CASE 2/2007

Members:
Downes P

Tribunal:
Administrative Appeals Tribunal

MEDIA NEUTRAL CITATION: [2007] AATA 63

Decision date: 20 February 2007

Justice Downes (President)

1. This case involves a narrow question. It is whether the applicant was entitled to an Australian Business Number from July 2000. That depends upon whether he was carrying on an enterprise. Broadly speaking, he relies upon activities which can be summarised as manufacturing and selling. I have come to the conclusion that the applicant was carrying on such an enterprise during the period from July 2000 until 2005. I will now give my detailed reasons.

2. The applicant has been carrying on business associated with manufacturing for most of his life. He has been particularly involved in wood-turning and the use otherwise of lathes. Unfortunately, for approximately 28 years his wife has suffered from psoriasis and this caused him in about 1993 more or less to retire.

3. By the year 2000, however, the applicant was interested in going back into business and on 11 May 2000 he applied for an Australian Business Number. He gave the name of his proposed business as [the applicant's manufacturing business] and he specified in the application that the activities in which the business would be conducted would be "metal products, steel pipes, bars, RHS to retailers and wholesalers".

4. The applicant's application was successful and he was allotted an Australian Business Number. Because the applicant had spent a good deal of time during his earlier working life dealing with engineering works associated with the use of lathes, he began, as part of his new business, to develop lathes. I think that the description he used of his proposed business in his application for an Australian Business Number reflects that activity. However, that was not the only activity that he engaged in after he resumed business.

5. It seems, from the applicant's evidence, that the activity of manufacturing and selling lathes that he was engaging in was not profitable, at least in part because of cheap imports. Accordingly, by April of 2004 the applicant had decided no longer to continue with that activity and he conducted over a period of months in early 2004 sales of the equipment he held which had become redundant as a result of his change in business.

6. I think it is fair to say that the applicant is an enterprising person, although it may be that some of his dreams exceeded their potentiality. Nevertheless, when he gave up the business of lathe manufacturing, he replaced it with a new proposed business, which involved some ambition. This was a business of manufacturing art frames and manufacturing decorative frames to go with the art frames. The applicant's original intention was that he would create paintings himself on the art frames which would then be framed by the decorative frames and he was hopeful of establishing a very profitable business, even internationally, involving the exhibition of his framed paintings.

7. 

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The way he commenced this activity was to advertise for artists who would make line drawings on canvas frames for him on which he would then complete paintings. These would in due course be framed in the decorative frames and displayed. That appears never to have happened. However, the applicant did advertise for artists to undertake the line drawings and a number of them answered his advertisements.

8. In due course, some of those artists demonstrated interest in purchasing the art frames that he had manufactured for use in their own artistic activities and the applicant accordingly sold a number of art frames to these artists. I think that his evidence is that the artists were not confined to those who answered his advertisements because other artists came to him as a result of hearing about his frames through word of mouth.

9. Unfortunately, the grander project that the applicant was engaged upon involving his own artistic works being framed and displayed did not come to fruition. By 2005 the applicant had really abandoned the project and, in due course, most of the frames that had been prepared were discarded.

10. The applicant had some other projects going at the same time. One of these was a project involving [a processed material], which he was proposing to find somebody to market. The project, somewhat ambitiously, was intended to assist in neutralising the effects of alcohol because of qualities of the [product]. The applicant also developed a machine specifically designed [for use with the product]. That project is still a project which the applicant is hopeful of pursuing in the future, but not by way of developing it himself. Rather, he hopes to find somebody who would, when the secret details of the process are explained to them, develop the project on his behalf.

11. Another project which the applicant had was associated with the delivery of fine wine. This involved the use of a number of identical Toyota motor vehicles which the applicant acquired very cheaply. At one stage he had some 16 of these vehicles. Again, this project was not ultimately successful and I do not think ever even launched. Ultimately the applicant says that he disposed of the vehicles for no reward.

12. So far, I have recounted the activities of the applicant which are the most noteworthy in the sense of their uniqueness and ambition. However, at all relevant times the applicant was continuing to carry on what I might call a core business which did involve manufacture and sale of products.

13. The applicant gave evidence of the work that he carried out during the period and produced hundreds of photographs on a DVD of this work. I viewed these photographs during the hearing and the applicant has explained many of them to me. What the evidence of the applicant shows, which is supported by the photographs, is that during the relevant time, from 2000 to 2005, the applicant was engaged in manufacturing and selling a wide number of products. These included steel framed arched swimming pool covers, barbecue stands, mobile smoke ovens, a range of health equipment, including foot and body rollers, port casks, carports, game boards, router tables, jewel cases, ceramic cases, mobile drill stands and a range of products made from jarrah.

14. It goes without saying that the manufacture of these products, most of which I have seen photographs of, involved a substantial degree of skill. It really seems to me that it is by reference to these activities, which I find to have occurred, that the question of whether the applicant was entitled to an Australian Business Number will be determined.

15. As part of the applicant's activities I find that he placed advertisements in newspapers relating to his products from time to time. It seems that he did not put an entry in the Yellow Pages, but he claims to have no faith in the Yellow Pages. Perhaps he had no entry in the White Pages, although the evidence does not really enable me to make a finding relating to that. I suspect that some of his business came from word of mouth. It is certainly clear that the applicant was seeking to attract customers and at least in part was doing that by advertising.

16. In November 2003, admittedly some time after the new business was commenced, the applicant rented a workshop. He occupied this workshop from approximately November 2003 until August 2005. He paid approximately $500 rent per month for the first six months,

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and thereafter paid some $1400 per month by way of rental.

17. Before I proceed to assessing the evidence of the applicant there are two matters I must deal with. Prior to cancelling the Australian Business Number the Registrar made contact, through one of the officers of the Register, with the applicant seeking information from him. It was not anticipated that the applicant would visit the office, although that may in due course have occurred, but on a day in about August 2004, the applicant says that he decided to visit the office of the Register to put material in support of his case before the office.

18. He says he visited a Bunnings hardware store on his way to the office for the purpose of acquiring goods for his activities and that while his vehicle was parked nearby, a suitcase, which contained the records and which he had locked in the boot, was stolen. There is no doubt that the applicant reported a robbery, both to Bunnings and to the police, and in due course advertised in the lost and found column of the West Australian.

19. The Registrar has suggested, through his counsel, that I should not be satisfied that the robbery occurred. He points out that it is convenient that it appears to have occurred just before a visit to the office of the Registrar. I think this points to a submission that the applicant would be more advantaged by not having his documents than by having the documents. I think that the Registrar stops short, however, of making a submission that the story was false and contrived. In any event, it is a serious allegation. On the evidence before me I could not find that the robbery did not occur as the applicant says it did. On the face of it, he complained promptly and in those circumstances, to the extent to which it is relevant to do so, I must find that the robbery occurred as suggested. For reasons which will appear shortly, however, I do not think that this issue is really central to the findings that I need to make.

20. The second matter that I need to address is the applicant's suggestion that he earned substantial sums of money which he was able to employ in connection with his activities from gambling and, in particular, from roulette. I have to say that it strikes me as surprising that a scheme of relative simplicity of the kind that the applicant described could be so successful in earning income in the way he described it. I accordingly have some real doubts as to whether the evidence that he gave about earning substantial sums from gambling was correct. However, again, I do not think, and again for reasons I will give, that this is particularly significant to the issues that I need to decide.

21. In summary, it seems to me that the applicant, who always had grand visions, in 2000 was looking towards advancing some of those grand visions, but to do so in the context of more solid businesses of the kind he has described. The applicant accepts that he no longer carries on the manufacturing and selling business that he says he carried on from 2000. I do not think the precise day on which he ceased to carry on the business matters, but it was probably at about the end of 2004.

22. The applicant says that he is now engaged in an activity which would entitle him to an Australian Business Number relating to his activities as an author and artist, but he accepts that he ceased to carry on the business he was carrying on at about 2004. If he is to have an Australian Business Number for the alleged new businesses that would require fresh applications and is not a matter for my consideration.

23. Accordingly, the matter of concern to me is whether between the time at which the Australian Business Number was allotted and the end of 2004, the applicant was carrying on a business. The reason this is not simply academic is that when the Registrar made a decision to cancel the applicant's Australian Business Number, it was done not just on the basis that he did not carry on any relevant enterprise at the time the decision was made, but had never carried on any such enterprise. The decision was accordingly given retrospective effect to the date of the original allocation of a business number. That has the consequence that, if upheld, the applicant would not be entitled to input credits which he claimed and, accordingly, on the material before me, he would have an obligation to repay the Commissioner of Taxation the sum of $25,105, together, possibly, with interest.

24. Ultimately, in determining this matter I need to address the statutory provisions relating to entitlement to an Australian Business

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Number. They are contained in the Act called, A New Tax System (Australian Business Number) Act 1999 (Cth). Section 8 of that Act provides that an entity is entitled to an Australian Business Number if the entity is "carrying on an enterprise in Australia".

25. Section 38 of the Act relevantly says:

  • "38(1) 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…
  • (2) However, enterprise does not include an activity, or series of activities, done:
    • (b) as a private recreational pursuit or hobby; or
    • (c) by an individual…without a reasonable expectation of profit or gain."

26. In its reasons furnished under section 37 of the Administrative Appeals Tribunal Act 1975 (Cth) for upholding the decision that the Registrar correctly cancelled the applicant's Australian Business Number from 1 July 2000, the decision-maker found that the applicant was not carrying on an enterprise. As part of the reasoning process the decision-maker said:

  • "6. It is considered that at the time of his registration the applicant did not have a reasonable expectation of profit or gain.
  • 7. It is also considered that since his registration the applicant has not had a reasonable expectation of profit or gain."

27. It appears that although it was not the sole consideration so far as the decision-maker was concerned, the question of whether there was a reasonable expectation of profit or gain was a material consideration. That is, of course, a reference to section 38(2)(c) of the Act.

28. I have already said that I find that the applicant was relevantly carrying on an enterprise during the period 2000 until the end of 2004. That necessarily carries with it a finding that he was either carrying on a business or an adventure or concern in the nature of trade. It seems to me that the applicant was carrying on a business. A finding simpliciter that the applicant was carrying on a business is not, however, sufficient to exhaust the task of a decision-maker addressing the issue of whether an Australian Business Number should be cancelled. The decision-maker needs to judge a finding that the activity was in the form of a business against the disqualifying factor that it will not qualify if it was a private recreational pursuit or hobby, or, if carried on by an individual, it was without a reasonable expectation of profit or gain.

29. At this point it is appropriate that I should set out some of the financial material relating to the activities of the applicant. There is not much of it because of the robbery. Most of it effectively comes from the Registrar's records. It is first necessary to note that it appears that the applicant has not filed an income tax return since 1993, when his former business was wound up. Naturally, the Registrar places emphasis on this fact. Next, the Registrar places emphasis on the fact that the business activity statements filed by the applicant do not appear to show what would in ordinary parlance be called a profitable business. I think I should set out what those statements show, and it is as follows:


"Quarter ended Sales Purchases
30 September 2000 Nil Nil
31 December 2000 Nil Nil
31 March 2001 $10,800 Nil
30 June 2001 $9,369 Nil
30 September 2001 $1,709 $7,370
31 December 2001 $2,400 $7,576
31 March 2002 $2,750 $8,801
30 June 2002 $3,762 $12,742
30 September 2002 $8,880 $18,592
31 December 2002 $28,872 $27,643
31 March 2003 $10,168 $21,301
30 June 2003 $9,312 $18,524
30 September 2003 $9,481 $24,672
31 December 2003 $29,132 $84,451
31 March 2004 $35,641 $34,467
30 June 2004 $47,308 $189,391
30 September 2004 $3,129 $10,486
31 December 2004 Nil Nil"

Those are the total of the business activity statements lodged by the applicant. Against the significant submission put on the part of the

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Registrar that this does not appear to disclose a profitable business, a number of things need to be taken into account.

30. The first is the danger of using hindsight. It is necessary for an application to be made for an Australian Business Number at the time that a business is commenced, not after it has already become profitable. Accordingly, most judgments as to whether a business has a reasonable expectation of profit and gain will be made at a time prior to the business actually having become profitable. This fact is a reminder that one should be careful about the use of hindsight when a business does not become profitable. There must be a legion of failed companies in Australia who had Australian Business Numbers and which did not have their business numbers cancelled when they failed on the basis that there was no reasonable expectation of profit at the time the businesses were commenced.

31. In terms of its trappings, the activities of the applicant amount to what one might think of as the classic type of business, a business of manufacture and sale. He did manufacture, he did sell, he did so for part of the time by using premises in the nature of a factory or workshop for which he paid substantial rent. There is a lot to be said for the view that few people would commit themselves in the way the applicant appears to have committed himself if they did not think that the business was reasonably likely to be successful. It is true that the business, throughout its period, does not from the business activity statements appear to be making substantial profits, but it was making sales.

32. In a number of quarters the sales exceeded $10,000 and in one quarter sales exceeded $28,000. The sales of $29,132, $35,641 and $47,308 in the quarters ended December 2003, March 2004 and June 2004 respectively, and particularly the later of those periods, are slightly problematic because this was the time when the applicant was closing down the lathe business and moving into another business. He has given evidence that during that period he held an almost continuous garage sale, which he regularly advertised, to dispose of surplus equipment. I should note, however, that the applicant dates that activity only really in the third of the periods that I have just mentioned. In any event, he suggests that the selling of the material and equipment that he did sell during the period was nevertheless part of his business.

33. The fact remains that the applicant did sell throughout the period and the business activity statements show receipts for the sales. The ultimate question for me is whether the activity being conducted by the applicant amounted to an enterprise by way of being a business, and in determining that matter I need to take into account the two potentially disqualifying factors that I have referred to.

34. On the face of it, what the applicant was doing looks exactly like a business. I suspect that is why the Registrar placed emphasis on the issue of whether there was a reasonable expectation of profit or gain. Once the issue of hindsight is put to one side, it seems to me that the applicant did have a business with respect to which there was a reasonable expectation of profit or gain, even although in fact that profit was not realised.

35. Viewed objectively, the business was exactly the sort of business which would be likely to be successful. It was not like a hobby farm which could never be a successful primary industry because there was not enough land to support a viable business. I am satisfied that the applicant did not put in the long hours he must have just for the love of working. In any event, I find both that the activities proposed by the applicant and actually carried out were done with a reasonable expectation of profit or gain whether that depends upon an objective or subjective assessment. I note that the phrase "profit or gain" has been little considered. I have come to my conclusion on the basis that it adds little or nothing to "profit". However, I note that it may encompass gain which falls short of "profit" or net gain.

36. Accordingly, it appears to me that the correct or preferable decision in this case is that as at the date on which the cancellation was made, no cancellation should have been made prior to the end of 2004.

37. I think in looking at what it is that I am deciding in this case, it is significant to note what I am not deciding. I am not deciding whether the applicant's GST returns are accurate. I am not deciding whether he ought to have filed income tax returns in the period from

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1993 onwards. I am not deciding whether his record keeping was adequate for a business. I am not deciding what was the extent of his activities provided there were activities which entitled him to an Australian Business Number.

38. For all of the reasons I have given, I propose to set aside the decision of the Registrar cancelling the applicant's Australian Business Number and to substitute a decision cancelling the Australian Business Number from 31 December 2004.

 

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