The court confirmed section 76 is a general anti-avoidance provision and every avoidance issue needs to be addressed objectively on its merits

Summary

An arrangement was entered into by the taxpayer for the purchase of a mining licence for $45 million for which the taxpayer sought an input tax deduction. The transaction was void under section 76 of the Goods and Services Tax Act 1985 (GSTA). The Court found that the effect of the structure supporting the transaction was to produce a GST refund totally disproportionate to the economic burden undertaken by the taxpayer. They found that the end in view was a distortion which very plainly defeated the intent and application of the Act.

Impact of decision

A well reasoned decision which confirms that where transactions are not a "sham", the Commissioner is still entitled to consider the tax consequences of the transactions under section 76 of the GSTA. The court has confirmed that section 76 is a general anti-avoidance provision and therefore every avoidance issue will need to be assessed objectively on its merits on a case-by-case basis.

Facts

This case dealt with the treatment by the Commissioner of a GST second-hand goods input claim made by Glenharrow Holdings Limited ("Glenharrow") after Glenharrow purchased a mining licence from Michael Meates for the sum of $45 million.

The mining licence was issued in November 1990 for a period of 10 years. It was purchased in 1996 by Michael Meates for $10,000. Michael Meates did not claim GST on the mining licence and did not use it as part of a GST-registered activity. Michael Meates was approached by Gerard Fahey who wanted to purchase the licence. A valuation of the licence was undertaken by Mark Meates, a cousin of Michael Meates. Mark Meates was not a registered valuer but had studied valuation as part of his MBA. He placed a value on the licence of somewhere between $45 million and $180 million.

Gerald Fahey agreed on behalf of Glenharrow to pay $45 million on the basis there would be vendor finance. A skeleton agreement was recorded between the parties which provided for an $80,000 deposit, with the remaining $44.920 million to be vendor financed. At the time Glenharrow had a share capital of $100. The deposit was obtained from its shareholder Gerald Fahey. When the licence was transferred Glenharrow gave Michael Meates a cheque for the remaining $44.920 million. Michael Meates then gave Glenharrow a cheque for the same amount as an advance by way of loan to Glenharrow. Glenharrow delivered to Michael Meates a general mortgage debenture over all its assets and over its shares. The mortgage was executed by Gerald Fahey but was without personal liability to Gerald Fahey.

The Commissioner refunded GST in relation to the deposit of $80,000 when it was claimed by Glenharrow. However, the application for a refund of $4,991,111 for the balance of $44.920 million was declined.

The statutory consent process for the transfer of the licence from Meates to Glenharrow was not completed until November 1998. By the time the licence expired in November 2000 Glenharrow had mined only 36 tonnes of rock.

High Court decision:
Chisholm J found that the transaction was not a sham and that the principal purpose for the purchase of the licence was for the making of taxable supplies. Notwithstanding that, Chisholm J held that section 76 did not require proof of a subjective intention and was directed at the effect or purpose of the arrangement. He noted that the definition of "tax advantage" in section 76 (4) of the GSTA included an increase in the entitlement of any registered person to a refund of tax. Chisholm J then concluded that if the consideration for the licence was grossly inflated the input tax would also be grossly inflated. He found that the appropriate value for the mining licence was $9.757 million. The Commissioner was ordered to credit Glenharrow with a GST input deduction for the GST on the $9.757 million.

Court of Appeal:
Glenharrow appealed against the High Court finding of avoidance. The appellant claimed there could not be any tax advantage in terms of section 76 as the High Court found they had acquired the licence having paid $45 million for the principal purpose of making taxable supplies. Glenharrow considered their case analogous to Peterson v CIR [2006] 3NZLR 433. The Commissioner cross-appealed against the valuation of the tax advantage allowed. He argued that the concept of payment had been met in purely juristic terms, there was no definitive commitment to pay and that the economic burden intended by Parliament had not been suffered by Glenharrow.

The majority of the Court of Appeal found Chisholm J was not wrong to find tax avoidance on the basis of a grossly inflated value. The majority were satisfied that there had been a significant temporal mismatch and that the line had been crossed into tax avoidance. The tax advantage for Glenharrow was seen as an increased entitlement to a refund received without suffering the economic burden intended by the Act. The Court considered the case of Peterson was distinguishable due to the factual findings regarding the economic burden suffered and the scope of the inquiry.

Decision

The appeal from Glenharrow was dismissed. Reasons were delivered by Blanchard J. The Court accepted that before looking at the provisions of section 76, the position in relation to the sale of the licence was that the licence was a second-hand good. The deed of sale provided for a consideration of $45 million in money and the open market value provisions of the Act did not apply to the agreement which was considered to be at "arms length". They then considered the operation of section 76.

The Court confirmed that section 76 assumed that the arrangement under scrutiny was not a sham. The section 76 determination requires an assessment that goes beyond the technical legality of the constituent parts of the arrangement. The onus is on the taxpayer under section 149A(2)(b) of the Tax Administration Act ("TAA") to show that the Commissioner could not have been properly satisfied that section 76 applied in the circumstances.

There is a two-stage process before the Commissioner can carry out a section 76 reconstruction. Firstly there must be an arrangement entered into between at least two persons. Secondly the Commissioner must be properly satisfied that the arrangement was entered into between the two parties to defeat the intention or application of the Act or any provision of the Act. This does not mean that the Commissioner must be satisfied that the parties subjectively had that defeating purpose. A natural reading of section 76, as it stood prior to 2000, was to require the Commissioner to be satisfied that an arrangement had been entered into so as to defeat the intent and application of the Act.

The Commissioner was required to ask what the purpose of the arrangement was. This question in turn required examination of the effect of the arrangement. The Court followed the findings in Newton v Commissioner of Taxation of the Commonwealth of Australia [1958] AC 450 in relation to the term "purpose or effect" where Lord Denning found that the word purpose did not mean "motive" but rather "the effect which was sought to achieve". The crucial distinction is that general anti avoidance rules are not aimed at the purpose of the parties but at the purpose of the arrangement. The Court also followed the findings of the Privy Council in Ashton v Commissioner of Inland Revenue, [1975] 2NZLR 717, where Viscount Dilhorne confirmed that, "if an arrangement has a particular purpose, then that will be its intended effect".

The Court found that any assessment would principally be a matter of inference from the arrangement and its effect. The intention of the Act would be defeated if an arrangement had been structured to enable the avoidance of output tax, or the obtaining of an input deduction in circumstances where that consequence was outside the purpose and contemplation of the relevant statutory provisions.

The Court examined the history behind the GSTA and the need for avoidance legislation. It determined that GST was a type of "value added tax" intended to be broad based, efficient and neutral. The Court concluded that registered persons producing taxable supplies effectively operated as tax collectors on behalf of the Government and as such were not themselves subject of the GST's economic incidence. By the same token it was recognised that registered persons should not obtain unacceptable windfall gains from the regime. They found that reading the Act as a whole it was clear that the legislature anticipated that for a trader in goods and services there would over time usually be some balancing out or netting off of the GST components of sales and purchases.

The Court recognised that there was potential for registered taxpayers to create distortions at the boundary between themselves and unregistered persons. It said that the same could occur where transactions were between those registered on a payments basis and those registered on an invoice basis. The Court confirmed that the general anti-avoidance provision was available to stop or counteract both these distortions.

The Court concluded that it did not need to form a view on whether or not the price paid for the licence was the market value. However, it did rule that even though there was stone to be extracted while the licence was running the arrangement still had a very artificial element. The Court noted that an objective observer could have said that Glenharrow would never have been able to mine enough stone during the term of the licence to generate sufficient sales to pay for the licence. There was no issue that Glenharrow undertook liability for the $44.920 million funded by vendor finance. However Glenharrow was a shell company with a share capital of just $100. Michael Meates was unregistered and there was no GST impost on the other side of the transaction. The Court found that the effect of the structure was to produce a GST refund totally disproportionate to the economic burden undertaken by Glenharrow. They found that the end in view was a distortion which very plainly defeated the intent and application of the Act.