San Remo Heights Pty Ltd v FC of T

Members:
RJ Olding SM

Tribunal:
Administrative Appeals Tribunal, Brisbane

MEDIA NEUTRAL CITATION: [2020] AATA 4023

Decision date: 9 October 2020

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RJ Olding (Senior Member)

1. This case is about whether the Applicant, San Remo Heights Pty Ltd (" the Company "), is liable for Goods and Services Tax (" GST ") on sales of two lots of vacant land.

2. The only controversy is whether an element of the definition of "taxable supply" in the GST Act is satisfied, namely whether the sales were "made in the course or furtherance of an enterprise that [the Company carried] on".^[1] A New Tax System (Goods and Services Tax) Act 1999 (Cth) (“ GST Act ”), s 9-5(b).

3. As the Company has the burden of proving the assessment by the Respondent Commissioner (" the Commissioner ") is excessive,^[2] Taxation Administration Act 1953 (Cth), s 14ZZK. the question for the Tribunal is: Has the Company discharged the burden of proving the sales of the subject lots were not made in the course or furtherance of an enterprise that the Company carried on?

THE LEGAL FRAMEWORK

4. "Enterprise" is relevantly defined for GST purposes as:

"An enterprise is an activity, or series of activities, done:

• (a) in the form of a business; or
• (b) in the form of an adventure or concern in the nature of trade …"^[3] GST Act, s 9-20(1).

5. "Business" is defined^[4] GST Act, s 195-1. inclusively and therefore encompasses activities within the ordinary meaning of the word. There are well-known indicia of a business - such as profit-making purpose, scale, repetition and regularity, the amount of capital invested, and organisation of activities in a business-like way, with books

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and records^[5] See, for example, the discussion in Ferguson v Federal Commissioner of Taxation (1979) 37 FLR 310 , [15] . - which, along with the nature of the activities, may assist in determining whether a particular activity or series of activities is in the form of a business.

6. It has been held that where a company is incorporated for the purpose of making profits for its shareholders any gainful use to which the company puts its assets prima facie amounts to carrying on a business^[6] American Leaf Blending Co. Sdn. Bhd. v Director-General of Inland Revenue (Malaysia) (1979) AC 676 , 684 . and that it is easier to draw an inference that activities of a company constitute a business than when similar activities are carried on by an individual.^[7] Brookton Co-operative Society Ltd v Federal Commissioner of Taxation (1981) 147 CLR 441 , 452 and 469 .

7. A profit-making objective is also central to the concept of an adventure or concern in the nature of trade, but an isolated commercial transaction may have the requisite character. As Edmonds J noted in
Professional Admin Service Centres Pty Ltd v Commissioner of Taxation:^[8] (2013) 94 ATR 445 .

"The word "business" is defined in s 195-1 of the GST Act in an inclusive and non-inclusive way, but is of little or no assistance in the present context. Australian income tax law jurisprudence emphasises the existence of a profit-making purpose, repetition and regularity, the conduct of activities using business-like methods, the volume of activity and the existence of a significant commercial purpose as relevant indicia to a finding that the activity or activities constitute a business. But para (b) of s 9-20(1) makes it clear that an "enterprise" can include an isolated commercial venture in the nature of trade, which implies that it be entered into for a commercial purpose, including the purpose of profit-making [citing various income tax authorities]"^[9] (2013) 94 ATR 445 , [39].

THE FACTS

8. The primary facts are not in dispute. The following findings are drawn mainly from unchallenged evidence by way of a witness statement provided by Mr John Andrew Keam, a director and secretary of the Company since 2014, who was not called to give evidence.

9. The Company acquired a parcel of land (" the parent lot ") in Bergin Grove, San Remo, Victoria in 1962. Because of the effluxion of time, no-one called upon to provide evidence can now say what was the Company's object in acquiring the parent lot.

10. The Company undertook various subdivisions of the parent lot:

• (a) in April 1987, creating four new lots, each sold that year;
• (b) in November 1987, creating another four lots, one sold in 1989, another in 1995, the remaining two in 1998;
• (c) in June 2000, creating lots that became known as "3 Bergin Grove", "5 Bergin Grove", "7 Bergin Grove" and "7 Mary Grove" (collectively, the " San Remo Vacant Lots ").

11. The Company sold 7 Bergin Grove in 2002 and 7 Mary Grove in June 2019.

12. The lots the subject of the review were also sold:

• (a) 3 Bergin Grove - by contract dated 18 July 2018 for $420,000, completed on 15 October 2018; and
• (b) 5 Bergin Grove - by contract dated 7 August 2018 for $422,000, completed on 7 November 2018.

13. In assessing the Company's net amount for the December 2018 quarterly tax period, the Commissioner included GST on the sales of 3 Bergin Grove and 5 Bergin Grove. The Company objected to the assessment; the Commissioner disallowed the objection; and the Company has applied to the Tribunal for review of the objection decision.

14. The Company also holds various rental properties and a operates a sheep grazing business.

15. The rental properties comprise three commercial and four residential properties at various locations in Victoria. The sheep grazing is conducted on parcels of land in San Remo, Victoria.

16. The San Remo Vacant Lots are not contiguous with the grazing land nor were they used for grazing or rental purposes. The Company has not claimed income tax deductions or input tax credits for expenses or capital allowances (depreciation) associated with their ownership. Mr Keam is not aware of any occasions on which the Company sought to have the San Remo Vacant Lots rezoned, applied for relevant permits or previously attempted to sell those lots.

17.

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In his written statement, Mr Keam stated:

"The sole objective of San Remo Heights Pty Ltd disposing of the San Remo Vacant [Lots] is to facilitate the closure of the Estates and simplify ongoing affairs of San Remo Heights Pty Ltd."

18. Since Mr Keam was not cross-examined or his evidence otherwise relevantly impugned, I find that the Company's sole objective in selling the two lots was as Mr Keam stated. The "Estates" are those of deceased relatives who previously held shares in the Company. Financial statements for the Company indicate an indebtedness to two deceased estates.

19. The Company's submissions included a number of assertions, including:

"there is no evidence of any business plan relating to property development or sale, no evidence of the Applicant undertaking land development and sale in a systematic, organised or businesslike manner and the Applicant has not registered any business name related to property development and does not employ any employees related to property development."

20. Since it bears the burden of proof, it is, of course, for the Company to put forward evidence in support of its case.

21. As there is no evidence relating to the existence or otherwise of a business plan or registered business name, I make no findings in that regard. I accept that in the 2017 and 2018 financial years the Company had no employees: the Company's financial statements for the year ended 30 June 2018 record no wage and salary expense for 2018 or in the 2017 comparatives.

22. Mr Keam's witness statement is silent as to manner in which the subdivisions and sales took place. I therefore make no findings regarding whether that was systematic, organised or businesslike, other than to note that the lands were not treated as trading stock in the Company's 2018 financial statements.

THE PARTIES' POSITIONS IN SUMMARY

23. The Company accepts its property rental and grazing activities constitute enterprises and accordingly is registered for GST. However, it says it is not liable for GST on the two sales of vacant land because they were not made in the course or furtherance of either of those enterprises or any other enterprise.

24. The Commissioner maintains the Applicant's enterprise is broader than the rental and grazing activities and encompasses the acquisition, subdivision and sale of the subdivided lots. Even if that is not so, the Commissioner says the Company has not established that the land sales were not made in the course or furtherance of the rental or grazing enterprises.

CONSIDERATION

25. I accept the Company's submission that, in order for there to be a taxable supply, it is necessary to identify an enterprise carried on by the taxpayer in the course or furtherance of which a supply has been made. That does not mean the character of the enterprise needs to be determined with precision; it is sufficient to identify an enterprise carried on by the taxpayer and that the supply is made in the course or furtherance of that enterprise.

26. If the only enterprises carried by the Company were, as the Company submits, the property rental and grazing enterprises, the Company would discharge its burden of proof if it proved the sales were not made in the course or furtherance of those enterprises. On the uncontested evidence in this matter, I am satisfied the sales have no connection with the property rental or grazing enterprises - no specific connection was suggested by the Commissioner - and were not made in the course or furtherance of either or both of those enterprises.

27. But that is not the end of the matter. The sales will nevertheless be taxable supplies if they were made in the course or furtherance of another enterprise. Mr Wright, who appeared for the Company, argued that the Company, in acquiring and subdividing the parent lot, and selling the two lots, was not carrying on an activity or series of activities in the form of a business, nor in the form of an adventure or concern in the nature of trade.

28. There is no evidence that the Company acquired the property other than for commercial purposes, which would be exceptional for a company, nor any evidence of facts from which the Tribunal could draw any such inference. I

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accept, as Mr Keam's evidence establishes, the sales of the San Remo Vacant Lots were motivated by a desire to finalise the estates of his late relatives to whom the financial statements of the Company indicate the Company remained indebted and simplify the Company's affairs. However, such motivation is not inconsistent with the land being acquired for the commercial purpose of generating a financial gain or the achievement of that goal upon the sales occurring.

29. The Company's submission that the relatively small scale and long periods between the subdivisions, and other factors identified above, are against the conclusion that the activities are in the form of a business, is not without force. However, the Company did carry out a series of activities - subdivisions and sales - albeit over an extended period, which culminated progressively in the sale of 12 lots. On the evidence I cannot determine those activities were undertaken other than for commercial purposes. There is no evidence of whether sales of subdivided lots at an opportune time was contemplated when the parent lot was acquired, but that could not be excluded on the evidence before the Tribunal. As such, there is a degree of repetition and scale in the activities and there is no evidence that would exclude a conclusion that those activities were carried out for a commercial purpose.

30. It might be thought that the long periods of apparent inactivity could found an inference that the parent lot was not acquired with the intention of subdivision and resale at a profit, since what an entity actually does may be evidence of its earlier intention, and the periods of apparent inactivity might point against there being a "series" of activities.

31. On the other hand, it has been said that:

"The carrying on of "business", no doubt usually calls from some activity on the part of whoever carries it on, though, depending on the nature of the business, the activity may be intermittent with long intervals of quiescence in between."^[10] American Leaf Blending Co. Sdn. Bhd. v Director-General of Inland Revenue (Malaysia) (1979) AC 676 , 684 .

32. In this case, the long periods of apparent inactivity are not necessarily inconsistent with the activities being in the form of a business. They might be explained by prevailing market conditions - Australia suffered several economic downturns in the periods before the subdivisions in 1987 and - or strategic business decisions relating to, for example, other priorities, or other commercial considerations consistent with the land being held for business purposes.

33. On the evidence, I simply have no way of deciding. There are no minutes or other relevant records in evidence other than the 2018 financial statements, nor testimony of any director or other person to shed light on the circumstances prevailing between the subdivisions Indeed, there is no evidence of whether the apparent inactivity was actual inactivity.

34. In particular, there is no evidence of the purpose of the controlling minds of the Company relating to the subdivisions that created the San Remo Vacant Lots in 2000 or why no sales proceeded for some years after the subdivisions, other than Mr Keam's explanation of the delay between his appointment as a director over a decade later in 2014 and the sales in 2018 "as a result of myself needing time to understand the magnitude and complexity of the Estates". It would be reasonable to infer, or at least it cannot be excluded in the absence of contrary evidence, that selling at an opportune time was contemplated when the land was acquired and when the subdivisions were carried out. While there is no positive evidence of these matters, perhaps of more relevance there is no evidence excluding commercial or other explanations for the periods of inactivity that would not be inconsistent with the activities being in the form of a business.

35. Aside from the Company's sole objective in selling the San Remo Vacant Lots being to facilitate winding up the deceased estates and simplifying its affairs, there is little other direct evidence to support the Company's position. The Company's own choices on taxation treatment of whatever expenses may have been incurred in owning the land, while not irrelevant, in my view carry little weight against the objective evidence of the activities undertaken, and there is no evidence of whether deductions were claimed for subdivision costs. I accept that the

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Company's accounts not treating the lands as trading stock is relevant and consistent with its position.

36. In the end, what I am left with is that the Company:

• (a) acquired the parent lot for purposes which have not been proved to be other than of a commercial nature;
• (b) undertook multiple subdivisions of the parent lot, albeit separated by lengthy periods of apparent inactivity^[11] I say “ apparent ” inactivity because as noted earlier there is little evidence of what occurred in the periods between the subdivisions and sales. I make no finding in that regard. the reasons for which are unexplained;
• (c) sold 12 of the subdivided lots for prices that it is not suggested, and certainly has not been proved, did not result in a gain to the Company;
• (d) in selling the San Remo Vacant Lots, but not so far as the evidence suggests the other subdivided lots, had as its sole objective facilitation of winding up the deceased estates and simplifying the Company's affairs; and
• (e) recorded the land and relevant expenses in the financial records of the Company but not did not treat the San Remo Vacant Lots as trading stock or claim input tax credits or tax deductions in relation to it (there is no evidence regarding the treatment of the lots created in the earlier subdivisions).

37. In the absence of significant contrary evidence, those circumstances would not be inconsistent with a conclusion that the Company acquired the parent lot with a view to commercial gain, subdivided the parent lot at various times and realised the contemplated gain by sale of the 12 subdivided lots. Particularly in the context of a company, those circumstances are capable of constituting a series of activities in the form of a business. In my view, the Company has not provided sufficient evidence to exclude that conclusion. That may or may not be because of evidence being now unavailable due to the passage of time, but I can only decide this matter on the evidence before me.

38. In respect of whether the Company's activities were properly characterised as a series of activities in the form of an adventure or concern in the nature of trade, Mr Wright referenced income tax cases^[12] Statham v Federal Commissioner of Taxation (1988) 20 ATR 228 ; Casimaty v Federal Commissioner of Taxation (1997) 37 ATR 358 ; Commissioner of Taxation v Williams (1972) 127 CLR 226 . in which it was held on the facts of those cases that activities involving the subdivision and sale of property did not constitute an adventure or concern in the nature of trade, or analogous expressions. Those cases concerned a different issue: whether the gain on sale was income and in particular whether the sales in question constituted mere realisation of a capital asset.

39. The answer to that question is not determinative for current purposes. The GST legislation contemplates that a sale may be taxable supply even though the sale proceeds are of a capital nature. It is also notable that the cases cited were concerned with individual taxpayers rather than companies and each involved circumstances, such as inheritances and gifts, not coloured by a profit-making purpose for the acquisition of the land.

40. The considerations I have outlined in respect of whether the Company's activities in relation to the land amounted to a business also require the conclusion that the Company has not discharged the burden of proving those activities were not an adventure or concern in the nature of trade.

41. Having regard to these considerations, I am not satisfied the Company has established that the series of activities outlined did not constitute an enterprise at the relevant times. Once that conclusion is reached, there can be little doubt the sales of the two lots were in the course or furtherance of that series of activities. There is certainly no evidence to suggest otherwise.

42. For these reasons, I am not satisfied the sales were not in the course or furtherance of an enterprise carried on by the Company. That being so, the Company has not discharged its burden of proving the assessment is excessive. The objection decision must therefore be affirmed.

CONCLUDING OBSERVATIONS

43. The Commissioner's report of his review of the two sales asserted:

"The supplies of land in question might be considered to be mere realisation of a capital asset in circumstances where the supplier is not registered.

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The report then sets out s 188 of the GST Act, and continues:

In your situation, you [that is, the Company] are registered for GST and any supplies you make (including capital assets) will be subject to GST unless another provision in the GST Act specifically provides that the supplies are GST-free or input taxed."^[13] T7, page 78.

44. Similarly, the objection decision stated:

"5. In your situation, you are registered for GST and any supplies you make (including capital assets) will be subject to GST unless another provision in the GST Act specifically provides that the supplies are GST-free or input taxed…

…

7. A company registered for GST can have multiple activities attached to enterprise and would have an intention to make a profit in its business.

8. As the land was purchased and held as an asset, the sale will be a taxable supply …

…

12. As the purchase was made in 1962 and the land was held until after Registration for GST, there is nothing exceptional relating to the sale of the property for it to not be counted as a taxable supply."^[14] T2, pages 9-10.

45. These extracts suggest that, once a company is registered or required to be registered for GST, any supply it makes will be in the course or furtherance of an enterprise.^[15] The oral submissions by Ms Clarebrough, who appeared for the Commissioner, included that it is “ difficult to conceive of a situation where a company, absent not beneficially owning an asset, could be said not to be holding that asset for an overall commercial purpose ”: Transcript, page 39, lines 41-44. However, Ms Clarebrough quite properly conceded that any such presumption could be rebutted on the evidence.

46. That, with respect, is not correct as a matter of statutory language - s 9-5(b) of the GST Act requires determination of whether the particular supply was made in the course or furtherance of an enterprise carried on by the relevant entity, whether a company or otherwise. A company may face a particular challenge in discharging its burden of proving a supply was not made in the course or furtherance of an enterprise, but that is not say it is an impossible task - for whether any entity's activities constitute an enterprise is ultimately a question of fact - but it requires an evidentiary foundation on which to do so.

47. It is the absence of such a foundation that led me to conclude the Company has not discharged its burden of proving the relevant elements of a taxable supply were not satisfied in relation to the two sales. These reasons should not be taken to endorse a process of reasoning that effectively by-passes the requirements of s 9-5(b) where the taxpayer is a company.