taxable vs non-taxable transactions mismatching of inputs and outputs registered v unregistered persons timing mismatches payments basis taxpayers v invoice basis taxpayers and inflated prices
Thus taxpayers can still try to arrange their affairs to attract a specific GST advantage.
Key Facts
• Glenharrow: shelf company with a share capital of only $100
• Glenharrow registered for GST on an invoice basis
• Meates not registered for GST
• Glenharrow purchased from Meates a mining licence
(second hand goods) for $45m
• Mining licence originally issued 1990
• On-sold 1994 for $100
• On-sold to Meates in 1996 for $10,000
• Note: divergence as to whether $45m was inflated?
• High Court: “grossly inflated”
• Court of Appeal: “artificial” and “totally unrealistic”
Supreme Court: disagreed, not artificially inflated
Key factors led to the finding of tax avoidance
• Glenharrow paid a deposit of $80,000 (provided by a shareholder) and claimed input tax credit on that amount
• Vendor finance for rest ($44,920,000)
• Glenharrow extracted only $210,000 worth of minerals
• Glenharrow claimed input tax credit for the tax fraction at the time (one-ninth) of $44,920,000, namely $9m
• Outcome but for GST Act?
• Glenharrow immediately claimed $9m GST input credits
(and intended annually for 9 years)
• While payment of $44,920,000 would never occur as
Glenharrow virtually uncapitalised and mine unprofitable
Meates not required to account for GST
Held:
• Supreme Court: arrangement was designed to defeat the intention and application of the GSTA contrary to s 76
• The purpose of s 76 was to strike down arrangements that frustrated the taxing regime despite juristic compliance with substantive taxing provisions
•Arrangement was artificial with no economic effect other than attempting to claim a GST input tax credit
• Because of the vendor finance and reality that payment would never be made, no consideration truly paid
• No economic cost of the goods as intended by Parliament before an input credit could be claimed
• No economic effect other than attempting to claim a GST input tax credit
• This tax advantage was not merely incidental to the parties commercial decisions
• Purpose: an objective test deduced from arrangement itself
• Did not matter if honestly believed the purchase price not inflated; objectively it was not realistic
• Premise of GSTA, and secondhand goods provisions in particular, that transactions would be driven by market forces
• Commercial and fiscal effects would be driven by such market forces, not distortions
• When market forces do not prevail s 76 applies
• Here the GST distortion was not price but “payment”
• GST refund disproportionate to economic burden
• Further distortion as Meates was not registered for GST and thus no corresponding payment of GST
• Distortions plainly defeated intent and application of GSTA
Consequences outside the purpose and contemplation
Question 2
In the Penny & Hooper decision, the Supreme Court held that structures adopted by both Penny and Hooper were completely lawful, and therefore the actual “structures” implemented by the taxpayers did not constitute tax avoidance. However, the annual fixing of salaries payable to the taxpayers at artificially low levels, where the incidence of taxation was reduced, taken together with other factors, was found to constitute tax avoidance. Thus, a fundamental underlying issue in the Penny & Hooper case (and the predecessor cases) was the lack of economic substance surrounding the controlled transactions.
Question 3
Dr Philippa White incorporated a company through which she continued her work as an anaesthetist and also leased two avocado orchards. The income the company earned from her anaesthetics practice was offset by the losses generated by the orchards. Dr White received no salary.
