Act, s 284-150(2)
[164] TA Act, s 284-15(3)
[165] (2003) 2003 ATC 5076
[166] (2003) 2003 ATC 5076 at 5,095
[167] (2003) 2003 ATC 5076 at 5,095
[168] (2003) 2003 ATC 5076 at 5,095
[169] (2004) 213 ALR 450
[170] (2004) 213 ALR 450 at 477
[171] TA Act, s 359-5(1)
[172] TA Act, s 357-60(1)
[173] TA Act, s 357-60(2)
[174] TA Act, s 359-25
[175] s 357-75
[176] [2004] 3 NZLR 274

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