ACN 154 520 199 Pty Ltd (In Liq) and Commissioner of Taxation (Taxation)

[2019] AATA 5981

ACN 154 520 199 Pty Ltd (In Liq) and Commissioner of Taxation (Taxation) [2019] AATA 5981 (20 December 2019)

Division:TAXATION AND COMMERCIAL DIVISION

File Number(s):      2016/6242

Re:ACN 154 520 199 Pty Ltd (In Liq)

APPLICANT

AndCommissioner of Taxation

RESPONDENT

DECISION

Tribunal:Deputy President Bernard J McCabe

Ms G Lazanas, Senior Member

Date:20 December 2019

Place:Sydney

The Tribunal affirms the decisions under review.

...............................[SGD].........................................

Deputy President Bernard J McCabe

Ms G Lazanas, Senior Member

CATCHWORDS

TAXATION – GST – input tax credits – gold industry – creditable acquisition – whether applicant made first supply of that precious metal after its refining – meaning of precious metal – meaning of refining – whether ordinary or trade meaning – interpretation of word in statutory context – general anti-avoidance provisions – whether taxpayer engaged in scheme – whether taxpayer obtained a GST benefit – whether an entity that entered into or carried out the scheme or part of the scheme did so with the sole or dominant purpose of the taxpayer getting a GST benefit from the scheme – whether the principal effect of the scheme or of part of the scheme is that the taxpayer gets the GST benefit from the scheme – round robin arrangement – objection decision regarding assessments of net amount of GST affirmed

TAXATION – ADMINISTRATION – administrative penalty – recklessness – failure to take reasonable care – objection decision regarding rates of penalty and decision not to remit penalty affirmed

LEGISLATION

Administrative Appeals Tribunal Act 1975 (Cth) ss 33, 43

A New Tax System (Goods and Services Tax) Act 1999 (Cth), 4-1, 4-5, 4-10, 7-1, 9-5, 9-30, 9-40, 9-70, 9-75, 11-1, 11-5, 11-10, 11-15, 11-20, 11-25, 17-5, 29-70, 38-1, 38-385, 40-1, 40-100, 165-1, 165-5, 165-10, 165-15, 165-40, 182-1, 182-10, 195-1

Income Tax Assessment Act 1936 (Cth) s 177C

Tax Administration Act 1953 (Cth) ss 14ZZE, 14ZZJ, 14ZZK, Sch1 ss 284-75, 284-90, 284-145, 284-220, 298-20

CASES

Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue (2009) 239 CLR 27

Attorney-General v Colonial Sugar Refining Company Ltd (1900) 26 VLR 83

BRK (Bris) Pty Ltd v Commissioner of Taxation (2001) 46 ATR 347

Caltex Australia Petroleum Pty Ltd v Commissioner of Taxation [2008] FCA 1951

Collector of Customs v Agfa Gevaert Ltd (1996) 186 CLR 389

Federal Commissioner of Taxation v ACN 154 520 199 Pty Ltd (in Liq) (formerly EBS & Associates Pty Ltd) [2018] FCA 1140

Federal Commissioner of Taxation v Consolidated Press Holdings (2001) 207 CLR 235

Federal Commissioner of Taxation v Hart (2004) 217 CLR 216

Federal Commissioner of Taxation v Lenzo (2008) 167 FCR 255

Federal Commissioner of Taxation v Ludekens (2013) 214 FCR 149       

Federal Commissioner of Taxation v Macquarie Bank Ltd (2013) 210 FCR 164

Federal Commissioner of Taxation v Peabody (1994) 181 CLR 359

Federal Commissioner of Taxation v Sleight (2004) 136 FCR 211

Federal Commissioner of Taxation v Spotless Services Limited (1996) 186 CLR 404

Federal Commissioner of Taxation v Trail Bros Steel & Plastics Pty Ltd (2010) 186 FCR 410

Federal Commissioner of Taxation v Zoffanies (2003) 132 FCR 523

General Crude Oil Company v Department of Energy (1978) 585 F.2d 508

Grinding Balls Inc v Director, Division of Taxation (1980) 424 A.2d 470, 176 N.J. Super. 620

Herbert Adams Proprietary Limited v Federal Commissioner of Taxation (1932) 47 CLR 222

Mayes, Internal Revenue Collector v Paul Jones and Co (1921) 270 F. 121

Orica Limited v Federal Commissioner of Taxation [2015] FCA 46

Pepsi Seven-Up Bottlers Perth Pty Ltd v Commissioner of Taxation [1995] FCA 1655

P&N Beverages Australia Pty Ltd v Commissioner of Taxation [2007] NSWSC 338

The Queen v A2; The Queen v Magennis; The Queen v Vaziri [2019] HCA 35

Saga Holidays Ltd v Commissioner of Taxation [2005] FCA 1892

Saga Holidays Ltd v Commissioner of Taxation [2006] FCAFC 191

Very Important Business Pty Ltd and Commissioner of Taxation [2019] AATA 1120

Vincent v Commissioner of Taxation (2002) 50 ATR 20

Zeroz Pty Ltd v Deputy Commissioner of Taxation [1997] FCA 199

SECONDARY MATERIALS

Explanatory Memorandum to the A New Tax System (Goods and Services Tax) Bill 1998 (Cth)

Goods and Services Tax Ruling: GSTR 2003/10: Goods and Services Tax: What is ‘precious metal’ for the purposes of GST?

Practice Statement Law Administration, PSLA 2012/5: Administration of penalties for making false or misleading statements that result in shortfall amounts

REASONS FOR DECISION

Deputy President Bernard J McCabe and Ms G Lazanas, Senior Member

20 December 2019

INTRODUCTION

1. Alchemy was a medieval pseudoscience in which the forerunners of modern chemists (and more than a few charlatans) attempted to conjure gold out of a variety of other substances. This case involves a form of fiscal alchemy. It arises out of an arrangement, in which the applicant played an integral role, that exploits features of the A New Tax System (Goods and Services Tax) Act 1999 (Cth) (GST Act) to conjure input tax credits out of dealings in gold.

2. At the heart of this case lies a dispute over the applicant’s entitlement to $122,112,065 worth of input tax credits in relation to acquisitions of scrap gold made during the monthly tax periods from 1 February 2012 to 30 June 2014 (the Relevant Period). The applicant, a refiner of precious metal, says it is entitled to the input tax credits under Div 11 of the GST Act because it paid a GST-inclusive price when it acquired scrap gold for the refinery from third-party suppliers. The applicant says it processed the scrap gold into investment-grade bullion with a metallic fineness of at least 99.5%. It then made what it claimed were GST-free supplies of precious metal to bullion dealers, relying on Div 38 (specifically s 38-385) of the GST Act. The applicant then claimed input tax credits in the ordinary way under Div 11 with respect to the GST that was paid on the acquisition of the scrap gold. But was the applicant right to treat its supply of precious metal to the dealers as GST-free supplies under Div 38? If the applicant does not satisfy Div 38 and its supplies of precious metal were instead regarded as input taxed supplies under Div 40, the applicant is not entitled to claim input tax credits on the scrap gold it acquired and used in the manufacture of the bullion.

3. As we shall see, the Commissioner’s primary argument is that the applicant did not make creditable acquisitions within the meaning of s 11-5 of the GST Act – and, therefore, it has no entitlement to input tax credits – because the applicant cannot satisfy the requirements of Div 38. Relevantly, s 11-5 says there can be no creditable acquisition without a creditable purpose. So far as relevant, s 11-15 says there is no creditable purpose with respect to the acquisition of a thing if the acquisition relates to making supplies that would be input taxed: s 11-15(2)(a).

4. Specifically, the Commissioner says the applicant in this case cannot satisfy the requirement in s 38-385(a) that the supply of precious metal would be GST-free if “it is the first supply of that precious metal after its refining by, or on behalf of, the supplier” because the applicant was not refining the scrap gold it acquired. The Commissioner says the scrap gold in question had already been refined to the requisite standard before it was delivered to the applicant’s refinery. The scrap gold which was already of 99.99% fineness was effectively being recycled through the refinery in the course of a manufacturing process that did not include any meaningful refining. If there was no refining within the meaning of s 38-385(a), the gold bullion that was manufactured and sold was necessarily input taxed pursuant to s 40-100 – and therefore no entitlement to input tax credits arises under Div 11.

5. We are satisfied the Commissioner should succeed in relation to what we will refer to as the ‘no refining issue’. We reach that conclusion for several reasons. In any event, our conclusion on that issue disposes of the applicant’s claim with respect to the disputed input tax credits. But the Commissioner put a second argument that we need only consider if we concluded the applicant was able to satisfy the requirements in Divs 11 and 38. The Commissioner had made declarations under Div 165 disallowing or negating $72,953,611[1] worth of input tax credits arising out of transactions involving a sub-set of suppliers. Division 165 contains the anti-avoidance provisions in the GST Act.

   [1] The declaration issued by the Commissioner on 8 April 2016 in respect of the tax periods ending 29 February 2012 to 30 June 2012 recorded an incorrect total figure of $3,178,221. The correct total was $3,178,838 and the parties operated on the basis that $72,953,611 properly reflected the total amount of input tax credits disallowed by the Commissioner.

6. Broadly, it transpired that a number of the third-party suppliers were pocketing the GST they should have remitted to the Commissioner after making taxable supplies of scrap gold to the applicant. The applicant shrugs at this, saying any loss to the revenue is a matter between the Commissioner and the rogue suppliers who have failed to comply with their GST obligations. The applicant says it claimed its input tax credits in the usual way, and that it paid GST to the rogue suppliers in the GST-inclusive prices for the scrap gold. The Commissioner does not allege the applicant was a party to any fraud by third-parties, but he says Div 165 was applicable because:

   (a)the applicant had obtained a GST benefit in the form of the input tax credits from a scheme; and

   (b)one or more entities (including the third-party suppliers) entered into or carried out the scheme for the dominant purpose of giving the applicant the GST benefit, or the principal effect of the scheme was that the applicant got the GST benefit.

7. In light of our views on the application of Divs 11 and 38 of the GST Act, it follows there is no GST benefit for the purposes of Div 165. However, if we are wrong about Divs 11 and 38, we adopt the position set out below in relation to ‘the Div 165 issue’.

8. The Commissioner also imposed administrative penalties totalling $58,059,829.75. We do not see any basis for disturbing those assessments.

9. We will begin by setting out the legislative framework including the general policy underpinning the different GST treatments of ‘precious metal’. That discussion will be of particular assistance to anyone who is unfamiliar with the ways that supplies of precious metal are handled under the GST Act. We will then set out the background facts, including the history of the applicant and a description of the way in which it conducted its business, as well as an explanation of its dealings with (a) the third-party suppliers of scrap gold and (b) the dealers of precious metal to whom the applicant supplied the investment-grade bullion.

10. That factual background necessarily entails a detailed consideration of the voluminous evidence that was before us. Much of that evidence was uncontroversial. Against that background, we then turn to an analysis of the substantive GST issues, namely, the no refining issue and the Div 165 issue, followed by a brief analysis of administrative penalties.

11. We note, at the outset, that the Tribunal’s documents lodged by the Commissioner (T-Documents) in this matter exceeded 44,000 documents with more than 60,000 pages in total. However, the parties adopted a pragmatic approach and tendered an agreed hearing book at the start of the hearing comprising 10 folders of materials. By the conclusion of the hearing, some 13 days later, the hearing book had expanded to 13 folders, and we were also presented with 29 exhibits. Documents that were not relied on by the parties were, by consent, removed from the final form of the hearing book. The references to page numbers in our decision are to the pages of the hearing book, unless otherwise specified.

12. We should also note that the hearing was conducted in private at the applicant’s request pursuant to s 14ZZE of the Taxation Administration Act 1953 (Cth) (TAA 1953). As the hearing drew to a close, we discussed with the parties how we would manage our related obligation (in s 43 of the Administrative Appeals Tribunal Act 1975 (Cth) (the AAT Act) as modified by s 14ZZJ of the TAA 1953) to publish the reasons in a way that preserved the anonymity of the applicant. The applicant’s counsel acknowledged that would be practically impossible to achieve given the unusual factual circumstances. It was agreed we would publish our reasons without an attempt to obscure the identity of the applicant.

    THE LEGISLATIVE FRAMEWORK

13. Under the GST Act, an entity is liable to pay GST on any ‘taxable supply’ and is entitled to an input tax credit on any ‘creditable acquisition’: s 7-1. Relevantly, amounts of GST are set off against amounts of input tax credits to produce a net amount for each tax period applicable to the entity: s 17-5. The assessed net amount is the amount which the entity must pay to the Commonwealth if the amount is greater than zero, or which the Commonwealth must pay to the entity if the amount is less than zero.

    Division 11 of the GST Act and creditable acquisitions

14. We have already pointed out the applicant’s entitlement to claim input tax credits on certain acquisitions of scrap gold, namely, where it was of at least 99.5% fineness, is the essential issue in this dispute. Division 11 of the GST Act is concerned with ‘creditable acquisitions’. Section 11-1 relevantly states what Div 11 is about, including that an entity is entitled to input tax credits for its creditable acquisitions and that Div 11 defines ‘creditable acquisitions’.

15. ‘Input tax credit’ is relevantly defined in s 195-1 (the ‘Dictionary’ of the GST Act) to mean an entitlement arising under s 11-20.

16. Section 11-20 of the GST Act provides “you are entitled to the input tax credit for any *creditable acquisition that you make”.[2]  Section 11-25 explains the amount of the input tax 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.

    [2] The presence of an asterisk before a term in the GST Act indicates that the term is defined for the purposes of the GST Act, but once a term has been identified by an asterisk, the term is not usually asterisked if it appears later in the same subsection and some basic terms are not identified with an asterisk: s 3-5.

17. Section 11-5 provides that you make a ‘creditable acquisition’ if:

    (a)     you acquire anything solely or partly for a *creditable purpose; and

    (b)     the supply of the thing to you is a *taxable supply; and

    (c)     you provide, or are liable to provide, *consideration for the supply; and

    (d)     you are *registered, or required to be registered.

18. An acquisition is “any form of acquisition whatsoever”: s 11-10(1).

19. Subsections 11-15(1) and (2) deal with ‘creditable purpose’ as follows:

    (1)You acquire a thing for a creditable purpose to the extent that you acquire it in *carrying on your *enterprise.

    (2)However, you do not acquire the thing for a creditable purpose to the extent that:

    (a)     the acquisition relates to making supplies that would be *input taxed; or

    (b)     the acquisition is of a private or domestic nature.

20. ‘Input taxed’, according to the definition in s 195-1, has the meaning given by s 9-30(2) and Div 40 of the GST Act. So far as relevant, s 9-30(2) states that a supply is input taxed if it is input taxed under Div 40 of the GST Act. Division 40 of the GST Act specifies the supplies that are input taxed. If a supply is input taxed, then no GST is payable on the supply and there is no entitlement to an input tax credit for anything acquired or imported to make the supply: s 40-1. One of the kinds of supplies that is input taxed under Div 40 is the supply of ‘precious metal’, as explained below.

    The GST treatments of precious metal: the principal provisions

21. Sections 38-385 and 40-100 of the GST Act are the principal provisions regulating the GST treatment of supplies of precious metal.

22. Section 38-385 of the GST Act provides:

    A supply of *precious metal is GST-free if:

    (a)     it is the first supply of that precious metal after its refining by, or on behalf of, the supplier; and

    (b)     the entity that refined the precious metal is a *refiner of precious metal; and

    (c)     the *recipient of the supply is a *dealer in precious metal.

    Note: Any other supply of precious metal is input taxed under section 40-100.[3]

    [3] The “notes” at the base of each of ss 38-385 and 40-100 help to explain the interaction of ss 38-385 and 40-100. See ss 4-1, 4-5 and 4-10 as to the status of notes. Broadly, they form part of the Act but are non-operative material.

23. A ‘refiner of precious metal’ is defined in s 195-1 as “an entity that satisfies the Commissioner that it regularly converts or refines precious metal in carrying on its enterprise”. A ‘dealer in precious metal’ is “an entity that satisfies the Commissioner that a principal part of carrying on its enterprise is the regular supply and acquisition of precious metal”: s 195-1. 

24. Section 40-100 provides:

    A supply of *precious metal is input taxed.

    Note: If the supply is the first supply of precious metal after refinement, the supply is GST-free under section 38-385.

25. The apparent conflict between s 38-385 and s 40-100, which both deal with precious metal in different ways, is resolved by s 9-30(3), the effect of which is that where a supply would be both GST-free and input taxed, the supply is GST-free.

26. On any view of the GST Act, the best GST outcome for a supplier is the making of GST-free supplies. This is because if a supply is GST-free, then no GST is payable on the supply and an entitlement to an input tax credit for anything acquired to make the supply is not affected: s 38-1.

27. As we have explained, the applicant’s entitlement to claim certain input tax credits, which is the essential issue in this proceeding, depends upon whether it was making GST-free supplies or input taxed supplies of precious metal.

28. A supply of metal that does not meet the definition of ‘precious metal’ will be a taxable supply if the provisions of s 9-5 are satisfied. It is unnecessary in the present case to set out the requirements of a ‘taxable supply’ as it was not in dispute, at least before the Tribunal, that the relevant supplies of scrap gold to the applicant by the third-party suppliers were taxable supplies.

29. Section 195-1 of the GST Act defines ‘precious metal’ to mean:

    (a)     gold (in an investment form) of at least 99.5% fineness; or

    (b)     silver (in an investment form) of at least 99.9% fineness; or

    (c)     platinum (in an investment form) of at least 99% fineness; or

    (d)     any other substance (in an investment form) specified in the regulations of a particular fineness specified in the regulations.

30. It follows gold will only be considered to be ‘precious metal’ if it is in the requisite form (namely, investment form) and is of the requisite metallic purity, namely, at least 99.5% fineness. The phrase ‘investment form’ is not defined by the GST Act. In the absence of a statutory definition, the Commissioner articulated a definition in GSTR 2003/10: Goods and Services Tax; What is ‘precious metal’ for the purposes of GST? at [29], as follows:

    … for gold, silver or platinum to be in an investment form for the purposes of the GST Act, it must be in a form that:

    ·is capable of being traded on the international bullion market, that is, it must be a bar, wafer or coin;

    ·bears a mark or characteristic accepted as identifying and guaranteeing its fineness and quality; and

    ·is usually traded at a price that is determined by reference to the spot price of the metal it contains.

1. It is common ground that the above view was generally accepted. The parties agreed that absent a recognised mark and indication of fineness, a gold bar will not be ‘precious metal’ irrespective of its degree of metallic purity.

2. As noted above, there is no dispute that the gold bars produced by the applicant were ‘precious metal’. It is accepted they were of a fineness of at least 99.5% and they were in an investment form, so they satisfied two of the fundamental criteria. Nor is it in dispute between the parties that a precious metal bar in an investment form ceases to be in an investment form when it is cut, defaced or otherwise damaged (even though its 99.5% fineness may be unaffected).

3. Where the requirements of s 9-5 are met, supplies of metal other than ‘precious metal’, such as gold that is not in investment form (referred to as ‘scrap gold’ in this decision), are taxable supplies on which GST is payable by the supplier under s 9-40 of the GST Act. It follows that, where a supplier made a taxable supply of scrap gold to the applicant, GST was included in the purchase price paid for the scrap gold, regardless of whether the supplier remitted the GST to the Commissioner: ss 9-70 and 9-75.

4. We set out the statutory provisions relevant to the discussion of the Div 165 issue and to the issue of administrative penalties further below.

5. We should lastly refer to s 14ZZK(b) of the TAA 1953. The operation of that section is well understood. It requires the taxpayer to establish the Commissioner’s assessments were excessive, and persuade us what were the correct (or more nearly correct) assessments. It also places an obligation on the taxpayer to establish the decisions regarding non-remission of administrative penalties should not have been made, or should have been made differently.

   BACKGROUND FACTS

   The applicant

6. To understand the applicant’s business, one must know more about how it was formed, the individuals behind it and their ambitions for the applicant.

7. The applicant was registered as a company on 29 November 2011. At all material times, Jane Simpson and her father, Francis Gregg, were two of the four directors of the applicant. Ms Simpson and Mr Gregg controlled a company named Fraja Pty Ltd that owned 50% of the applicant. Ms Simpson and Mr Gregg were also directors of Australian Bullion Company (NSW) Pty Ltd (ABC NSW). It is not in dispute that ABC NSW was a ‘dealer in precious metal’: see above at [23]. The trading name of ABC NSW was at all relevant times ‘ABC Bullion’.

8. The other two directors of the applicant were the brothers Phillip Cochineas and Andrew Cochineas who, together with their associates, indirectly owned 50% of the applicant through interposed entities including Chryso Capital Pty Ltd. Mr Phillip Cochineas and his associates also owned and controlled Palloys Pty Ltd and its related entities (Palloys). The Palloys group was involved in jewellery production and included AGS Metals Pty Ltd (AGS Metals), which had a Brisbane office; and a Melbourne based business, PJ Williams and Associates (PJ Williams). 

9. The applicant registered for GST on 1 December 2011 and accounted for GST on a monthly basis. It lodged its first Business Activity Statement (BAS) for the monthly tax period ended 29 February 2012. As already noted above, the monthly tax periods that are the subject of this dispute are the monthly tax periods February 2012 to June 2014, inclusive.

10. From February 2012, the applicant traded as ‘EBS & Associates’ and described its business to the Commissioner as involving the acquisition and refining of scrap and other metal in order to produce precious metal for sale to dealers.

    The applicant’s business and key personnel

11. Mr Phillip Cochineas was the managing director of the applicant’s business from 29 November 2011 (the date of its incorporation) to 31 August 2015, when the applicant ceased trading.

12. Mr Phillip Cochineas was the applicant’s principal witness and provided two affidavits as well as oral evidence at the hearing. He was cross-examined at length. The cross-examination included several testy exchanges that reflected his confidence in the applicant’s GST position and opposition to the Commissioner’s position. Much of his evidence is uncontroversial, although we will have a good deal more to say about it and the applicant’s decision not to call some other witnesses in due course. We will refer to Mr Phillip Cochineas as Mr Cochineas throughout these reasons and we will identify his brother, Mr Andrew Cochineas, using his full name.

13. Mr Cochineas has been employed in the gold industry for over 10 years and, more recently, he served on ‘The Gold Industry Group’ board of directors, a group which represents the interests of gold producers, explorers, prospectors and service providers in Australia. He holds a Bachelor of Commerce (Accounting) and Bachelor of Laws as well as a Masters of Business Administration. He was well positioned to recognise and capitalise on, along with his associates, a business opportunity in the gold industry.[4] He said, in 2011, he and his associates saw the need for a new business that consolidated various stages of the production and marketing of precious metal. They hoped to establish a “fully vertically integrated refining and bullion dealing model” that brought together a refiner capable of processing large amounts of scrap metal and a recognised precious metal hallmark with which to stamp the bullion.[5] They saw an opportunity to work with secondary refining material (that is, existing material such as scrap gold, consisting of jewellery and recycled gold from various users) as opposed to primary refining material (gold that was sourced directly from mines). Mr Cochineas explained there were many small players in the secondary refining sector of the market. We are satisfied that explanation of their purpose is incomplete. We will have more to say below about the significance of the GST treatment of precious metals to the joint venturers’ business plans for the applicant.  

    [4] Hearing Book, Volume 3, pp 2,038-2,039; Affidavit of Phillip George Cochineas sworn 8 December 2017 (First Cochineas Affidavit), [34].

    [5] Hearing Book, Volume 3, pp 2,038-2,039; First Cochineas Affidavit, [34]-[35].

14. The applicant was formed as a joint venture between ABC NSW and Palloys to acquire an existing assaying, refining and precious metals’ manufacturing business known as the ‘JSPL Business’. Mr Cochineas explained that business had hitherto operated as a toll refinery. A toll refinery refines scrap metal for other businesses on contract. It charges a fee for its refining services. The toll refiner does not acquire the metal it refines, nor does it sell the output. It provides a service and delivers the refined product back to the owner. The JSPL Business was attractive to the applicant because it possessed:

    ·strong assay and analytical capability;

    ·significant capacity to refine silver and gold accompanied with relevant know-how (Mr Cochineas referred to its experience in two refining techniques as a particular asset);

    ·a history of providing assay and refining services to existing bullion dealers; and

    ·good brand recognition in the Australian scrap metals market.[6]

    [6] Hearing Book, Volume 3, p 2,037; First Cochineas Affidavit, [31].

15. Mr Cochineas and his associates proposed a different business model for the applicant. Their model combined the assets of the existing JSPL Business and elements of their other Palloys’ businesses, together with their industry contacts, experience, access to capital and know-how.

16. The arrangement between ABC NSW and Palloys was contemplated as early as 20 May 2011, according to minutes of a meeting titled ‘Project Goldfinger’ held on that day (the Goldfinger Minutes). The meeting was attended by Ms Simpson, Mr Gregg and Messrs Andrew and Phillip Cochineas. The Goldfinger Minutes recorded that a special purpose company (ultimately the applicant), owned equally by ABC NSW and Palloys, would be incorporated to acquire the JSPL Business. ABC NSW would provide the applicant with an interest-bearing gold and silver loan, and Palloys would provide daily management services for a fee. According to the Goldfinger Minutes, the applicant would develop an advanced assaying laboratory with the industry’s fastest turnaround. The plan contemplated ABC NSW and Palloys directing all their refining work to the applicant. It was also anticipated the applicant would exclusively produce ABC hallmarked bullion bars and own the intellectual property in the ABC hallmark. The applicant would focus on refining scrap of at least 18 karats (that is, metal with a fineness of at least 75%). It would send all other scrap metal with lesser fineness to different refiners. One of these refiners was Produits Artistiques Métaux Précieux (PAMP), which is a London Bullion Market Association (LBMA) accredited Swiss refiner. ABC NSW was at all relevant times the exclusive Australian distributor of PAMP bars.

17. The distinction between primary refining material and secondary refining material looms large in these proceedings. The joint venturers expected it would be easier to enter and disrupt, if not dominate, the secondary refining sector of the gold market given their business model, existing relationships with third parties who would become key suppliers of the refinery, and experience in the precious metal industry. Mr Cochineas said there were more significant barriers to entry into the sector of the market that dealt with primary refining material. He insisted it was always intended the applicant would move into that sector in due course, although it was unclear what steps were taken to that end by the applicant.

18. Attached to Mr Cochineas’s first affidavit was the ‘Project Goldfinger Term Sheet’ dated 1 September 2011 which, amongst other things, set out the services to be provided by the applicant after it was established. The document stated the applicant was to develop a state-of-the-art assaying laboratory with the fastest turnaround in the industry, and was “to perform refining services in its own right and also for ABC and Palloys”. It was also stated that, generally, “[the applicant] is to assay only and send all melted scrap to PAMP or other refinery” with ABC NSW to arrange preferential rates for the applicant. “Only 18ct+ scrap to be refined at [the applicant]”, it explained.[7]

    [7] Hearing Book, Volume 3, p 2,133.

19. As noted above, the applicant was incorporated on 29 November 2011 to give effect to the joint venture plans. ABC NSW and Palloys entered into a Shareholders’ Agreement on or about 30 November 2011 that explained how the whole business was to work. Curiously, we were not provided with a final copy of the Shareholders’ Agreement even though Mr Cochineas deposed that it was executed on 30 November 2011. Instead we were given a copy of a draft which we assume captures the agreement of the parties. We know the draft was apparently prepared by Mr Andrew Cochineas, one of the applicant’s directors, when he was working at a law firm. We also know the Shareholders’ Agreement was extensively discussed with Ms Simpson and that Ms Simpson sought her own independent legal advice for ABC NSW from another law firm, as revealed from the following extracts of a lawyer’s email to Ms Simpson dated 17 October 2011:

    …my understanding of the EBS Palloys deal is as follows (please let me know if I have any of this wrong);

    EBS currently operates a gold refining business. There are other aspects to the EBS business but you are only interested in the assaying/refining/barring aspects (“Business”).

    You [ABC NSW] and Palloys (in partnership, on a 50/50 basis) wish to acquire the Business and have already established “Newco” to conduct the Business. A significant motivation is to obtain the benefit of the current GST-free “first supply from a refinery” exemption.

    In other words, you will be able to have gold refined and barred by Newco with the “ABC Refining” mark. Those bars (I assume) will then be marketed by you and/or your network of distributors under your standard distribution agreement.

    Similarly, Palloys will channel all its assaying/refining/barring business through Newco.

    …

    6. Under clause 6.3, ABC is obliged to “loan” precious metals to the Group pursuant to “Loan Agreements”. You didn’t mention anything about gold loans. Not sure what this is all about?? It’s one thing for the Company to be providing services; it’s another for it to be “owning” gold??[8]

    [8] Hearing Book, Volume 7, pp 5,802-5,803.

20. Ms Simpson replied to the above email on the same day, in relation to the abovementioned query (amongst many others raised by the lawyer), as follows:

    Newco has to have the use of gold to conduct the refinery – that is the whole basis for the business model we are proposing. In most instances, Newco will only be assaying gold – the actual refining will be occurring in Switzerland at PAMP. What will happen is that Newco will assay a client’s gold and then pay out on the basis of the assay i.e. Newco will not wait for the actual refining to have taken place. In this regard, the gold provided as the gold loan will be used to pay out the customer.[9]

    [9] Hearing Book, Volume 7, p 5,803.

21. The applicant acquired the JSPL Business on 1 February 2012 and says it commenced operations as a general refiner on or about that date.

22. The Commissioner did not dispute the applicant was a ‘refiner of precious metal’ as defined in s 195-1. Accordingly, we find the applicant did commence refining operations. We make that finding notwithstanding the initial plans for a more limited operation. The documents above suggested the early focus was on assaying while the actual refining occurred at PAMP.

23. While we accept the eventual scope and scale of the refining operations evolved beyond what was contemplated in the foundational documents we have described, those documents are significant for another reason. They make clear the features of the GST Act were squarely in the mind of the joint venturers from the beginning. As a general refiner (as distinct from a toll refiner), the applicant acquired scrap gold on its own account. The scrap gold was converted into precious metal, that is, gold bullion in investment form, that the applicant planned on selling GST-free to dealers in precious metal – including to ABC NSW, which was involved in the joint venture. As noted above, the lawyer for ABC NSW highlighted “[a] significant motivation is to obtain the benefit of the current GST-free ‘first supply from a refinery’ exemption.”

24. Mr Cochineas confirmed the investors in the new business were conscious from the outset of the importance of adhering to the requirements of the GST Act for the making of GST-free supplies. Mr Cochineas annexed a document to his first affidavit that was described as a ‘Policy Document’ prepared in early 2012 in conjunction with Ms Simpson, amongst others.[10] The Policy Document explained the applicant’s plans to ensure the new venture was able to be classified as a ‘refiner’ pursuant to the GST Act to be able to deliver GST-free supplies of bullion onto the market. We will have more to say about those practices and strategies in the course of our discussion of the application of Div 165. For present purposes, it suffices to note the Policy Document relevantly canvassed whether the applicant was a refiner under the GST Act by reference to the definition of the term ‘refiner of precious metal’ in s 195-1 of the GST Act and the meaning of ‘precious metal’, also defined in s 195-1. It also separately canvassed whether the applicant was “a recycler according to the [GST] Act” – although we note there is no such term in the GST Act. The Policy Document recorded that the applicant acquired material which is “essentially unuseable by jewellers” (sic) and “reworks this material into useable form”. It was not clear what the authors meant by that statement. In any event, the authors of the Policy Document reached the following conclusion:

    …[the applicant] is therefore a recycler of precious metals, as well as a refiner in a technical, meticulous and literal way…[11]

    [10] Hearing Book, Volume 3, pp 2,040 and 2,189-2,192; First Cochineas Affidavit, [40].

    [11] Hearing Book, Volume 3, p 2,190.

25. This brings us to the acquisitions of scrap gold made by the applicant. We were told the applicant initially expected to source its material from local suppliers of scrap gold, even though there were many potential foreign suppliers of relatively pure secondary refining material, especially in Asia. Mr Cochineas explained offshore suppliers would be approached to “fulfil latent capacity and subject to funding”.[12] We were told the Shareholders’ Agreement between the joint venturers anticipated they would direct any of their individual refining needs (or those of their subsidiaries) to the applicant, and – to the extent the joint venturers were in the business of acquiring precious metal from a refiner – they would acquire that precious metal from the applicant. As already noted above, one of the joint venturers was ABC NSW, a dealer in precious metal.

    [12] Hearing Book, Volume 3, p 2,041; First Cochineas Affidavit, [44].

26. Mr Cochineas said the applicant also invested heavily in the refining operations.[13] He said the applicant acquired new plant and equipment and hired more staff with experience and expertise. The applicant “became the largest private assaying and refining business in Australia, second only in output to the Perth Mint”.[14] The applicant was also accredited on 13 August 2014 by various industry bodies and aimed to comply with relevant Australian Standards for the analysis of gold, silver and their alloys.[15]

    [13] Hearing Book, Volume 3, p 2,043; First Cochineas Affidavit, [51(e)].

    [14] Hearing Book, Volume 3, p 2,044; First Cochineas Affidavit, [52].

    [15] Hearing Book, Volume 3, pp 2,044 and 2,196-2,197; First Cochineas Affidavit, [52]. The applicant did not obtain LBMA accreditation, although a successor entity did in December 2015.

27. The detail of this investment – and its consequences – is interesting. Philip Williams, a chemist who had sold his Melbourne-based business named ‘P J Williams’ to AGS Metals (see [38] above), was engaged by the applicant (and other entities in the Palloys group) to provide metal consultancy services. Mr Williams gave evidence for the applicant. He explained he had been engaged by the applicant to review the JSPL Business operations when they were acquired by the applicant. He recommended upgrades to the existing plant to make it an all-service refinery. He also recommended the acquisition of plant including additional furnace capacity, fume cupboards and scrubbers.[16] Mr Williams recalls those recommendations being made in mid-2012. He said improvements were made over time. He referred, in particular, to the acquisition of a new, much larger furnace which would enable the refinery to melt material more efficiently.[17] Mr Williams said the capacity of the aqua regia[18] plant was increased between early 2012 and April 2013 with the addition of fume cupboards. He also recalled up to 30 employees were working in the refinery by April 2013. The workforce comprised a chief chemist and an assistant, one to two people working in the aqua regia area, three to four people in the furnacing and smelting area, ten people in the barring area and three to four people in the vault. There were another six to eight people in administration.[19]

    [16] Transcript p 360.

    [17] Transcript p 360.

    [18] Aqua reqia refining is a process by which scrap gold is melted and cast into flaky granules, which are then dissolved in a mixture of nitric and hydrochloric acids. The dissolved mixture is then reacted with sodium sulphite to selectively precipitate pure gold as a fine powder, which is filtered, washed, dried, melted and granulated. This process is used for batches of combined refining material with less than 12% silver contaminants to 99.99%+ metallic purity gold; Hearing Book, Volume 3, p 2,069; First Cochineas Affidavit, [140(b)].

    [19] Transcript pp 376-377.

1. While there appears to have been significant investment in plant and equipment after the refinery was acquired by the applicant, Mr Cochineas explained in his statement that annualised production staff wages (crudely speaking, labour costs) more than tripled between 2012 and 2015. Yet he also acknowledged “the annual gold refining capacity did not increase markedly as a result of these improvements, remaining largely static at approximately 30 tonnes of fine gold per annum” notwithstanding all this investment.[20]

   [20] Hearing Book, Volume 3, p 2,043; First Cochineas Affidavit, [51(e)].

2. That is puzzling, at least at first glance. What was the point of all that investment if it did not yield an increase in output? We have formed the view that much of the evidence about investment in plant and staff was a red herring, at least for present purposes. To understand why that is so, one must appreciate the full import of the applicant’s business model and the decision to focus on secondary refining material that was already substantially pure. As we will explain, the majority of the scrap gold supplied to the applicant during the Relevant Period was already at least of 99.99% fineness. It follows some of the refinery processes were not engaged, or not engaged to the same extent as they would have been if the applicant had been refining scrap gold that was less than 99.99% fineness. As Mr Williams explained, a refiner of material that was already at or close to 99.99% fineness could rely on a pyrometallurgical process (like smelting and fluxing) rather than having to resort to other processes (like aqua regia refining or chlorination) that were typically used to achieve an increase in the fineness of gold that was less than 99.5% fineness.[21]

   [21] Transcript pp 363-364.

3. Put simply, it is quicker, easier and cheaper for the refinery to work with material that has already been refined to the point of fineness expected of investment-grade bullion. That is just as well given the evidence from Mr Williams that the plant and equipment available when the refinery was acquired by the applicant at the start of 2012 was not capable of processing large amounts of low-grade material.[22] But that capacity did not appear to be substantially increased even after the investment in plant and staff resources that occurred in 2012-2013. Mr Williams referred, for example, to the (we would interpolate ongoing) difficulties of dealing with 9 karat jewellery that included lots of silver. It seems at least some of that material was diverted to PAMP in Switzerland which had the capacity to do more complex refining jobs and deal with lower grade scrap. We note that evidence is consistent with the Goldfinger Minutes (see [46] above), the email exchange between Ms Simpson and the lawyer for ABC NSW (see [49] above) as well as the ‘Project Objectives’ identified in the Shareholders’ Agreement which also suggest the refinery would only assay material, while melted scrap would be diverted to PAMP (see [50] above).

   [22] Transcript p 364.

4. Mr Cochineas confirmed, under cross-examination, that low-grade scrap was diverted to PAMP. Mr Cochineas acknowledged PAMP was an “overflow or external refiner” that could be (and was) used for all types of scrap material.[23] He also agreed, under cross-examination, that the applicant preferred to send PAMP low-grade material. He said that was because of the prohibitive cost of transporting higher grade scrap.[24] His evidence on this point was consistent with the evidence given by Mr Williams and another metallurgist, Stephen Lowden. Mr Lowden was also employed by AGS Metals. He assisted the applicant as a metallurgist from time to time. Mr Lowden, who gave evidence for the applicant, said the applicant was unable to refine jewellery that included three or more metals in the amalgam. For those jobs, he explained, one needed to use a “full metal refiner” like PAMP rather than a “two metal refiner” like the applicant.[25] That evidence appears to be consistent with the plan foreshadowed in the Goldfinger Minutes, but it does not assist in determining how much low-grade scrap was actually diverted to PAMP (or any other refiner, for that matter). One reason for the uncertainty lies in the fact low-grade scrap was not necessarily sent directly to PAMP by the applicant. Mr Cochineas stated it was provided to ABC NSW, which had the business relationship with PAMP. ABC NSW would then deliver the scrap gold to PAMP. But mystery remains over the extent to which PAMP was used.[26] Ultimately, whatever business activities were going on with PAMP are irrelevant as the input tax credits in dispute concerned the applicant’s acquisitions of scrap gold of at least 99.99% fineness and not acquisitions of low-grade scrap gold.

   [23] Transcript p 260.

   [24] Transcript pp 260-261.

   [25] Transcript p 470.

   [26] We acknowledge there is material included in the T-documents which hints at the extent of the relationship with PAMP. Most obviously, there are emails from Mr Cochineas foreshadowing the applicant’s plan to send 60kg of metal directly to PAMP in September 2012. One of the emails said this “will become a regular thing”; Hearing Book, Volume 7, p 6,241.

5. Given what we know of the applicant’s business model, it makes sense that the applicant would divert low-grade scrap to PAMP so the applicant was free to concentrate on scrap that was already pure, and thus quicker, easier and cheaper to process. We are satisfied the speed, difficulty and cost of the refinery processes were important variables affecting the applicant’s profitability. The applicant’s gross margin in respect of its refining business was primarily derived from the difference between the price at which it bought the fine metal content in scrap from its suppliers and the price at which it sold the finished product as precious metal, namely, investment-grade bullion, to dealers. It also earned some fees from refining, assaying and barring. There was no suggestion the applicant had other income sources, and it did not make a significant amount from toll refining. The fact the refinery process could be made more efficient by economising on processes calibrated to deal with relatively pure scrap surely worked to the benefit of the applicant and its joint venturers who were interested in capturing more of the value of the production process. Creating a vertically integrated supply process allowed the applicant and ultimately the joint venturers to capture value that might otherwise be diverted to an outside refiner.[27]

   [27] Hearing Book, Volume 3, p 2,039; First Cochineas Affidavit, [35].

6. There were other benefits to this model. Mr Cochineas explained one of the principal risks in the business was the volatility of the gold price. If the refining process was delayed while small lots went through the refinery, the applicant was exposed to the risk of a significant variation in the gold price between when the scrap was acquired and the time when the finished bars were sold to dealers.[28] The dealers, for their part, were also concerned about the reliability of the refiner. Could the applicant quickly fill orders for gold bars as required? Whilst the vertically integrated supply chain and scale were important responses to those challenges, we are satisfied it was the increase in turnover (turnover being a function of volume and speed) that was ultimately crucial. The applicant’s turnover increased dramatically in the Relevant Period, as discussed further below. An increase in turnover meant the applicant was able to reduce the time lag between receipt of the scrap gold and payment for the finished product. It thereby reduced its own exposure to movements in the gold price. It also meant the applicant was able to fill orders more quickly, and it could plan better in response to anticipated fluctuations in demand. That benefitted the applicant and the joint venturers who valued a secure, flexible and stable supply of refined material.

   [28] Hearing Book, Volume 3, p 2,042; First Cochineas Affidavit, [49]-[50].

   The applicant’s funding and payment arrangements

7. The applicant’s funding arrangements were an integral feature of its business model. Whereas the former refining business it acquired had operated as a toll refiner, the applicant was in the business of acquiring scrap gold and then selling the finished product. Quite apart from any capital required to effect process improvements by hiring staff and acquiring and upgrading plant and equipment, it needed working capital to fund its trading. To that end, the joint venturers agreed in the Shareholders’ Agreement to provide metal and general finance loans to assist the applicant to make acquisitions of scrap. The applicant also obtained an overdraft facility from a bank that initially provided $3 million in credit. The facility was extended to $10 million by June 2013.[29] But the increase in turnover and the stable relationships with suppliers of scrap gold and dealers in precious metal also created a kind of virtuous cycle. Mr Cochineas pointed out the applicant’s ability to acquire scrap gold from a regular supplier and sell the finished product to a regular dealer almost simultaneously reduced the risk associated with volatility and “acted as a natural hedge against pricing risk inherent in precious metal trading”. That innovation eliminated the need for costly external hedging facilities and improved cashflow.[30]

   [29] Hearing Book, Volume 3, p 2,041; First Cochineas Affidavit, [46].

   [30] Hearing Book, Volume 3, p 2,041; First Cochineas Affidavit, [45].

8. That brings us to the payment arrangements the applicant was offering to suppliers. The essence of those arrangements was described by Mr Cochineas as follows:

   A key strategy to drive Refining Material to [the applicant] rather than its Australian competitors was to institute a system of fast payment to suppliers of Refining Material based upon preliminary testing of that Refining Material by [the applicant] or sometimes by the supplier itself. I was aware that this system was a common international industry practice but prior to the advent of [the applicant] I had formed the view based on my investigations of the Australian gold refining industry that it was not widely practised by Australian refiners.[31]

   [31] Hearing Book, Volume 3, p 2,044; First Cochineas Affidavit, [53].

9. Mr Cochineas said that strategy was essential to the applicant’s success because it gave the refinery’s clients “a significant cashflow advantage and a point of difference compared to doing business with [the applicant’s] Australian competitors”.[32] He said the payment practices were common overseas, so he knew the plan was workable, but it was not common in Australia in 2012. Mr Cochineas explained the applicant’s principal competitor at the time took up to three weeks to make financial settlement with its clients. The applicant, in contrast, paid a supplier once the scrap was in the physical possession of the applicant or in the physical possession of its supplier (also referred to as a client of the applicant). That practice was important because many suppliers (or clients) would not ship the scrap to the applicant until they were paid. The ongoing relationships between the applicant and various suppliers meant it was easier to adjust a supplier’s account if there was variation between the results of the preliminary analysis and the results returned from the more detailed assay and laboratory testing.

   [32] Hearing Book, Volume 3, p 2,044; First Cochineas Affidavit, [54].

   The applicant’s turnover

10. The applicant’s turnover increased dramatically during the Relevant Period. In the last five months of the 2012 financial year when the applicant took over the JSPL Business, Mr Cochineas said the turnover was $63,278,865. In the 2013 financial year, turnover surged to $594,838,536, an eye-watering 392% increase on the previous financial year. In the 2014 financial year, turnover increased by a further 25% to $745,785,032, although the growth was affected by attention from the authorities during that period, as explained below. Turnover decreased by 12% to $654,159,601 in the 2015 financial year.

    The warrants, the audits and the assessments

11. While the applicant’s turnover began to swell, there were some early warning signs of trouble ahead. Mr Cochineas said the Australian Federal Police (AFP) executed search warrants at the applicant’s premises as well as the premises of ABC NSW on 29 October 2013. He told us the warrants were issued in connection with an investigation of third parties. Documents were seized from the applicant and the contents of some of its computer systems were also downloaded. More importantly, Mr Cochineas said some of the applicant’s suppliers of scrap gold had their bank accounts frozen by the Commissioner. It became impossible to continue dealing with those entities. Mr Cochineas added the applicant voluntarily ceased dealing with some suppliers that were unwilling or unable to supply declarations to the applicant confirming their compliance with the GST laws. The investigation and other regulatory activity also created bad publicity which started to affect the applicant’s trade.[33]

    [33] Hearing Book, Volume 3, p 2,047; First Cochineas Affidavit, [64].

12. The Commissioner began to conduct more GST compliance activity in relation to the applicant’s business, which impacted on its operations and relationships. The Commissioner retained refunds claimed in the applicant’s BASs for October and November 2013 for verification. The questions over the claims for input tax credits and the delay in paying the GST refund caused the applicant to become more cautious in its payment strategies. That new-found caution appears to have caused some of the suppliers to move their business away from the applicant.[34] While Mr Cochineas said the Commissioner completed the audit of those particular BASs and paid a GST refund to the applicant on 13 December 2013, further GST audits followed. In particular, a more detailed and extensive audit was launched by the Commissioner on 8 July 2014. Mr Cochineas said the applicant’s business did not change in any substantive way during the periods covered by the GST audits, and it continued to claim input tax credits of over $40 million during the 2015 financial year.[35]

    [34] Hearing Book, Volume 3, p 2,047; First Cochineas Affidavit, [64].

    [35] Hearing Book, Volume 3, p 2,048; First Cochineas Affidavit, [69].

13. On 8 April 2016, the Commissioner issued notices of assessment and notices of amended assessment of net amount disallowing certain input tax credits claimed by the applicant in its BASs in the Relevant Period totalling $122,112,065. The Commissioner also issued declarations and issued alternative notices of assessment negating input tax credits claimed by the applicant in its BASs in the Relevant Period totalling $72,953,611. On the same day, the Commissioner also issued notices of assessment of administrative penalties totalling $58,059,829.75 in relation to the GST shortfall for the Relevant Period.[36] The applicant objected on 28 April 2016[37] and the Commissioner disallowed the applicant’s objections in their entirety on 21 September 2016.[38] The applicant applied to the Tribunal for review of the objection decisions on 18 November 2016.

    [36] Hearing Book, Volume 1, pp 21-30.

    [37] Hearing Book, Volume 3, pp 1,842ff.

    [38] Hearing Book, Volume 1, pp 4ff.

14. Mr Cochineas’s evidence suggested he was puzzled by the Commissioner’s decision to issue the abovementioned assessments given the behaviour of the ATO’s audit team. He recounted the gist of a number of conversations with the leader of the audit team, and he also referred to correspondence and file notes of dealings with taxation officers.[39] Mr Cochineas said the applicant was given the clear impression by the Commissioner’s staff that all was in order. He said the applicant expected it would receive a clean bill of health. In particular, he said the head of the audit team had opined on 17 March 2014 in a meeting with various persons present that refining material which was already 99.99% fineness when acquired could still lead to the making of GST-free supplies of precious metal and give rise to creditable acquisitions.[40] That advice goes to the heart of the issue in dispute. While we have no reason to doubt Mr Cochineas’s account of the meeting, a statement from an officer in those circumstances cannot on any view be construed as binding the Commissioner in relation to any GST shortfall. It was not a private binding ruling for the purposes of the TAA 1953.

    [39] Hearing Book, Volume 3, pp 2,048-2,050; First Cochineas Affidavit, [70]-[73].

    [40] Hearing Book, Volume 3, p 2,049; First Cochineas Affidavit, [71].

    The supply of refinery material to the applicant

15. That brings us to a more detailed discussion of the supply of scrap material to the applicant, and the refining processes that followed. We will have more to say in the context of our discussion of the application of Div 165 about some of the main suppliers that dealt with the applicant during the Relevant Period. For now, it is enough to say the applicant entered ongoing relationships with a few entities that regularly supplied large quantities of scrap gold. Mr Cochineas deposed that the applicant went through a process of due diligence and ‘on-boarding’ with each of the suppliers and negotiated terms on an individual basis. We note that some of the suppliers had previously dealt with one of the joint venturers, but it was agreed amongst the joint venturers that those entities should be encouraged to deal with the applicant after 2012.

16. We have already explained the applicant decided to focus – at least initially – on suppliers of secondary refining material. Mr Cochineas explained the material came in a number of different forms, including precious metal bars that were hallmarked and in investment form. Mr Cochineas said very few bars in the form of investment-grade bullion were acquired and, when they were, the applicant did not claim any input tax credits because the supplies to the applicant were not taxable supplies.[41]

    [41] Hearing Book, Volume 3, pp 2,051-2,052; First Cochineas Affidavit, [76].

17. Mr Cochineas confirmed the applicant was supplied with a larger number of damaged or defaced precious metal bars. These bars bore a hallmark, but they were cut, melted or otherwise damaged in a way that made them untradeable as ‘precious metal’. Some of the bars had been previously produced and hallmarked by the applicant, but many of them were hallmarked by somebody else, including PAMP. Mr Cochineas said these bars were sold to the applicant by the third-party suppliers as taxable supplies on the basis they were not in investment form. That meant the applicant paid GST-inclusive prices for these acquisitions of scrap gold. Mr Cochineas added the applicant claimed input tax credits in the usual way, just as it did for other acquisitions of things acquired for carrying on its enterprise. The applicant took the same approach to claiming input tax credits when it acquired other scrap gold including:

    ·metal blobs or slugs;

    ·metal granules;

    ·jewellery, jewellery scrap and jewellery by-products; and 

    ·metal industrial by-products.

18. We were provided with samples of many of these items to inspect. Subsequently, photos were substituted for the purposes of the Tribunal’s records.[42] The samples we were shown all weighed the same and we were told they were all at least 99.99% fineness gold. That meant each of the samples was of the requisite degree of fineness expected of ‘precious metal’. But they did not all look the same.

    [42] Exhibit A1.

19. The precious metal bar we were shown was instantly recognisable by its shape and hallmark. The bag of gold granules was also distinctive. The blob or slug was a curiosity. It was the size of a misshapen cricket ball, its surface was pitted (compared to the precious metal bar, which was smooth) and it appeared to have flecks of debris embedded within it. We were also shown what appeared to be a bag of dirt. The dirt was in fact an ore containing 99.5% gold. The gold in the ore was invisible to the naked (or perhaps untutored) eye. It was, to us, indistinguishable from the silicon and other rock material. We were told some Australian gold mines produce gold that is already 99.5% fineness as it emerges from the earth – but the pure gold still needs to be separated from the material in which it is found.

1. The applicant’s records do not permit us to determine the form of the refining material supplied to the applicant in every case. There was an extensive discussion of job sheets during the hearing. Those sheets included some detail about each acquisition. In the latter part of the relevant period, some of the job sheets were accompanied by a photograph. Mr Cochineas pointed out the job sheets were ultimately used for calculating how much money should be paid to the supplier, which depended on the quantity of pure metal. They were not intended to keep a detailed record of the form of the material acquired.[43]

   [43] Hearing Book, Volume 3, pp 2,062-2,063; First Cochineas Affidavit, [115].

2. Some of the refining material was relatively impure in the sense the scrap gold included numerous other metals which had to be separated during the refining process to create metal that was of 99.5% fineness or better. For example, we were told a lot of the gold jewellery was combined with silver or palladium, and some of the other material might include other metals so the percentage of pure gold in the sample was substantially less than 99.5%. But it turns out the greater portion of the secondary refining material supplied during the Relevant Period, and the acquisitions to which the Commissioner’s assessments related, were actually at least 99.99% fineness. According to the applicant’s laboratory analyses, around 22% of the material supplied during the period was less than 99.99% fineness gold.[44] That means on the applicant’s calculations around 78% of the scrap it acquired was already refined to the level of metallic purity that was expected of precious metal. We accept some of that material – perhaps a great deal of it, like the metal blobs with visible flecks of dirt – was contaminated with non-metallic impurities like silicon. In some cases, we accept those contaminants were introduced, perhaps unintentionally, by the suppliers.

   [44] Hearing Book, Volume 3, pp 2,053 and 2,060; First Cochineas Affidavit, [79] and [107].

3. Mr Cochineas said some of the suppliers might have melted down gold bars or other material that was 99.99% fineness using primitive equipment in uncontrolled conditions. That process could introduce non-metallic contaminants (like silicates and borates) into the melted product.[45] Those non-metallic contaminants had to be eliminated by the applicant as part of its processes, even if the product already had a high level of metallic purity.

   [45] Hearing Book, Volume 3, pp 2,061-2,062; First Cochineas Affidavit, [110].

4. That evidence was tested during cross-examination, but we do not understand there to be a dispute that 78% of the scrap gold was already at 99.99% fineness when it arrived in the applicant’s refinery.[46] As noted above, it is in respect of those acquisitions of scrap gold that the Commissioner disallowed the applicant’s input tax credits. We will return to that evidence below, but first we should pause to describe in more detail what happened when the material was delivered to the refinery.

   [46] Hearing Book, Volume 3, p 2,060; First Cochineas Affidavit, [107].

   The applicant’s refining processes

5. When material was delivered to the refinery, it was handled by the inventory team who completed a job sheet recording the weight and a basic description of the material and the name of the supplier. After October 2013, a photograph was taken of the material upon delivery as well. A preliminary analysis of the metallic content was done at that point using an XRF (x-ray fluorescence) gun, a hand-held device, and recorded on the job sheet.[47] The XRF gun is designed to read the characteristic fluorescent x-rays emitted by particular metals. It is a quick and non-intrusive method for assessing the metallic content of the sample.[48] The material would then be placed on a trolley which was wheeled to the vault with the job sheet attached to await the melting process.

   [47] Hearing Book, Volume 3, p 2,062; First Cochineas Affidavit, [114]. There was evidence that refinery staff would occasionally examine scrap proffered for sale using the XRF gun before it was delivered. That analysis was used to calculate the amount of any advance payment that would be made to the supplier. Nothing turns on this evidence for present purposes, although it did tend to underline the importance which the applicant attached to fast turnaround for established suppliers.

   [48] Hearing Book, Volume 3, p 2,055; First Cochineas Affidavit, [87].

6. Mr Cochineas insisted every piece of scrap gold received was melted down and subjected to the smelting and fluxing processes. He said that was the invariable practice, even where the scrap in question was defaced or damaged precious metal bars that bore a recognised hallmark confirming the bar was of 99.99% fineness. The motivation behind that practice was clear from the evidence. No refinery, and certainly not the applicant, was prepared to accept anybody else’s word for the purity of the product it acquired. Every refinery was worried about fraud. We were told there were well known examples of apparently intact bullion bars being touted for sale that, when cut or melted, revealed less valuable substances like tungsten inside. Mr Cochineas also referred to an example of a bar that was hallmarked as being of 99.99% fineness but analysis showed it was, in fact, only at 99.98% fineness.[49] He insisted nothing could be accepted at face value. The material received always had to be melted and analysed for quality control purposes.[50]

   [49] Hearing Book, Volume 3, p 2,063; First Cochineas Affidavit, [119].

   [50] Hearing Book, Volume 3, p 2,063; First Cochineas Affidavit, [117].

7. Fraud was not the only risk. It seems a number of the suppliers melted down material they had on hand into blobs in an effort to conceal the source of that material. We were told by Mr Cochineas that suppliers were concerned that if they revealed the sources who supplied them, the refiner might approach those sources directly and cut the supplier out of the process. That attempt to cover tracks had consequences, however. The melting often occurred in uncontrolled conditions and introduced impurities into the blobs that were not present before. Mr Cochineas pointed out material which had been inexpertly melted might also include an amalgam of different metals that were not spread consistently throughout the sample. Smelting and fluxing ensured all of the material supplied in a particular batch could be reduced to a homogenous amalgam that could then be properly sampled for its metallic purity.[51]

   [51] Hearing Book, Volume 3, p 2,063; First Cochineas Affidavit, [120].

8. It was clear from the evidence that the primary objective of the initial smelting and fluxing process was to provide quality assurance. This aim was corroborated by Mr Williams.[52] Having melted the material, there was an opportunity to eliminate any non-metallic impurities that might be present, like silicates, borates, carbides, sulphides and other compounds of these materials. The initial melt also permitted the refiner to identify and remove low-melting-point alloy metal like lead, zinc or tin. Mr Williams pointed out in his oral evidence that the very act of melting the gold in controlled circumstances in and of itself caused the gold to become purer. Every time gold was melted, it increased its metallic fineness as silver and other metals were volatilised.[53] Mr Cochineas said the next steps taken beyond that point were determined by the nature of the material.

   [52] Transcript p 369.

   [53] Transcript p 366.

9. Mr Cochineas described a few common processes that the refinery was capable of undertaking to reduce or eliminate metallic impurities and to remove non-metallic contaminants.[54] Apart from primary smelting and fluxing, these processes include oxidation, dross extraction, and silver drenching. He explained these processes were carried out in a dedicated area of the refinery which was serviced by exhaust systems called scrubbers that collected fumes. Mr Cochineas said quantities of volatilised gold and silver were collected by the scrubbers over time. That material was fed back into the refining process in due course.[55]

   [54] Hearing Book, Volume 3, p 2,064-2,065; First Cochineas Affidavit, [122].

   [55] Hearing Book, Volume 3, p 2,065-2,066; First Cochineas Affidavit, [125].

10. While the metal was still in a molten state, Mr Cochineas said it was standard practice to collect a dip sample that could be analysed by the metallurgical laboratory attached to the refinery. The dip sample was collected using a small glass pipette. We were told the laboratory took four assays of every dip sample. The assay result was recorded in the laboratory and the dip samples were kept for three months. The assay result was also recorded on the job sheet, which could then be used to determine the final financial settlement with the supplier.[56] This settlement was also known as the ‘out-turn’.

    [56] Hearing Book, Volume 3, pp 2,066-2,067; First Cochineas Affidavit, [127]-[132].

11. Mr Cochineas explained that, at the time of out-turn, the applicant was taken to purchase the total number of grams of fine metal content of the material supplied (that is, the number of grams of 99.99% fineness gold or other investment-grade metal that existed within the batch of molten material). The purchase price was determined by the terms agreed with each supplier but was generally calculated with reference to the prevailing spot price for the metal, less a discount and less any fees payable to the applicant by the supplier under the terms. The price was recorded in a tax invoice created by the supplier in question or in a recipient-created tax invoice (a kind of tax invoice recognised by s‑ 29‑70(3) of the GST Act) prepared by the applicant. That was the usual practice, at any rate. In some cases, Mr Cochineas explained, the grams of gold were simply credited to the supplier’s fine metal account with the applicant. In either event, the molten gold sitting in the refinery became the property of the applicant at that point.

12. Once the metal had passed into the applicant’s ownership, the applicant was free to subject the molten product to such other refining and manufacturing processes as it saw fit in order to extract the pure metal. Refinery employees were responsible for deciding what further refining processes should be used.[57] Mr Cochineas said the options included further smelting and fluxing, aqua regia refining, chlorination refining, electrolytic refining, and electro-parting refining.[58] As we understand the evidence, these processes were undertaken selectively depending on the characteristics of the particular batch of molten material. It is not clear from the evidence which processes were actually undertaken in each case.

    [57] Hearing Book, Volume 3, p 2,071; First Cochineas Affidavit, [141].

    [58] Hearing Book, Volume 3, pp 2,069-2,071; First Cochineas Affidavit, [140].

13. It stands to reason that the applicant’s processes would have been made somewhat easier (or at least less costly and time consuming) if the refining material had already been refined and was reliably at least of 99.99% fineness when received. Mr Cochineas’s evidence certainly left the impression – we think by design – that all of the classic refining processes were available to be used on all of the scrap received into the refinery. But that seems unlikely given the ongoing limitations on the refinery’s capacity and the fineness of the scrap gold the applicant was dealing with. The evidence of Mr Williams was that pyrometallurgical processes alone – that is, smelting and fluxing – were usually sufficient to increase the metallic fineness of gold by a few decimal points from, say, 99.8% or even 99.5% to at least 99.99%.[59]

    [59] Transcript pp 363-365.

14. We note Dr Stewart Murray, a metallurgist called by the applicant as an independent expert witness, made essentially this point during cross-examination. He explained smelting and fluxing were a more efficient way to achieve small increases in fineness if that was all that was required compared to alternative approaches, like aqua regia refining.[60] It also seems unlikely the applicant would do more than what was required given what we understand to be its business model which prized quick turnaround, especially as Mr Cochineas emphasised the business worked with very tight margins.[61]

    [60] Transcript p 418.

    [61] Transcript pp 280-281.

15. As the molten material was processed, the batches might be combined and subject to further assays and (if the batch included lower grade material) refining processes until the applicant was left with batches of 99.99% fineness gold. Once the laboratory gave its approval, the material was granulated and placed into 5kg bags. Those bags of fine granule stock were undifferentiated in the sense it was no longer possible to determine the original source of the material. When the applicant was ready, the fine granules were melted, poured into moulds and cast into bars that were inspected, hallmarked and readied for sale to dealers in precious metal.

16. During the relevant period, the applicant supplied most of its precious metal to two companies, ABC NSW and Ainslie (Dealers), each being a ‘dealer in precious metal’, as defined in s 195-1. In respect of the 2013 calendar year, approximately 63% of the applicant’s customer receipts were from ABC NSW, with 30% of customer receipts from Ainslie.[62] As noted above, ABC NSW was associated with the applicant as Ms Simpson and Mr Gregg were at all relevant times two of the applicant’s directors and indirectly owned 50% of the applicant. Ainslie was not related to the applicant. All of the bullion sold by the applicant to the Dealers was on the basis it was GST-free. That means the applicant did not charge GST to the Dealers and, significantly, for present purposes, it claimed to be entitled to its input tax credits for the GST charged to it by the third party suppliers with respect to its acquisitions of scrap gold.

    [62] Hearing Book, Volume 5, p 4,224; Expert Report of Dawna Wright dated 13 March 2018 (Wright First Report), [7.4.6].

17. We will explore the relationship between the applicant and ABC NSW in more detail in the course of our analysis of Div 165. For present purposes, it is enough to say they had interests in common. The applicant depended on ABC NSW to place orders for precious metal as it was one of very few dealers to which the applicant sold its precious metal. ABC NSW relied on the applicant to manufacture and supply it with investment-grade bullion so that ABC NSW could make supplies to its customers. The closeness of the relationship and the predictability of their interaction helped smooth the operation of the applicant’s business.

    Summary of Findings

18. In summary, the evidence we have discussed above comes to this: we accept the applicant was a refiner of precious metal and that it acquired a large volume of scrap gold from a relatively small pool of suppliers as part of a business strategy which targeted suppliers of secondary refining material. The applicant and or its joint venturers were familiar with many of the main suppliers. Indeed, some of the main suppliers were directed to the applicant by one of its founding investors, ABC NSW, in order to increase turnover at the refinery. We accept the applicant did not always know where the suppliers sourced their material because suppliers tended to be secretive for reasons of their own. Having said that, we do know the applicant knew a few of its main suppliers were sourcing material from ABC NSW in particular, and that a proportion of the material delivered to the applicant was in the form of damaged bars or in other forms which were likely to have been comprised of gold that had been in investment form but which had been melted to disguise its provenance. We set out below our further findings in relation to a few of the main suppliers in the course of our analysis of the application of Div 165 of the GST Act.

19. We accept at least 78% of the material acquired by the applicant from the suppliers was 99.99% fineness at the time of acquisition. However, we also accept some of that material – we cannot say how much – might have been supplied in a form that included non-metallic contaminants that had to be removed before the material was transformed into investment-grade bars that were hallmarked and ready for sale by the applicant to its dealers, ABC NSW and Ainslie. We should note, at this point, that the Commissioner accounted for the different provenance and nature of scrap gold, and the final assessments and objection decisions were only in respect of the 78% of the material at 99.99% fineness.[63]

    [63] Hearing Book, Volume 2, pp 1,676-1,677.

20. We are also satisfied, and accordingly find, the applicant invariably subjected the material it received from its suppliers to smelting and fluxing processes as part of its quality-control process – but this pyrometallurgical process was not conducted for the purpose of making material it knew had a metallic purity of at least 99.99% into a product that was more than 99.99% fineness. We accept the very act of melting the scrap in controlled circumstances by the applicant might incidentally increase the metallic purity of the material, but we do not accept that was the purpose of the initial melt in every case. Instead, the purpose was to provide quality assurance and facilitate the efficient production of investment-grade bullion, namely, gold bars of at least 99.5% fineness, in an investment form, for supply to the dealers in precious metal.

21. It is unclear how much of the scrap material identified as being of at least 99.99% fineness was subjected to additional refining processes (such as aqua regia refining) as opposed to merely processing the molten material into standardised batches that could be granulated and cast into precious metal bars. We are satisfied the applicant had the incentive and intention to limit the time-consuming, finicky and costly refining processes (like aqua regia refining) as opposed to the routine pyrometallurgical and manufacturing processes that could be used to create the finished product.

22. So much for the production process. We now turn to what the applicant did with its output.

    DID THE APPLICANT MAKE CREDITABLE ACQUISITIONS?

23. The applicant’s ability to make GST-free supplies – and thus its entitlement to claim input tax credits on the acquisitions of scrap gold of at least 99.99% fineness that went into the manufacture of the end product said to be GST-free – depends on whether it can satisfy s‑38-385 of the GST Act and, therefore, make creditable acquisitions under s 11-5. The requirements in s 38-385 (b) and (c) have been satisfied because it is uncontroversial the applicant was a ‘refiner of precious metal’ and the Dealers were ‘dealers in precious metal’. (Those paragraphs are not without significance for the present discussion. As arises from a consideration of the relevant statutory context, it is important to observe that not all first supplies of precious metal are GST-free.) The only part of s 38-385 which is in dispute in these proceedings is s 38-385(a) which requires us to ask whether the supply of the finished product to the Dealers:

    …is the first supply of that precious metal after its refining by, or on behalf of, the supplier[?]

24. The Commissioner says that question is resolved against the applicant because it was not engaging in ‘refining’, whereas the applicant insists it was. The argument about the meaning of the word ‘refining’ was framed as follows: the Commissioner argued ‘refining’ is properly regarded as a process that is solely concerned with increasing the metallic fineness or purity of the gold, whereas the applicant argued it might also include processes that are about (or also about) eliminating non-metallic impurities and contaminants.

25. With that approach in mind, the parties provided a good deal of evidence about the applicant’s operations to assist us in determining whether the applicant was ‘refining’ the scrap gold it acquired. We also heard from people in the industry to ascertain their understanding of the term. But in analysing the interpretation of the word ‘refining’, it is vital to remember the word does not appear in a vacuum. The word must be read in the context of the GST Act as a whole, beginning with the text of s 38-385(a). That approach makes sense given we are not simply trying to interpret and apply a word. We are trying to answer a question posed by s 38-385. In doing so, the plain meaning of the word ‘refining’ must be considered, although any established trade or industry usage of the word is likely to be important in a case like this where the legislative provisions are addressed to a particular sector of business or commerce.

1. At the heart of the application of Div 165 in a case like this is whether the ‘scheme’, or ‘any part of the scheme’, was entered into or carried out by any of the participants for the sole or dominant purpose, objectively ascertained, and taking into account the matters in s 165-15, of enabling the applicant to get a GST benefit from the scheme: s 165-5(1)(c)(i). The enquiry directed by this test is whether the sole or dominant purpose of getting a GST benefit from the scheme can be attributed to one of the participants of the scheme or part of the scheme through an analysis of the listed matters. The relevant purpose need not be attributed to the taxpayer; it is sufficient that the purpose can be attributed to any one participant in the scheme: Federal Commissioner of Taxation v Macquarie Bank Ltd (2013) 210 FCR 164 at [289]-[290]; Federal Commissioner of Taxation v Ludekens (2013) 214 FCR 149 at [243]-[246].

2. It is well established that the term ‘dominant’ indicates that purpose which is the ruling, prevailing, or most influential purpose: Federal Commissioner of Taxation v Spotless Services Limited (1996) 186 CLR 404 at 416.

3. Division 165 also applies where the ‘principal effect’ of the scheme or part of the scheme is that the taxpayer gets a GST benefit directly or indirectly, taking into account the matters in s 165-15: s 165-5(1)(c)(ii). The principal effect test requires one to look at the objective outcomes produced by the scheme to see whether it is explicable by some reason beside the GST benefit obtained by the taxpayer. The ‘principal effect’ is an important effect, as opposed to merely an incidental effect: Explanatory Memorandum to the A New Tax System (Goods and Services Tax) Bill 1998 (Cth), paragraph 6.345.

4. Under both tests, the subjective intentions of the participants in the scheme must be disregarded, as the tests are expressed in terms of “it is reasonable to conclude”. This approach is supported by the income tax jurisprudence: see Federal Commissioner of Taxation v Zoffanies (2003) 132 FCR 523 at [53]-[54]; Federal Commissioner of Taxation v Sleight (2004) 136 FCR 211 at [67]; Federal Commissioner of Taxation v Hart (2004) 217 CLR 216 at 243; Vincent v Commissioner of Taxation (2002) 50 ATR 20 at [122]; Orica Limited v Federal Commissioner of Taxation [2015] FCA 46 at [19]. Furthermore, while all of the matters identified in s 165-15(1) must be taken into account, the Tribunal is entitled to form a “global assessment of purpose”: Federal Commissioner of Taxation v Consolidated Press Holdings (2001) 207 CLR 235 at 263. As to the precise matters that must be considered for Div 165 purposes, there are twelve paragraphs set out in s 165-15(1), some of which are different to Part IVA of the ITAA 1936, including the last one which is open-ended and which references “any other relevant circumstances”.

5. The Commissioner submitted that, in the present case, in relation to the wider or narrower ‘scheme’ and taking account of the matters referred to in s 165-15(1), one or more of the following listed entities, whether alone or with others, entered into or carried out the scheme or a part of the scheme. Moreover, these entities entered or carried out the scheme with the sole or dominant purpose of the applicant getting a GST benefit from the scheme which was the input tax credits for its acquisitions and for which the applicant paid the GST-inclusive prices to the Division 165 Supplying Entities:

   (i)the applicant;

   (ii)the IPJ Group entities;

   (iii)the Majid Group entities, Gold Buyers and/or Mr Faraj;

   (iv)MAK and/or Mr Kukulka;

   (v)YPP and/or Mr Bourke;

   (vi)USH and/or Mr Calabrese.

6. Further, or in the alternative, the Commissioner says the principal effect of the scheme is that the applicant got the GST benefit from the scheme, directly or indirectly.

7. The applicant’s position was that it is not reasonable to conclude any participant in the alleged scheme (in either of its formulations) entered into or carried out the scheme, or part of the scheme, for the dominant purpose of the applicant getting a GST benefit. The applicant accepted, based on the evidence produced, that certain rogue suppliers altered gold to make taxable supplies to the applicant, collected GST-inclusive prices from the applicant and then fraudulently retained that GST. However, the applicant distanced itself from that fraudulent conduct and argued its dominant purpose, having regard to the listed matters, was not to secure input tax credits but to acquire scrap gold it needed to produce precious metal. It said it is irrational to suggest the dominant purpose of a taxpayer acquiring a taxable supply of goods that are critical to its business is not to obtain the goods themselves but simply to obtain the input tax credits. In any event, the applicant argued the availability of input tax credits to the applicant was an expected and natural incident of the payment of GST-inclusive prices.

8. Further, the applicant submitted it was not the principal effect of the scheme that the applicant received the GST benefit: it submitted the principal effect was to enable the rogue suppliers to sell scrap gold to third-party purchasers including the applicant as a taxable supply, thereby enabling those suppliers to recover GST-inclusive prices and fail to remit that GST to the Commissioner. The applicant says that is the step which cannot be explained other than by reference to tax evasion on the part of the Division 165 Supplying Entities, and the availability of input tax credits to the applicant was irrelevant to the purpose and effect of any scheme participant.

9. The applicant’s arguments have a superficial appeal, but the reality is that the applicant’s entitlement to the input tax credits was more important to the operation of the scheme than the GST liabilities evaded by the Division 165 Supplying Entities. The input tax credits paid by the Commonwealth to the applicant funded the round-robin arrangements because, in simple terms, it was only economically feasible for the applicant to pay those GST-inclusive prices to the Division 165 Supplying Entities in the knowledge that the applicant would receive the input tax credits. Without the entitlement to the input tax credits, the applicant would not have paid those prices to the Division 165 Supplying Entities and, consequently, there would have been no acquisition of precious metal by the third-party suppliers (including the Division 165 Supplying Entities) from the Dealers. There would have been no defacing of that precious metal, no taxable supplies in altered form to the applicant, no processing of the metal by the applicant, and no sale of an equivalent amount of precious metal back into the market by the applicant to the Dealers, and so on. In other words, the round robin arrangements would have fallen over if the applicant had not been able to claim the input tax credits. It was the GST benefit in the form of the larger input tax credits payable by the Commonwealth to the applicant, because of the Division 165 Supplying Entities making taxable supplies to the applicant, that underpinned the scheme.

10. We are satisfied that either the applicant or the other entities listed at [264] above entered into the scheme (in either of its formulations) with the dominant purpose of the applicant getting a GST benefit from the scheme. We reach that conclusion after taking account of the matters listed in s 165-15(1). Our analysis in relation to the matters listed in s 165-15 follows.

11. As to s 165-15(1)(a) and the manner in which the scheme was entered into or carried out (in both of its formulations), this involved the acquisition of investment-grade bullion, the deliberate alteration of the bullion and the subsequent supply of scrap gold to the applicant for refining. Those transactions and course of conduct occurred systematically on an almost daily basis over a period of at least 20 months from the start of the applicant’s business, with increasing frequency and involving increasingly large volumes and values. The applicant’s dealings with the Division 165 Supplying Entities including its lax due diligence procedures, as well as its rapid out-turn and favourable payment terms, facilitated the efficient perpetuation of the scheme. The applicant’s supplies of investment-grade bullion to the Dealers (one of which was a related entity) were also instrumental to the ongoing and increasing volume of high-value transactions carried out by the Division 165 Supplying Entities.

12. As we have explained above, Mr Cochineas and Ms Simpson – but especially Mr Cochineas – were on notice (and in some cases had actual knowledge) of the fraudulent activities of the Division 165 Supplying Entities. That state of knowledge must be attributed to the applicant. Further, the Division 165 Supplying Entities created a liability to GST when making taxable supplies of scrap gold and the Division 165 Supplying Entities passed on the GST to the applicant as part of the price for the scrap gold. There was no commercial reason for the round robin arrangement except for the GST consequences arising from the different treatments of gold. Accordingly, the manner in which the scheme was carried out strongly suggests the dominant purpose of the entities listed at [264] above (including the applicant), was to secure the GST benefit.

13. As to s 165-15(1)(b), the form and substance of each scheme was to create GST liabilities in the Division 165 Supplying Entities and corresponding entitlements to input tax credits in the applicant for which the Commonwealth was liable to make payment to the applicant. There was no economic substance to the wider or narrower scheme as it was not an ordinary commercial arrangement. It was an arrangement for the applicant to claim input tax credits. The form and substance of the scheme points to the conclusion that producing the GST benefit was the dominant purpose of the scheme.

14. As to s 165-15(1)(c), in relation to the purpose or object of the GST Act, it is clear the input tax credits are available to a refiner for acquisitions that relate to it making the first supply of precious metal after its refining, but are not available for acquisitions that relate to input taxed supplies. It is manifestly also clear that, in the present case, the outcomes under the GST Act were manipulated by the contrived step of the deliberate alteration of investment-grade bullion so that it no longer satisfied the definition of ‘precious metal’ and could be sold to the applicant as taxable supplies. The only reason the investment-grade bullion was being repeatedly defaced was in order to create entitlements to input tax credits in the applicant. This factor strongly suggests the dominant purpose of the entities listed at [264] above (including the applicant), was to get the GST benefit.

15. In regard to the timing and period over which the schemes (in either formulation) were carried out (as referred to in paragraphs 165-15(1)(d) and (e)), they commenced shortly after the applicant was incorporated to acquire the existing JSPL Business. The first ‘client’ of the applicant was the IPJ Group – one of the Division 165 Supplying Entities – in respect of which the applicant set up its processes with ABC NSW, a related entity. Further, the schemes entailed the monthly claiming by the applicant of input tax credits, matched by a consistent failure by most or all of the Division 165 Supplying Entities to properly account for GST on their taxable supplies. Other events which ensued and which also reflect on the requisite dominant purpose of the applicant in getting a GST benefit from the scheme include the fact that after the search warrants were executed, the applicant’s trading with the IPJ Group entities and the Majid Group entities (other than Majid Jewellers) ceased. Additionally, the applicant’s trading with Majid Jewellers and MAK decreased substantially. Separately, Gold Buyers had previously gone into liquidation. The timing of these events strongly suggests the dominant purpose of the entities listed at [264] above (including the applicant), was to secure the GST benefit.

16. This analysis is premised on the applicant succeeding as to its entitlements to input tax credits under Div 11. In those circumstances, but for the application of Div 165, the effect of the GST Act would be that the applicant would be entitled to input tax credits totalling $72,953,611: s165-15(1)(f).

17. Section 165-15(1)(g) requires consideration of any change in the taxpayer’s financial position that resulted or may reasonably be expected to result from the scheme. During the 18 months leading up to July 2014, the applicant’s turnover increased from $63,000,000 to $745,785,032 at a time when the spot price for gold was falling,[223] and its profit before tax increased by 6296%. For the reasons explained above in relation to pricing, the high turnover and profit was, in the main, due to the input tax credits that the applicant claimed as part of the scheme. This factor strongly suggests the dominant purpose of the applicant was to secure the GST benefit.

    [223] Hearing Book, Volume 6, p 4,730; Supplementary report of Dawna Wright dated 28 March 2018, [5.5.3].

18. While the applicant’s financial position was boosted by the scheme, the same cannot be said for the financial position of other ‘connected entities’ (a reference to entities that had a connection or dealing with the taxpayer). The impact of the scheme on their financial position and any other consequence for the avoider or connected entity must also be taken into account pursuant to s 165-15(1)(h)-(i). While the authors of the fraud benefitted from the tax evasion, that is beside the point for present purposes. The scheme (in either of its formulations) had a deleterious impact on their fortunes because they incurred a GST liability which made the transactions uncommercial. Another change that resulted from the scheme in either of its formulations was the substantially increased turnover and, consequently, increased margins and profitability for the Dealers with which the applicant transacted, including the applicant’s related entity, ABC NSW. We consider this factor strongly suggests the dominant purpose of the entities listed at [264] above, was to secure the GST benefit. This is because the adverse economic outcomes for the Division 165 Supplying Entities under the GST Act could not have been the driving force of the scheme. The creation of the matching input tax credits in the applicant lay at the heart of the scheme.

19. As to the nature of the connection between the applicant and other connected entities (referred to in s 165-15(1)(j)), the applicant’s primary customer, ABC NSW, was a related entity of the applicant. As noted above, the two directors of ABC NSW, Ms Simpson and Mr Gregg, were also directors of the applicant during the Relevant Period. Ms Simpson and Mr Gregg also indirectly held 50% of the shares in the applicant. Furthermore, the relationship between ABC NSW and the applicant in the scheme (in either of its formulations) was symbiotic in that their businesses were co-dependent. The applicant relied on ABC NSW to place orders for the production of precious metal. On the other hand, the applicant was only in a position to produce precious metal after acquiring scrap metal from the Division 165 Supplying Entities. The Division 165 Supplying Entities had previously acquired the precious metal from, amongst others, the Dealers, including ABC NSW. In relation to the applicant’s transactions with the Division 165 Supplying Entities, we have already referred above to the fact that the applicant did not insist on any due diligence regarding the origin of the scrap gold and that it offered favourable trading terms. In relation to the IPJ Group, we also noted the relationship between Mr Cochineas and his associates with the Catanzariti brothers was more than a strictly business relationship. The nature of the connections and the mutual benefits derived from the input tax credits suggests the dominant purpose of the entities listed at [264] above was to secure the GST benefit.

20. Sections 165-15(1)(k) and (l) refer to the circumstances surrounding the scheme and any other relevant circumstances. We are of the view these factors require a holistic consideration of the scheme in either of its formulations to be taken into account. We consider the fact “a significant motivation [for the establishment of the applicant] is to obtain the benefit of the current GST-free “first supply from a refinery” exemption” (see [49] above) to be particularly influential in our consideration of the factors, especially when coupled with the fact the applicant commenced its business with IPJ (one of the entities engaged in fraudulent conduct). The early email correspondence between representatives of the applicant and ABC NSW, including as to the processes to be adopted (see [161] above), also suggest there was implicit co-operation between the applicant, IPJ and ABC NSW as to the arrangement between them. Furthermore, we are satisfied the initial process which Mr Cochineas wanted to test with ABC NSW (albeit involving small quantities) was to be the applicant’s roadmap for similar arrangements with other Division 165 Supplying Entities (see [146] above). We conclude the applicant was, at best, wilfully blind to the creation of a contrived market in gold transactions which entitled it to claim input tax credits upon its acquisitions of scrap gold from the Division 165 Supplying Entities. The applicant facilitated and willingly participated in the round robin arrangement and benefited from the input tax credits that were created. The relevant circumstances surrounding the scheme strongly suggest the applicant had the requisite dominant purpose of the applicant getting the GST benefit from the scheme.

21. Further to our conclusion at [269] above, we are satisfied the dominant purpose of the entities listed at [264] above was to create an entitlement to claim input tax credits in the applicant. Without that, the applicant would not pay GST-inclusive prices for the scrap gold. The objective purpose of the Division 165 Supplying Entities was to make sales to the applicant that were taxable supplies by them and creditable acquisitions by the applicant. It was the input tax credits which were critical to the scheme in both of its formulations. The Division 165 Supplying Entities were able to benefit from the payment of those input tax credits by being able to recover GST-inclusive prices from the applicant regardless of the fact they never intended to remit the GST to the Commissioner.

22. Further, or in the alternative, in relation to the wider scheme and/or the narrower scheme, taking account of the maters listed in s 165-15, as discussed above, we conclude the principal effect of the scheme or of part of the scheme in either of its formulations, is that the applicant obtained the GST benefit from the scheme, directly or indirectly. It is significant to note that the Explanatory Memorandum to the A New Tax System (Goods and Services Tax) Bill 1998 (Cth) states at 6.344 that “[t]his test is different from the purpose test in that it applies specifically to the avoider and the GST benefit obtained by the avoider”.

23. We are reinforced in our conclusions by s 165-1 which states, by way of an explanatory section, that Div 165 is “aimed at artificial or contrived schemes”. There was no conceivable commercial justification for the defacement of the investment-grade bullion into scrap gold other than to enable the acquisition of it by the applicant to become creditable acquisitions. Moreover, the applicant’s business model was opportunistic in nature as it was premised on recycling precious metal that was already of 99.99% fineness after it was deliberately defaced and turned into scrap gold. For completeness, this arrangement was not a carousel fraud arrangement involving innocent traders in a supply chain. The applicant was, at least, wilfully blind and enabled the arrangements to continue. It would have been obvious to the applicant that the investment-grade bullion was deliberately defaced to create taxable supplies. Contrary to what the applicant submitted, this is a case about needless refining as there was no legitimate commercial purpose in turning investment-grade bullion into scrap gold of 99.99% metallic fineness and then into precious metal bullion bars and so on. The applicant’s submission to the effect that it added value in the supply chain by producing precious metal fails to engage with the indisputable fact that the value of the precious metal was deliberately destroyed, over and over again, so as to create input tax credits in the applicant.

1. It is not determinative, in circumstances where the definition of ‘GST benefit’ in s 165-10(1)(b) refers to “an amount that is payable to the [applicant] under this Act apart from this Division is, or could reasonably be expected to be, larger that it would be apart from the scheme”, that the applicant’s input tax credits matched the GST liability of the Division 165 Supplying Entities and, furthermore, that the applicant paid GST-inclusive prices to the Division 165 Supplying Entities. It is also not determinative that the ‘scheme’ involved tax evasion by the Division 165 Supplying Entities. Irrespective of that conduct, Div 165 has to be applied on its terms.

2. We are satisfied Div 165 does apply to the applicant and the Commissioner was correct to negate the GST benefits in the sum of $72,953,611, in the alternative to the assessments issued to the applicant denying the applicant’s input tax credits totalling $122,112,065.

   IS THE APPLICANT LIABLE TO AN ADMINISTRATIVE PENALTY? IF SO, SHOULD THE ADMINISTRATIVE PENALTY BE FURTHER REMITTED IN WHOLE OR IN PART?

3. The Commissioner issued the applicant with a notice of assessment of shortfall penalty totalling $58,059,829.75.[224] This was assessed by reference to the greatest GST shortfall amount which arose from the ‘no refining’ issue.[225] Relevantly, the applicant claimed to have been entitled to input tax credits for acquiring gold of 99.99% fineness and making GST-free supplies. However, on the basis of our conclusions above, the applicant had a tax shortfall and, consequently, the applicant had made false or misleading statements to the Commissioner as to its net GST amount in its BASs lodged for the Relevant Period: s 284-75 of Schedule 1 to the TAA 1953. Alternatively, scheme penalties would apply pursuant to s 284-145 of Schedule 1 to the TAA 1953 in respect of the scheme shortfall amount.

   [224] Hearing Book, Volume 1, pp 39-41.

   [225] Hearing Book, Volume 3, p 1,818.

4. The penalties were imposed at the rate of 50% of the shortfall amount on the basis of the applicant’s recklessness as to the operation of the GST law for the tax periods ending 29 February 2012 to 31 October 2013: Item 2 of the table in s 284-90(1). In respect of the tax periods ending 31 November 2013 to 30 June 2014, the penalties were imposed at the rate of 25% of the GST shortfall amount based on the applicant’s failure to take reasonable care to comply with the GST law: Item 3 of the table in s 284-90(1).

5. Section 284-220(1) of Schedule 1 to the TAA sets out the circumstances where the base penalty amount is increased by 20%. The circumstance set out in s 284-220(1)(c) applied to the applicant as it had a base penalty amount calculated for the shortfall amount for an earlier BAS, notwithstanding the fact the applicant was issued with the penalty assessments at the same time. However, the 20% uplift in the base penalty amount was remitted by the Commissioner before issuing the notice of assessment of penalty.[226]

   [226] Hearing Book, Volume 3, pp 1,817-1,818.

6. The Commissioner has a discretion under s 298-20(1) of Schedule 1 to the TAA 1953 to remit all or part of a penalty but decided not to do so on the basis he had already remitted the 20% increase in the base penalty to 0% and because the circumstances did not warrant it. In this regard, the Commissioner adhered to the position in Practice Statement Law Administration, PSLA 2012/5: Administration of penalties for making false or misleading statements that result in shortfall amounts (PSLA 2012/5). He specifically emphasised the purpose of the penalty regime is to encourage entities to take reasonable care in complying with their tax obligations. It is also stated at paragraph 156 of PSLA 2012/5 that “remission decisions need to consider that a major objective of the penalty regime is to promote consistent treatment by reference to specified rates of penalty. That objective would be compromised if the penalties imposed at the rates specified in the law were remitted without just cause, arbitrarily or as a matter of course”.

7. The applicant submitted it is not liable to any administrative penalty because it was not reckless and did not fail to take reasonable care. Furthermore, the applicant argued its position was reasonably arguable. According to the applicant’s objection, the assessments of shortfall penalty are excessive in their entirety. Moreover, for each of the tax periods from November 2013 to June 2014, the applicant pointed out the Commissioner was fully aware of the nature of the applicant’s business as the applicant disclosed to the Commissioner details of certain scrap gold acquisitions that were of concern to the Commissioner prior to claiming input tax credits for those acquisitions. The applicant also stated the Commissioner, through one of his officers leading the audit of the applicant, informed the applicant that its acquisitions were ‘creditable acquisitions’ for the purposes of the GST Act.[227]

   [227] Hearing Book, Volume 3, pp 2,048-2,049; First Cochineas Affidavit, [70]-[71].

8. We have decided the administrative penalties were correctly imposed and, further, that the Commissioner was correct in not further remitting all or any part of the administrative penalties. The applicant did not make submissions or adduce any evidence that would persuade otherwise. We acknowledge that at the hearing, Deputy President McCabe indicated that if we considered it necessary we would invite further submissions. In the event, we decided it was unnecessary to accept further submissions because the applicant failed to adduce evidence that discharged the burden of proving the penalties were excessive or incorrect and that the remission decision should have been made differently: s 14ZZK(b)(i) and (ii) of the TAA 1953.

9. In particular, we agree with the Commissioner’s viewpoint that the shortfall amounts in the pre-November 2013 tax periods are due to recklessness, which is considered to be more than gross carelessness, as to the operation of the GST law: see BRK (Bris) Pty Ltd v Commissioner of Taxation (2001) 46 ATR 347 at 364. We took into account the fact the applicant had identified a significant potential risk as to it claiming input tax credits when it analysed whether it was a refiner or a recycler in early 2012 at the start of its operations and, nevertheless, proceeded to brazenly claim input tax credits with reckless indifference to the GST consequences. Moreover, the GST issues were key to the applicant’s business model. We accept the Commissioner’s position that the likelihood of the applicant incorrectly claiming input tax credits was very high and the amount at stake was very large.[228]

   [228] Hearing Book, Volume 3, p 1,815.

10. We are satisfied the shortfall amount from November 2013 onwards was due to the applicant’s failure to take reasonable care. The evidence demonstrates the applicant was, at that stage, under scrutiny from the Commissioner and somewhat circumspect in its dealings with third-party suppliers, including adopting more robust due diligence procedures. Mr Cochineas acknowledged that the applicant’s onboarding processes were evolving over a period of time, and ‘ramped up’ after October 2013.[229] The applicant also prepared memoranda explaining its views as to its input tax credit entitlements which it provided to the Commissioner at or about that time.

    [229] Transcript p 222.

11. We acknowledge the applicant appeared to have banked on the ATO team leader’s views as to its entitlements to claim input tax credits, coupled with the fact the Commissioner proceeded to process GST refunds to the applicant following verification activities. However, as already pointed out above, a taxation officer’s personal views do not bind the Commissioner nor did the limited verification actions preclude the Commissioner from undertaking further investigations and issuing assessments for tax shortfalls. We note this outcome is coherent with the conclusion reached by the Federal Court in a similar context: see Federal Commissioner of Taxation v ACN 154 520 199 Pty Ltd (in Liq) (formerly EBS & Associates Pty Ltd) [2018] FCA 1140 at [49]. In any event, we think it is appropriate, in all the circumstances, that the Commissioner remitted the 20% increase in the base penalty amount to 0%. We were not persuaded by the applicant that the rates of penalty should be reduced or that the penalties should be further remitted.

    CONCLUSION

12. The Commissioner’s decisions in respect of the objection to the assessments of net amount of GST are affirmed. The Commissioner’s decision in respect of the objection to the assessment and liability to pay administrative penalty are also affirmed.

I certify that the preceding 294 (two hundred and ninety-four) paragraphs are a true copy of the reasons for the decision herein of Deputy President Bernard J McCabe and Ms G Lazanas, Senior Member

................................[SGD]........................................

Associate

Dated: 20 December 2019

Date(s) of hearing:	3-7, 13-14, 17-18, 24-25, 27-28 September 2018
Counsel for the Applicant:	Mr J Hmelnitsky SC Mr B Jones
Solicitors for the Applicant:	Robinson Legal
Counsel for the Respondent:	Mr G Davies QC Mr E Wheelahan Mr G O’Mahoney Ms C Pierce
Solicitors for the Respondent:	Australian Government Solicitor