First error - failing properly to address s 165-5(1)(c)(i)
94 The analysis by the Tribunal of the dominant purpose of GB Traders and PMMS was limited. Its analysis of, and findings in relation to, the particular transactions in which those entities were directly involved was also limited. As will be noted in relation to the second error, there was no separate analysis of the principal effect of those parts of the scheme in which those entities were directly involved.
95 It is not known whether and, if so, which of the parties involved in entering into or carrying out the scheme as a whole, or various parts of it, were related. Leaving aside CSS's position, it is unclear whether any of the parties acted in concert or with knowledge of Manila Exchange's adulteration of bullion or non-remittal of GST. This is surprising given the Commissioner's focus on aspects of the transactions which suggested that they were connected and co‑ordinated. Apart from the heavy involvement of Mr Viceconte and PMMS in CSS's activities, it is significant that the transactions, from import of bullion, through adulteration into scrap gold, through subsequent negotiations and sales, to export of the scrap gold, occurred over a very short period of time on several occasions on the one day.
96 Reading the reasons as a whole, it is clear that the Tribunal did not reach a conclusion about the dominant purpose of GB Traders or PMMS in entering into or carrying out the scheme, or parts of the scheme, by considering, in relation to those entities, each of the matters identified in s 165-15. Each of the matters identified in s 165-15 must be considered in respect of each of the participants in the scheme and in relation to the various parts of the scheme. Particularly in a case where there is no express or clear finding that the parties acted in concert or were commonly controlled, it cannot be assumed that every entity participating in the scheme had the same dominant purpose.
97 The Tribunal referred to the involvement of PMMS on several occasions, but its consideration of that involvement was often undertaken by way of its relative significance to Manila Exchange's dominant purpose rather than as being capable itself of engaging Div 165.
98 In considering the "manner in which the scheme was entered into or carried out" (s 165‑15(1)(a)), the Tribunal noted the heavy involvement of PMMS in CSS's transactions which it described as "unusual". It said, at T [124]:
In respect of the dealings between [PMMS, CSS and Emirates Gold], the heavy involvement of PMMS in [CSS]'s transactions is certainly unusual. This weighs in favour of a conclusion that PMMS had a purpose of ensuring [CSS] carried out the transactions which would generate an entitlement to [input tax credits] on [CSS]'s acquisitions of scrap gold. I do not see how it could support a conclusion that the principal effect of the scheme was to secure a GST refund for [CSS].
99 This is one of several occasions on which the Tribunal reached a conclusion that a particular factor in s 165-15(1) supported a conclusion that PMMS had the requisite dominant purpose. As is discussed below, to the extent the Tribunal's reasons for putting these findings aside are exposed, they involve error.
100 The Tribunal's reasons in respect of "form and substance" (s 165-15(1)(b)) were:
[125] The form of the scheme is that scrap gold was sold by Manila Exchange to GB Traders. GB Traders and PMMS each on-sold the gold at a profit, with [CSS] exporting the scrap gold. I do not see any real difference between the form and substance of these transactions, other than in respect of the export sales by [CSS] where, as already noted, the transactions were significantly facilitated by PMMS.
[126] The telling element of substance is that Manila Exchange acquired bullion, adulterated it and sold the adulterated scrap gold at a lower price before GST than it paid for the bullion. And did not pay GST on those sales.
[127] However, that to me suggests Manila Exchange was intent upon perpetrating a fraud on the Commonwealth rather than securing [CSS]'s entitlement to [input tax credits]. And its actions, and those of any other entities that joined in the fraud, do not, in my view, point to a principal effect of the scheme being the securing of [CSS's input tax credits].
101 This reasoning, particularly the last sentence of T [125] read with [126], suggests that the Tribunal subordinated PMMS's purpose to that of Manila Exchange. The last sentence of T [125] suggests that the Tribunal considered that:
the substance of that part of the scheme in which PMMS was involved was to facilitate a GST‐free export sale of scrap gold which it had acquired; and
the form of the transaction was the purchase by PMMS of scrap gold and a taxable supply of that scrap gold to CSS but with PMMS having immediate and direct access to the GST refund to be paid to CSS.
102 The Tribunal may have been suggesting that, so far as PMMS's purpose was concerned, the form and substance of the transaction supported a conclusion that the dominant purpose of PMMS was to enable CSS to obtain a GST benefit. Such a conclusion was certainly open on the evidence. It is no answer to PMMS's dominant purpose that Manila Exchange may have had a different purpose or one considered to be more significant than PMMS's purpose, as appears to be the Tribunal's conclusion at T [126]. The statute requires analysis of the purposes of each participant in the scheme and the statute does not require the identification of which of several different purposes of several different participants is the more significant.
103 In considering the objects of the GST Act (s 165-15(1)(c)), the Tribunal correctly observed at T [128] that, generally, a purpose of the GST Act is to relieve GST-registered businesses involved in making taxable or GST-free supplies of GST costs on their inputs through the mechanism of input tax credits. The Commissioner is also correct to observe that it is not consistent with the policy or object of the GST Act for GST to become embedded in a supply of goods which have been deliberately devalued.
104 As explained above, the mere fact that CSS is entitled to obtain an input tax credit on its acquisition of adulterated gold is not necessarily inconsistent with the object or purpose of the GST Act in circumstances where CSS was not a party to, and had no involvement with or knowledge of, the deliberate adulteration of the gold and the fraud perpetuated by Manila Exchange. However, CSS's entitlement to an input tax credit may not be consistent with the object and purpose of the GST Act if its supplier and the arranger of CSS's export sales - namely, PMMS - was a party to, had knowledge of or was wilfully blind to that deliberate adulteration and fraud.
105 As mentioned earlier, the Tribunal made no clear findings as to whether the sale by PMMS to CSS was a part of a co-ordinated, connected series of transactions which included the adulteration of the gold by Manila Exchange or whether PMMS was a party to Manila Exchange's fraud or knew or should be taken to have known of it. This is surprising in light of the material before the Tribunal and the involvement of PMMS in CSS's activities.
106 Further, although generally it may be consistent with the object and purpose of the GST Act for refunds referable to input tax credits to be payable in respect of GST‐free exports, the exports by CSS were facilitated and controlled by PMMS. It is not necessarily consistent with the object and purpose of the GST Act to enable PMMS to obtain the cash benefit of input tax credits paid to CSS if PMMS's primary customer was CSS and PMMS's primary source of supply was gold adulterated by Manila Exchange. The Tribunal made no findings about the nature of PMMS's business and the connection of that business with GB Traders or Manila Exchange.
107 The Tribunal's analysis of the timing of the scheme (s 165-15(1)(d)) focussed primarily on Manila Exchange. It made no findings about the nature of the businesses of GB Traders or PMMS. In so far as PMMS was concerned, it acquired and on-sold scrap gold to CSS, apparently on the same day, in circumstances where PMMS was facilitating and co-ordinating CSS's export sales. The Tribunal did not clearly state a conclusion about how PMMS intended to generate its profit through its business activities. As explained above, and as the Tribunal appears to have accepted at T [135], the generation and payment of GST refunds to CSS were critical to PMMS being able to benefit from the scheme.
108 The Tribunal stated at T [135]:
It is true that PMMS and the earlier entities in the chain stand to benefit from [CSS] purchasing scrap gold from PMMS. That funded PMMS's purchases from GB Traders which in turn funded GB Traders' purchases from Manila Exchange. But GB Traders and PMMS only benefitted from the scheme to the extent of their profit on each of the series of transactions. That profit could have been achieved by direct sale to a refiner or export customer. Sales to [CSS] were not required to achieve that outcome, nor BG Traders' or PMMS's entitlement to [input tax credits].
109 The reasoning that GB Traders and PMMS could have made the same profit or obtained the same benefit by selling to a refiner or export customer rather than CSS is not sound. Division 165 does not cease to apply because the same scheme might have been entered into with another entity. Section 165-5 requires a conclusion to be drawn in respect of the actual participants in the scheme and s 165-15 requires an examination of factors that relate to the scheme that was in fact entered into or carried out. Whether the same benefit might have been obtained by entering into a different scheme is not a matter to be considered under s 165-15.
110 As to the effect the GST Act would have in relation to the scheme apart from the operation of Div 165 (s 165-15(1)(f)), the Tribunal stated:
[137] The Commissioner points out that but for Division 165 [CSS] would be entitled to [input tax credits] of $503,084 in respect of the Second Period.
[138] It is true that, but for the scheme, [CSS] would not be entitled to those [input tax credits], but nor would it have outlaid the purchase price of the scrap gold or received the selling price. An exporter receiving [input tax credits] on goods purchased for and in fact exported is an entirely orthodox and common application of the GST law. It is consistent with the scheme of the GST law.
[139] Seen in that context, the mere fact that [CSS] became entitled to the [input tax credits] in my view does not, in itself, strongly support a conclusion that an entity had a dominant purpose of [CSS] obtaining the [input tax credits].
111 This factor, generally, merely demonstrates that a GST benefit was obtained. For this reason, it is not a powerful consideration viewed in isolation. The Tribunal correctly observed that the mere fact that CSS became entitled to input tax credits for GST it paid to PMMS does not of itself point to a conclusion that the dominant purpose of a party to the scheme was to enable CSS to obtain those refunds. As with each factor, this factor had to be considered in the context of the scheme as a whole and from the perspective of each party to the scheme and in relation to parts of the scheme. It is not clear that the Tribunal did so.
112 It would have been open to conclude that the refunds were important in providing CSS with the funding it required to meet its obligation to PMMS to pay a GST inclusive price in circumstances where CSS was making GST-free supplies. The importance of that funding benefit was objectively demonstrated by PMMS seeking to become, and in fact becoming, a signatory to CSS's bank account into which the refunds were paid.
113 These considerations were also absent from the Tribunal's analysis of changes to CSS's financial position as a result of the scheme (s 165-15(1)(g)), suggesting that this factor was not taken into account in considering PMMS's dominant purpose for entering into the scheme or a part of it.
114 A second finding relevant to PMMS having the requisite purpose is found in the Tribunal's consideration of changes in the financial position of a connected entity as a result of the scheme (s 165-15(1)(h)), where the Tribunal stated at T [147]:
In relation to PMMS, the Commissioner notes that but for the GST refunds obtained by [CSS] it would not have been in a position to pay PMMS a GST-inclusive price for the scrap gold. That may be so, but again GST on acquisitions is intended to be creditable to a business purchaser in the usual course. Nevertheless, I accept that this weighs in favour of a conclusion that PMMS had an interest in, and therefore one might say a purpose of, [CSS] securing its [input tax credit] entitlement.
115 A third example is afforded at T [150]. In considering the connection between CSS and any connected entity (s 165-15(1)(j)), the Tribunal stated:
I accept that the close involvement in PMMS in [CSS's] transactions is relevant to this factor. It weighs in favour of a conclusion that PMMS had a purpose of assisting [CSS] in its business which necessarily included obtaining the benefit of the [input tax credits].
116 The Tribunal expressed its conclusions about the dominant purpose from T [160] to [167]. It concluded that Manila Exchange engaged in artificial activity designed to obtain an advantage from the GST system: at T [160]. It stated that there was no evidence that Mr Chavan or CSS "were aware of or had dealings with any of the entities in the chain of transactions or their controllers, other than PMMS and Emirates Gold": at T [161]. It thought it important that CSS did not profit from the scheme except through modest margins: at T [163]. It concluded that CSS therefore did not have a dominant purpose of obtaining the input tax credits: at T [164].
117 The reasoning about dominant purpose in relation to the remaining entities is at T [165] to [167]:
[165] The Commissioner submitted that [CSS's input tax credits] were the engine that drove the scheme. That it was only because [CSS] was able to obtain [input tax credits] that [CSS] was able to pay a GST-inclusive price to PMMS which in turn funded the earlier transactions in the chain. In so submitting, the Commissioner sought to draw an analogy with the ACN case. For the reasons indicated above, I respectfully reject the Commissioner's submissions that the ACN case assists the Commissioner in that regard.
[166] Further, the same GST-neutral outcome would have been achieved by PMMS selling the scrap gold to an arm's length purchaser, a refinery or an overseas customer. In all three cases, the seller would have been entitled to [input tax credits] on purchase of the scrap gold. In the first two cases the purchaser could be expected to pay a GST-inclusive price as it would be entitled to claim an [input tax credit], and in the third the sale would be GST-free as an export. The seller would, after deducting [input tax credits], effectively have paid GST on only its value added in the first two cases. In those circumstances, there was no particular imperative for any entity in the chain to secure [CSS's input tax credit] entitlements. The various other scenarios would similarly have funded the purchasing by the entities in the chain.
[167] Having regard to these aspects of the operation of the GST law, and looking at the whole of the circumstances surrounding the scheme, including the factors discussed above, I am persuaded [CSS] has discharged the burden of proving that it would not be concluded that any entity had a dominant purpose of securing [CSS's input tax credit] entitlements.
118 For the reasons given earlier, the Tribunal's distinguishing at T [165] of what was said in ACN FC was not well‑founded.
119 As to what was said at T [166], as was said earlier, it was erroneous to analyse dominant purpose by reference to a different scheme, involving a sale by PMMS to a refiner or exporter. It was also erroneous to analyse purpose by reference to a hypothesised sale by PMMS to an arm's length purchaser of scrap gold, without making findings about how such a transaction could have occurred. As has been said earlier, the evidence suggested that such a transaction could only have occurred if there was a later GST-free supply such that the whole series of transactions were funded by refunds of input tax credits.
120 The conclusion at T [167] is a conclusion about "the scheme" as a whole and does not include any conclusion about PMMS's purpose in the part of the scheme in which it was found to have been involved. The Tribunal apparently put to one side its findings that a number of factors favoured PMMS's purpose as being one of obtaining input tax credit refunds for CSS. To the extent it did so because of the reasoning at T [165] and [166], this involves erroneous reasoning.
121 Assessing the Tribunal's reasons as a whole, the Commissioner has established that the Tribunal failed to reach a conclusion about dominant purpose in accordance with the statute, by failing fully to undertake the statutory task.
122 If the Tribunal had considered, in the manner contemplated by Div 165, the purpose of PMMS in entering into the scheme or parts of it, it may have concluded that PMMS had the requisite purpose. The evidence indicated that PMMS arranged not only its sales to CSS, but also CSS's exports. CSS never sighted or took physical possession of the gold it exported but relied upon its predominant supplier, PMMS, to facilitate its exports. The evidence indicated that access to CSS's input tax refunds was important to PMMS. An officer of PMMS was a signatory to CSS's bank account, ensuring PMMS had direct and immediate access to CSS's GST refunds upon their payment to CSS. It was open to conclude that PMMS would not have been able to sell the scrap gold to CSS without PMMS's participation in part of the scheme.