• The impact of this case on ATO policy is discussed in Decision Impact Statement: Touram Pty Ltd atf the GKA Family Trust and Commissioner of Taxation (Published 12 August 2009).

TOURAM PTY LTD (AS TRUSTEE FOR THE GKA FAMILY TRUST) v FC of T

Members:
BJ McCabe SM

Tribunal:
Administrative Appeals Tribunal, Brisbane

MEDIA NEUTRAL CITATION: [2008] AATA 1167

Decision date: 23 December 2008

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BJ McCabe (Senior Member)

1. The taxpayer and the Commissioner are arguing about whether the sale of a vacant block of land to the taxpayer amounts to a "taxable supply" within the meaning of s 9-5 of A New Tax System (Goods and Services Tax) Act 1999 ("the Act"). The taxpayer says it is a taxable supply, which means it is entitled to claim an input tax credit in the amount of $20,612. The Commissioner disagrees. In particular, the Commissioner says the sale does not answer the description in s 9-5(b), which requires that the supply be made in the course or furtherance of an enterprise being carried on by the supplier. In those circumstances, the Commissioner argues, the claim for an input tax credit must be disallowed.

2. In order to resolve the dispute, I must consider the facts surrounding the sale and the history of the property in the hands of its previous owners. I must also consider the meaning of the word "enterprise".

3. For reasons I will explain, I am satisfied the supply was a taxable supply within the meaning of the Act. The objection decision under review must therefore be set aside.

THE FACTS

4. The taxpayer is the trustee of a family trust. The taxpayer entered into a contract to purchase a vacant block of land on Main Street in Kin Kin on 18 May 2006. The contract specified the purchase price was $226,737. Clause 2.1 of the contract provided that the purchase price "includes any GST payable on the supply of the Property to the Buyer."

5. The contract in question replaced an earlier contract between the vendor and one of the adult children of the directors of the taxpayer company. The contract was rescinded by mutual agreement pursuant to a term of the contract which allowed the buyer to substitute another entity as the purchaser. The taxpayer said the decision was made to nominate the taxpayer as the purchaser following due diligence inquiries that established the vendor was registered for GST, and because the taxpayer understood the sale was a taxable supply that would entitle the taxpayer to claim an input tax credit.

6. The settlement date of the new contract was 30 June 2006. On 28 June 2006, the taxpayer's solicitor wrote to the vendor's lawyer advising that the taxpayer required a stamped release of mortgage and a tax invoice from the vendor "in respect of the supply pursuant to the contract". The vendor's solicitor responded by letter the following day: see Exhibit 1, at folio 46. The letter included a document identified as a tax invoice. The letter explained:

We enclose for your information a copy of the Tax Invoice to be delivered at settlement. Please note that we are not representing that our client does have a GST liability, but rather, the invoice is compliant with the provision of Standard Condition 2.1 of the Contract which speaks in broad terms of any GST payable upon the supply. (Emphasis in original.)

7. The vendors say they did not instruct their lawyer to issue the invoice on their behalf. The letter does not suggest otherwise.

8. The sale was finalised and ownership of the property changed hands. The taxpayer's Business Activity Statement for the period 1 April 2006 - 30 June 2006 claims a GST credit in the amount of $20,612 in respect of the sale. The Commissioner forwarded a cheque to the taxpayer in that amount in due course.

9. I should say something about the land at the time of the sale. It is located in the town of Kin Kin, near Gympie in Queensland. Kin Kin is not a big place. The land in question is located on the eastern end of town. It was a vacant block situated opposite the Kin Kin Hotel. At the time of the sale to the taxpayer, the land was zoned "Village Business" by the Noosa Shire Council. The taxpayer lodged a development application in respect of the land when the sale was complete. The application to build a commercial complex on the property has now been approved.

A HISTORY OF THE LAND IN THE HANDS OF THE VENDORS

10. Pamela and Ian Falconer were the vendors of the property. Both of them provided written statements to the Tribunal and gave evidence at the hearing. In his statement, Mr Falconer recalled they had acquired the land on or around 28 October 1994. The land was zoned "Village Residential" at the time.

11. Mr Falconer and his wife applied to have the land re-zoned in 1997. They retained a town planner to this end. The re-zoning application was accompanied by some development plans prepared by the town planner. Those plans envisaged a complex comprised of five shops. The application to re-zone the land to "Village Business" was accepted by Noosa Shire Council on 4 December 1997.

12. In his statement, Mr Falconer summarised his evidence as follows:

• • The land was purchased with the intention that it be held as an investment with a view to capital appreciation
• • At the time of the rezoning application my wife and I did not have the means or the intention of developing the property
• • At all times during our ownership of the land the land remained vacant and unused
• • Neither my wife nor myself made representations to the applicant or its agents to the effect that the sale of the land was a taxable supply or that I am or my wife had intended to develop the land or had used the land in an enterprise.

13. Mrs Falconer repeated those assertions in her statement. In her oral testimony, she explained that she and her husband, who was a registered builder, had moved to Kin Kin from Melbourne in around 1988. They acquired a small fruit farm and proposed becoming famers on a full-time basis. The primary production business was carried on as a partnership. The partnership had existed since the early 1970s. It had previously conducted a building business in Melbourne and a range of other activities.

14. Mrs Falconer testified that she and her husband regarded the land at Main Street as a "personal asset". She agreed they funded the purchase using borrowed funds secured against their farm, which was a partnership asset. She also acknowledged their accountant had listed the vacant block as a partnership asset in the partnership accounts, but she says she was not aware of that at the time, nor did she appreciate the significance (if any) of doing so. She said the couple tended to put all of their assets (apart from the family car) into the partnership books without thinking about it too much. Although she said she was responsible for maintaining the partnership books, she was unable to explain why and to what extent holding costs associated with the vacant block were claimed as partnership expenses.

15. Mrs Falconer explained in her oral testimony that the couple had other business interests that supplemented their income. She spoke of a block of flats in Buderim that yielded rental income, for example. She also agreed that Mr Falconer resumed building work around 1993, albeit on a small scale at first. He did not advertise; most of his referrals came by word of mouth. She said in her evidence in chief that farming was the main source of income during this period, but she acknowledged the partnership tax returns suggested the couple made more money from their non-farming interests. She insisted that she and her husband never contemplated developing the land themselves. They did nothing with the land before they listed it for sale in 2005 at the suggestion of a local real estate agent who said the market was improving.

16. Mr Falconer was less forthcoming in his oral evidence. He was a vague witness. He had a poor recollection of the matters and events surrounding the circumstances of the sale. Perhaps that is because of the passage of time. He was reasonably clear about some matters, however. He confirmed he did not recall having a discussion with his wife about developing the land. He said in any event that he had not turned his builders' mind to the possibilities. He said the development plans prepared by the town planner were merely intended to smooth the way of the re-zoning application. The couple never intended acting upon the plans. He said the obstacle was not so much the money; rather, he said he would not have developed the property himself because he did not have the experience to do so. He said he was a builder, not a developer.

THE LEGAL RULES

17. I have already pointed out that the definition of "taxable supply" in s 9-5 of the Act requires that the supply in question be "made in the course or furtherance of an *enterprise" that the supplier carries on. The outcome in this case turns on the meaning of the word "enterprise".

18. Section 9-20 of the Act defines "enterprise" in broad terms. Relevantly, the Act provides:

• (1) An enterprise is an activity, or series of activities, done:
  • • in the form of a *business; or
  • • in the form of an adventure or concern in the nature of trade; …

19. Mr and Mrs Falconer were clearly conducting an enterprise: they ran a commercial farm; they undertook construction work for reward; and they rented out accommodation. The question is whether the sale of the land in Kin Kin to the taxpayer occurred in the course or furtherance of that or any other enterprise.

20. The definition in s 9-20(1)(a) requires that I embark on the familiar but inexact task of considering what constitutes a "business". The expression is a flexible one, and perhaps necessarily so. To paraphrase Stewart J in
Jacobellis v Ohio, 378 US 184 (1964), the concept is difficult to define but one knows it when one sees it. The best that can be said is that one looks for indicia one ordinarily associates with a business and makes a common sense evaluation of whether, in all the circumstances, the activities or organisation in question have the look and feel and character of a business.

21. A large number of cases have discussed the things that might be relevant to the task of assessing whether one is dealing with a business. The respondent referred me to the decision of Bowen CJ and Franki J in
Ferguson v Commissioner of Taxation [1979] FCA 29; (1979) 37 FLR 310 at 314. There are others, some of which I referred to in the course of my decision in
Re Body Corporate, Villa Edgewater Cts 23092 and Commissioner of Taxation [2004] AATA 425; 2004 ATC 2056.

22. The cases suggest one ordinarily expects to see an element of system or regularity. Repetition is also common, although one-off transactions might still qualify in the presence of other circumstances. One also expects to see a profit-making purpose, although the definition of "enterprise" in s 9-20(1)(e) and (f) extends to charitable and religious organisations. It may be that the means (the way in which the activity or organisation is conducted) are a surer guide than the ends (like making a profit).

23. The emphasis on whether the activity or organisation in question is carried on in a business-like way is consistent with the definition in s 9-20(1)(a). It refers to activities done "in the form of a *business" (emphasis added). Is there any evidence of this activity - the acquisition and sale of the vacant land - being carried on in a business-like way?

24. The analysis in this case is complicated by the state of the evidence. The relevant conduct and events occurred over a 12 year period. Memories have faded. Like many small-business people, the Falconers did not necessarily maintain comprehensive records. They also appeared to be unenthusiastic witnesses, which suggests their evidence should be treated with caution. Subject to those qualifications, I make the following findings.

25. I accept the land in question did not form part of the Falconers' other businesses. The dealing with this land was separate from the rest of their activities, although I note the couple borrowed against the security of the farm to buy the land at Main Street. But even if I accept the acquisition and sale of the land was discrete from the rest of the business and a one-off, that does not mean the Falconers were not also in the business of buying and selling this property.

26. I am satisfied the Falconers dealt with the land in a business-like way. While I accept they never intended to actively develop the land themselves, I do not think that matters. To the extent that a profit-making intention is relevant to the inquiry, I am satisfied from the evidence of both Mr and Mrs Falconer that they acquired the land with a view to selling it in due course for a profit. They had no other objectives in mind.

27. The more important indicia for present purposes is the practice of recording the purchase price, the holding costs and the development costs associated with the property in the partnership financial reports: see, for example, Exhibit 1, at folio 152. That is the sort of system and regularity one expects to see in a business. Mr Marks, for the respondent, suggested I should not read too much into this evidence: anyone holding property would probably record holding and other costs over time because those costs would be relevant when the time came to calculate the amount of any capital gain. I accept that is so, but one would not expect those records to be maintained in the partnership accounts if the property in question was a "personal asset". I note Mrs Falconer said they tended to list most of their assets in the partnership accounts, but she clearly understood that some assets - like the family car - did not belong there. I do not accept the property was included in the partnership accounts by accident.

28. While I have accepted the Falconers did not intend to develop the land themselves, they certainly went about doing the groundwork for a development in a business-like way. They commissioned a town planner to prepare plans for a commercial development and seek a re-zoning. They did so because they assumed it would make the property more valuable. They behaved exactly as a business person would behave if he or she was going to proceed with a development.

29. I am satisfied the vendors of the property were conducting a property investment enterprise. I reach that view because of the business-like way in which they went about the task of acquiring and holding the property. I am also satisfied that the sale of the property in 2006 was made in the course of furtherance of that enterprise in the sense that the ultimate goal - the realisation of a profit - was achieved through the sale process. It follows that the vendors of the property made a taxable supply of the land to the taxpayers within the meaning of s 9-5 of the Act. In those circumstances, I do not need to consider the arguments in relation the meaning of s 9-20(1)(b).

CONCLUSION

30. The objection decision is set aside. I decide in substitution that the vendor of the property at Main Street, Kin Kin, made a taxable supply of land to the taxpayer on 18 May 2006.