Division 165 of the GST Act contains anti-avoidance provisions in respect of GST that are similar to those available for income tax purposes. The Division 165 rules are designed to deter schemes that would produce benefits by reducing GST payable, increasing refunds, or altering the timing of payment of GST or refunds, and are aimed directly at artificial and contrived schemes.
Once it has established that the anti-avoidance provisions apply, the ATO can negate the GST benefits claimed as well as impose penalties (and additional penalties are also imposed for late payment).
For the anti-avoidance rules to apply, the following conditions must be present.
There must be a scheme
The definition of a scheme is very wide and includes arrangements, agreements, understandings, promises, and undertakings whether they are implied or expressed and they do not need to be legally enforceable. It also covers a scheme, plan, proposal, action (or course of action), or course of conduct whether unilateral or otherwise.
Note that the timing of the scheme is a crucial consideration. The scheme must be judged against the law in force at that time, and there must be an undertakable option to reconstruct the situation that would have applied if the scheme had not been entered into.
For example, if an arrangement was entered into in December 2016 which will produce a GST benefit in the future, and that arrangement was varied in November 2018, it is possible for that re-arrangement to be treated as a “scheme” for GST anti-avoidance purposes.
There must be a GST benefit
There must be a GST benefit that arises as a result of the scheme to an entity in the form of any of the following:
- the entity does not pay GST (or pays a lower amount of GST)
- the entity gets a GST refund (or an increased refund)
- the entity defers their GST liability to a later time, or
- the entity gets an earlier GST refund.
It is not necessary for that entity to be a party to the scheme — it is sufficient that they receive a GST benefit. In Division 165, the entity that obtains the GST benefit is referred to as the “avoider”.
The benefit must come from the scheme
This requirement is very wide. To satisfy it, it is only necessary that the entity avoiding the GST obtains the benefit as a result of the scheme. The entity can be deemed to get a GST benefit from the scheme even if there was no economic alternative to the scheme that would produce the same economic effect as the scheme.
Not from a choice or election
The anti-avoidance rule does not apply if the entity can demonstrate that the GST benefit was attributable to a choice, election, application or agreement that is available. For example, this would apply where an eligible business chooses one of the simplified accounting methods available to retail businesses.
Note that the choice, election etc must be expressly provided for in the GST law, the wine tax law or the luxury car tax law. The entity cannot rely on, for example, some perceived intention of Parliament in drafting the law or a principle underlying the law. Also, where the entity creates the circumstance or structure to fall into the choice, election and so on, Division 165 may still apply.
This is the most critical test, and actually involves two separate tests. If either of them is satisfied then the entity can be liable for penalties. The tests are:
- the sole or dominant purpose test, and
- the principal effect test.
The “sole or dominant purpose test” in Division 165 is similar to the sole or dominant purpose test in the income tax general anti-avoidance rule (that is, Part IVA). It requires the determination of the prevailing or most influential purpose even though it may be outweighed by all the other purposes combined. The test is satisfied if 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.
The “principal effect test” is considerably wider than the dominant purpose test. The test is satisfied if it is reasonable to conclude that the principal effect of the scheme is that the avoider gets the GST benefit from the scheme. The legislation refers to “the principal effect” (our emphasis). Therefore this test would not be satisfied if obtaining the GST benefit was either not the most important effect, or was just one of several effects of equal importance.
Both the sole or dominant purpose test and the principal effect test require the matters listed in s165-15 to be taken into account. These are:
- the manner in which the scheme was entered into or carried out
- the form and substance of the scheme
- the purpose or object of the GST Act and any relevant provision of the Customs Act 1901
- the timing of the scheme
- the period over which the scheme was entered into and carried out
- the GST effect of the scheme (ignoring Division 165)
- any change in the financial position of the avoider
- any change in the financial position of any entities connected with the avoider (the connection may be of a family, business or other nature)
- any other consequence for the avoider or a connected entity
- the nature of the connection between the avoider and a connected entity, including whether the dealing was at arm’s length
- the circumstances surrounding the scheme, and
- any other relevant circumstances.
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