• The impact of this case on ATO policy is discussed in Decision Impact Statement: Davsa Forty-Ninth Pty Ltd as Trustee for Krongold Ford Business Unit Trust and Commissioner of Taxation (Published 26 June 2019).

DAVSA FORTY-NINTH PTY LTD ATF KRONGOLD FORD BUSINESS UNIT TRUST v FC of T

Tribunal:
Administrative Appeals Tribunal, Melbourne

MEDIA NEUTRAL CITATION: [2014] AATA 337

FD O'Loughlin J

29 May 2014

1. The Applicant claims, and the Commissioner disputes, entitlements to ITCs^[1] Input tax credits within the meaning of the GST Act, ss 11–20 and 11–25. pursuant to the GST Act^[2] A New Tax System (Goods and Services Tax) Act 1999 (Cth). for the Relevant Period^[3] The GST periods: 1/7/2005 – 30/9/2005; 1/1/2006 – 30/6/2006; 1/7/2006 – 30/6/2007; 1/7/2007 – 30/9/2007; 1/4/2008 – 30/6/2008; 1/7/2008 – 30/9/2008. and a decreasing luxury car tax adjustment pursuant to the LCT Act^[4] A New Tax System (Luxury Car Tax) Act 1999 (Cth). associated with purchases of motor vehicles. The disputed claims arise in circumstances where the Applicant carried on activities described as a one man business by its principal who had a genuinely held belief that they would, or could, be profitable and that they constituted a business but on an objective view, the possibility of making profits or gains was close to, if not actually, zero.

2. The Applicant also disputes the appropriate amount of penalty levied pursuant to the Administration Act.^[5] Taxation Administration Act 1953 (Cth).

3. The Commissioner has denied the ITC claims on a number of bases.

4. The ITCs will be available:

• (a) if the motor vehicles were acquired in carrying on an enterprise^[6] Within the meaning of the GST Act, s 9–20. and were not acquisitions of a private or domestic nature; and
• (b) if the Applicant satisfies (a), further rules:
  • (i) limiting ITCs to the amounts referable to the extent the supplies were creditable;
  • (ii) concerning timing of ITC entitlements;
  • (iii) limiting ITC entitlements to 1/11^th of the luxury car limit;
  • (iv) limiting ITC entitlements for used motor vehicles acquired from vendors not registered for GST;
  • (v) limiting ITC entitlements where valid tax invoices^[7] Within the meaning of the GST Act, s 29–70. are not held in the period in which claims were made; and
  • (vi) limiting entitlements to ITCs to amounts of consideration paid in the period in which claims were made,
  all of which are put in issue by the Commissioner, do not prevent or limit the Applicant's claims.

5. The decreasing LCT adjustment will be available if luxury cars were supplied to the Applicant when it was registered under Part 2-5 of the GST Act, LCT was paid on those supplies because the Applicant didn't quote for the supplies, the motor vehicles were intended for use for a quotable purpose, and the Applicant has only used the motor vehicles for a quotable purpose.^[8] LCT Act, s 15–30.

Did the Applicant carry on an enterprise?

6. The heart of the dispute lies in whether the Applicant carried on an enterprise and acquired the motor vehicles subject to LCT to be used/held as trading stock. The Applicant claims it conducted a one man business that was an enterprise. The Commissioner disputes this. It is necessary to consider the Applicant's activities in some detail to resolve this difference in view.

The Applicant's activities

7. The following facts describing the Applicant's activities are taken from the Applicant's objection document which was adopted by the Applicant as its submissions and which the Commissioner accepts corresponds with the evidence given by Mr Krongold, the Applicant's director and principal, who was responsible for the Applicant's activities and was the person conducting what the Applicant contends was a one man business.

• (a) Mr Krongold is a director and shareholder of the Applicant and has been the person principally concerned and responsible for all of its relevant activities throughout the Relevant Period.
• (b) Mr Krongold has a long history of running various businesses - most of them profitably.
• (c) Mr Krongold also has extensive knowledge and experience in the motor vehicle retail sale industry.
• (d) In 1969, Mr Krongold entered the motor vehicle industry as a sales person with Peter Wright Ford, a Ford motor vehicle dealership in Footscray.
• (e) Mr Krongold established Sebring Datsun Motors, a Nissan dealership in Brighton Road, Elwood in 1970. Within two years, this dealership attained the position of Nissan's largest independent dealership in Australia.
• (f) In 1971, Mr Krongold established Sebring Volvo Motors, a Volvo dealership in Brighton Road, Elwood. This dealership sold 10 per cent of the Volvos that entered the Australian market.
• (g) In 1971, Mr Krongold also established a business facility in Nepean Highway, Elsternwick, for manufacturing car radios and other sound equipment accessories that imported and distributed items to a range of wholesale customers including the Nissan Parts Department and Nissan's national dealer distribution network.
• (h) The car radio and sound equipment business was sold in 1975. Between 1976 and 1981, Mr Krongold was the Director of Marketing and Supply with Minster Company Pty Ltd. Amongst other aspects of Minster Company Pty Ltd, Mr Krongold controlled, the motor vehicle section of the company and dealt with Australia wide purchasing, sales, servicing, finance and insuring.
• (i) Mr Krongold established a Daytona Nissan motor vehicle dealership in Southern Gippsland in 1982. This dealership was closed down in 1985.
• (j) In 1983, Mr Krongold established Knightsbridge Ford, a Ford motor vehicle dealership in Southern Gippsland. This dealership was sold in 1990.
• (k) The Applicant was incorporated on 13 May 1983 and the Krongold Ford Business Unit Trust was established in 1983.
• (l) Between 1990 and 1994, Mr Krongold operated a consultancy business to resolve disputes in the automotive industry between customers and service providers.
• (m) In 1995, Mr Krongold was employed as a Consultant for the metropolitan BMW dealership, Doncaster BMW.
• (n) In 1996, Mr Krongold was employed as a Consultant for Zhang & Associates, a company that developed internet websites for automotive dealers.
• (o) Between 1997 and 2004, Mr Krongold was employed as a Consultant for a rural dealership in Gippsland with four automotive franchises (BMW, Land Rover, Suzuki and Daihatsu).
• (p) Early in 2004, Mr Krongold decided to commence a business activity that he had been considering for some time. Mr Krongold thought that there was a niche market for motor vehicles with the following attributes: quality, class, prestige, distinction and performance. Mr Krongold believed motor vehicles with these characteristics generally increased in value over time. Mr Krongold thought that the potential for this niche market to be a business opportunity that could potentially be very lucrative in the future.
• (q) Consequently, Mr Krongold made the decision to run what he considered to be a business whereby he would acquire motor vehicles with the characteristics noted above, with these motor vehicles to be sold at a later date at a profit when their values had accrued appreciably. The motor vehicles that would be purchased were to have the characteristics noted above and were mainly to be sold in as new or near new condition.
• (r) In July 2004, Mr Krongold applied for the necessary motor car trading licence to enable him to run a car sales business. This licence was reissued on 13 July 2005.
• (s) The address from which the activities were to be conducted from was Bridle Road, Morwell.
• (t) Over a period the Applicant purchased a number of motor vehicles. The business records tendered reveal that the motor vehicles purchased, their purchase prices, whether they were new or used and whether the purchases were financed were as listed in Table 1.
  Table 1 Motor vehicles purchased by the Applicant

  Table 1 Motor vehicles purchased by the Applicant

  Date	Vehicle	Purchase Price	New/used	Under finance
  28-Jan-04	Saab SRA 205[*] Any entitlements to ITCs associated with these motor vehicles were not included the Applicant’s objection and are not, therefore, the subject of the present review by the Tribunal. Given the nature of two of the issues in dispute, namely whether the Applicant carried on an enterprise at all and, if it did, whether the motor vehicles acquired were acquired in carrying on that enterprise, and the contentions that Applicant makes that all of these motor vehicles were part of its enterprise, it is appropriate to include these motor vehicles in the analysis at a global level without needing to consider whether any ITCs or LCT adjustments referrable to them are to be allowed.	$57,636.00
  11-May-04	Suzuki STD648[*] Any entitlements to ITCs associated with these motor vehicles were not included the Applicant’s objection and are not, therefore, the subject of the present review by the Tribunal. Given the nature of two of the issues in dispute, namely whether the Applicant carried on an enterprise at all and, if it did, whether the motor vehicles acquired were acquired in carrying on that enterprise, and the contentions that Applicant makes that all of these motor vehicles were part of its enterprise, it is appropriate to include these motor vehicles in the analysis at a global level without needing to consider whether any ITCs or LCT adjustments referrable to them are to be allowed.	$44,306.00
  23-Jul-04	Jaguar XCF080[*] Any entitlements to ITCs associated with these motor vehicles were not included the Applicant’s objection and are not, therefore, the subject of the present review by the Tribunal. Given the nature of two of the issues in dispute, namely whether the Applicant carried on an enterprise at all and, if it did, whether the motor vehicles acquired were acquired in carrying on that enterprise, and the contentions that Applicant makes that all of these motor vehicles were part of its enterprise, it is appropriate to include these motor vehicles in the analysis at a global level without needing to consider whether any ITCs or LCT adjustments referrable to them are to be allowed.	$58,819.00
  20-Aug-05	VZ Commodore Monaro UFB041	$58,474.00	New	Yes
  27-Aug-05	VZ Commodore HSC coupe UCC592	$71,637.00	New	Yes
  18-May-06	Volks Golf UBG360	$48,948.00	New	Yes
  21-Jun-06	Volks Passat UTD757	$49,588.00	New	Yes
  13-Jul-06	Jaguar XX Coupe VXK666	$168,906.00	New	No
  11-Aug-06	Holden Astra QTB807	$11,851.00	Used	No
  29-Jun-07	BMW X5 Wagon TEC828	$74,545.00	Used	No
  29-Jun-07	Jeep Wagon TNL711	$5,909.00	Used	No
  29-Jun-07	Mazda Hatch DHM421	$3,182.00	Used	No
  17-Jul-07	Ford GT v-GT066	$59,842.00	New	Yes
  19-Mar-08	Cobra GT WIN665[*] Any entitlements to ITCs associated with these motor vehicles were not included the Applicant’s objection and are not, therefore, the subject of the present review by the Tribunal. Given the nature of two of the issues in dispute, namely whether the Applicant carried on an enterprise at all and, if it did, whether the motor vehicles acquired were acquired in carrying on that enterprise, and the contentions that Applicant makes that all of these motor vehicles were part of its enterprise, it is appropriate to include these motor vehicles in the analysis at a global level without needing to consider whether any ITCs or LCT adjustments referrable to them are to be allowed.	$59,416.00	New	Yes
  23-Jun-08	KIA Wagon WKB290	$49,950.00	New	Yes
  30-Jun-08	Citroen Diesel WMC482	$103,427.00	New	Yes
  Total purchase price	$926,436.00

• (u) All of the above motor vehicles were covered by a degree of comprehensive insurance from the time of purchase.
• (v) After three years of attempting to locate suitable premises for the proposed activities, the Applicant located premises in Keys Road, Moorabbin. In June 2008, a decision was made to rent the premises in Moorabbin from a connected party which had a common director with the Applicant. Vacant possession was available in August 2008.
• (w) Following possession of the Moorabbin premises, the Licence Motor Car Trading Authority was notified that the Applicant was seeking to extend its LMCT licence to the Moorabbin facility. The Licence Motor Car Trading Authority notified the Applicant that local council authority was required for this extension of the licence.
• (x) The Applicant did not occupy the Moorabbin premises during the Relevant Period.
• (y) The Applicant experienced some administrative difficulties with the local Council that delayed occupation of the Moorabbin premises.
• (z) The Applicant commenced advertising in April 2009.

8. The evidence also discloses the following:

• (a) In seeking registration as a Licensed Motor Car Trader in 2004 the Applicant advised the Business Licensing Authority that:

  It is the intended business plan of the company to sell late model 'as new' vehicles and or vehicles in 'as new' condition with full 'pedigrees' and service books maintained; displaying full, accurate, precise, and unblemished records of vehicle and servicing history with duly authorised and franchised dealers, as nominated from time to time by the manufacturers of the various vehicles when 'new'. This philosophy is to be applied in relation to all the vehicles stocked …

  Vehicles as and when 'traded-in' by clients will, in the normal course of events, be 'wholesaled'. They may, however, in very special circumstances, be retained for resale. This, of course, will be subject to their respective conditions and as to whether or not they fit within, or compliment [sic], the generic criteria of our 'normal stock inventory' policy - as outlined hereinabove; perhaps with some other 'distinguishing, unique qualities and or attributes' which will in no way permit them to undermine and or diminish the 'high' reputation and moral standing of the company vis a vis its normal client base.

  The management will not go out and buy 'en masse' 18+ vehicles at once but, rather, build up the inventory in a slow, coherent and disciplined manner.

  This is to ensure the unique qualities of the various vehicles in stock inventory, which will be specific to this business, are maintained at all times; ….

  It is intended that this very high standard of 'trading' will be maintained at all times; …

  which was consistent with the oral testimony given by Mr Krongold and can be accepted as a reflection of how he saw the proposed course of activities. Whether all of the motor vehicles purchased by the Applicant met the intended philosophy or standards outlined in this plan is questionable. However, the projected slow build-up of an inventory was observable in the acquisition of motor vehicles by the Applicant over a period of years.
• (b) In July 2005 the Applicant created a standard form agreement for prospective drivers of its motor vehicles to agree to meet an applicable excess for any damage to the motor vehicles and any infringement penalties associated with use of the motor vehicles while in their possession. It is not apparent that the forms were ever used.
• (c) The Bridle Road, Morwell premises was never used by the Applicant.
• (d) At least two of the motor vehicles were used privately by Mr Krongold and his wife to a significant degree and another three were used to slight degree. After Mr Krongold and his wife had a third child they needed a larger vehicle and they began using the KIA Wagon WKB290. For June 2008, Fringe Benefits Tax was paid in respect of the private use of five motor vehicles and the method of calculating the taxable amount of fringe benefits was the statutory formula method. The calculation was as set out in Table 2 below.
  Table 2 FBT calculations for June 2008 private use of motor vehicles

  Table 2 FBT calculations for June 2008 private use of motor vehicles

  Vehicle	Vehicle value	Stat %	Usage	FBT value
  Volks Golf UBG360	$48,948.00	26%	5%	$5,790
  Volks Passat UTD757	$49,588.00	26%	44.9%	$154
  Holden Astra QTB807	$11,851.00	26%	5%	$3,746
  KIA Wagon WKB290	$49,950.00	26%	90% (1 month)	$749
  Saab SRA 205	$57,636.00	26%	5%	$636
  	$11,075
  Uplift @ 2.0647	$22,867

• (e) During the Relevant Period only one motor vehicle was sold and that sale was to Mr Krongold's daughter and a loss on sale arose. The Holden Astra QTB807 vehicle was purchased from Mr Krongold's daughter as a trade-in for the Suzuki STD648, which was sold to her.
• (f) The Applicant did not keep all of the records required under its licence in the Relevant Period.
• (g) The Applicant did not keep records of all of the expenditure incurred in holding, servicing, repairing the motor vehicles it had purchased nor were ITCs claimed in respect of any of those costs. At least $14,219.37 (GST inclusive) was spent repairing the Jeep Wagon TNL711 which was originally owned by Mr Krongold's son, purchased as an insurance write off and repaired by the Applicant.
• (h) The motor vehicles were stored, some under vinyl sheets, at private premises of Mr Krongold and of parties related to him. The storage was effective in protecting the motor vehicles as those inspected by ATO officers in September 2009 were observed to have been in pristine condition.
• (i) The motor vehicles' odometers indicated a degree of use as set out in the Table 3 below:
  Table 3 Odometer readings (kms) for motor vehicles

  Table 3 Odometer readings (kms) for motor vehicles

  Vehicle	Odometer (kms)
  	When purchased (if known)	Advised by the Applicant in September 2009	ATO inspections Sept/Oct 2009 or time of sale	Approx Kms travelled from purchase to Sept/Oct 2009 or sale
  Saab SRA 205	0			14,236
  Suzuki STD648	0		26,060	26,060
  Jaguar XCF080	0	2,177	2186	2,177
  VZ Commodore Monaro UFB041	10	236	236	226
  VZ Commodore HSC coupe UCC592	0	241	243	241
  Volks Golf UBG360	1	21,431	21,735	21430
  Volks Passat UTD757	10	12,428	12,428	12,418
  Jaguar XX Coupe VXK666	0	1,392	1,403	1,392
  Holden Astra QTB807	65,965	68,018	68,019	2,053
  BMW X5 Wagon TEC828	n/a	33,267	33,381
  Jeep Wagon TNL711	n/a	27,478	27,478
  Mazda Hatch DHM421	n/a
  Ford GT v-GT066	0	209	2011	209
  Cobra GT WIN665	0	71	73	71
  KIA Wagon WKB290	0	5,524		5524
  Citroen Diesel WMC482	0	184	185	184

• (j) The Applicant had expressed difficulties in obtaining information from its former accountant and the evidence is not clear as to when those difficulties were resolved. It could have been in 2008 or 2009. The current accountant cannot remember.
• (k) The Applicant's current accountant initiated enquiries with the Respondent's office concerning the GST scheme but the details of the enquiry are not clear on the evidence. The Applicant's contention is that the enquiry concerned the appropriate GST treatment for motor vehicles acquired before it was registered as a licenced motor car trader. The Applicant contends that ITCs were not claimed until the enquiries had been made of the ATO and the position of the motor vehicles had been clarified. The evidence is not such that it allows any conclusions to be drawn beyond that some GST related enquiries were made. What the ATO was told about the nature of the Applicant's activities, their scale and related matters is not known and the precise terms in which the ATO responded are not known.
• (l) The Applicant did not claim any ITCs associated with or in respect of the three pre LMCT motor vehicles, and that fact was not realised by Mr Krongold until the hearing of this Application.
• (m) On an aggregate basis the motor vehicles were either not insured for their value or, if they were, the motor vehicles did not have a value greater than the sum of the purchase prices paid for them.
• (n) Mr Krongold displays a form of affection for the Applicant's motor vehicles, speaking of their features in terms and in a manner suggestive of a deep interest in motor vehicles.
• (o) The Applicant did not hold valid tax invoices for the motor vehicles referred to in Table 4 below during the periods in which the ITCs were claimed.
  Table 4 Motor vehicles for which the evidence does not show that valid tax invoices were held by the end of the period in which ITCs were claimed

  Table 4 Motor vehicles for which the evidence does not show that valid tax invoices were held by the end of the period in which ITCs were claimed

  	GST Period of ITC claim
  VZ Commodore Monaro UFB041	1/7/2005 - 30/9/2005
  VZ Commodore HSC coupe UCC592	1/7/2005 - 30/9/2005
  Volkswagen Golf UBG360	1/1/2006 - 30/6/2006
  Volkswagen Passat UTD757	1/1/2006 - 30/6/2006

• (p) Not all of the purchase consideration was paid for the motor vehicles in the periods in which the full ITCs associated with the purchases were claimed in respect of the motor vehicles listed in Table 5 below. What the evidence shows was paid is also listed.
  Table 5 Motor vehicles for which the evidence does not disclose payment of purchase consideration by the end of the period of ITCs claimed

  Table 5 Motor vehicles for which the evidence does not disclose payment of purchase consideration by the end of the period of ITCs claimed

  	GST Period of ITC claim	Amount of consideration paid
  VZ Commodore Monaro UFB041	1/7/2005 - 30/9/2005.	$8,009.45 of $66,5429.90 inclusive of all charges including GST and LCT
  VZ Commodore HSC coupe UCC592	1/7/2005 - 30/9/2005.	$72,500 of $84,300 inclusive of all charges including GST and LCT

• (q) The Applicant's profit and loss accounts do not record the expenses associated with holding, maintaining and servicing the motor vehicles. They do record that motor vehicles were held for sale and their carrying values as set out in Table 6 below;
  Table 6 Financial statement reporting of motor vehicles held for sale

  Table 6 Financial statement reporting of motor vehicles held for sale

  	Year ended 30 June
  	2006	2007	2008
  Stock on hand - motor vehicles for resale	$389,408.00	$650,619.00	$882,130.00
  Being
  Saab SRA 205	$57,636.00	$57,636.00	$57,636.00
  Suzuki STD648	$44,306.00	$44,306.00
  Jaguar XCF080	$58,819.00	$58,819.00	$58,819.00
  VZ Commodore Monaro UFB041	$58,474.00	$58,474.00	$58,474.00
  VZ Commodore HSC coupe UCC592	$71,637.00	$71,637.00	$71,637.00
  Volks Golf UBG360	$48,948.00	$48,948.00	$48,948.00
  Volks Passat UTD757	$49,588.00	$49,588.00	$49,588.00
  Jaguar XX Coupe VXK666		$168,906.00	$168,906.00
  Holden Astra QTB807		$11,851.00	$11,851.00
  BMW X5 Wagon TEC828		$74,545.00	$74,545.00
  Jeep Wagon TNL711		$5,909.00	$5,909.00
  Mazda Hatch DHM421			$3,182.00
  Ford GT v-GT066			$59,842.00
  Cobra GT WIN665			$59,416.00
  KIA Wagon WKB290			$49,950.00
  Citroen Diesel WMC482			$103,427.00

• (r) Mr Krongold's brother had a serious and ultimately terminal, medical condition during the Relevant Period and this disrupted Mr Krongold in his attention to business. Mr Krongold was also distracted from the Applicant's business during the relevant period by health concerns of one of his children, and, more recently, his own health condition.
• (s) The objective evidence as to motor vehicle values led, extracts of what is known in the motor vehicle industry as the Red Book, was to the effect that with time, the motor vehicles purchased by the Applicant would decline in value. The necessary conclusion to reach is that the Applicant has not established that its business would be profitable. When financing and other costs are included in evaluations, the necessary implication is that the situation would be worse.
• (t) The first advertising, beyond word of mouth which appeared to be limited to word of mouth advertising by family members and possibly associates, occurred in April 2009. That advertising comprised advertisements in newspapers and on an internet web site dedicated to motor vehicles offered for sale by both licensed motor car traders and private owners. It was the kind of advertising that could be expected of a motor vehicle sales business.
• (u) Some of the sales techniques or approaches used by the Applicant may have been unusual. For example, in pursuit of one sale the Applicant caused a letter to be written to a prospective customer in the following terms, and for it to be delivered by registered post:

  QCPDP World Automobiles

  (Quality, Class, Performance, Durability, Praticality)

  ….

  [date]

  Our Reference: qcpdp/It0001

  [Addressee]

  Dear [Addressee]

  Just a courtesy note as a follow up to your demonstration ride in our ….. last Saturday, …… (2.00pm - 3.00pm).

  We were quite flattered by all the favourable comments you 'heaped on' our car, and our attentive service to you in general, "compared to all the other dealers ("sharkies")" with whom you dealt.

  We got the distinct impression that you were very impressed with the "newness" and 'quietness' of the car and its very low kilometres, and felt this vehicle would rank very highly, if not the highest, in your final choice for purchase for your motoring needs in the immediate future.

  As we explained to you at the time, the purchasing of a quality, very low kilometre motor vehicle comes at a slight premium over generically, similar vehicles, which have endured a much harder life, and have far greater kilometres.

  As explained, our "much loved" one owner vehicle has been excellently maintained, driven and serviced by its one female owner/driver.

  If you were to favour us with your purchase of this motor car and undertook to maintain it in the same physical condition, servicing it regularly and properly, with appropriate servicing dealers, and average twelve thousand (12,000) to fifteen thousand (15,000) kilometres per annum, and had no accidents in the vehicle, we would be prepared to give you a …… dollar ($……) guarantee minimum Trade in any time within the next eighteen (18) months on the vehicle of your choice within our organisation.

  With the same above conditions applying, we would extend this guaranteed minimum Trade-in period from nineteen months (19) to thirty six months (36), with a guaranteed Trade-in value of ……. dollars ($…….).

  As you can see, this undertaking from our organisation ensures a monthly ownership cost to you of $ ….. per day or $ ……. per month, based on the purchase price after Trade-in at eighteen (18) months from the date of purchase.

  After Trade-in at thirty six (36) months from the date of purchase, your cost per day is ….. and ($…..) or …….. ($……..) per month, excluding, of course Government charges, which will be automatically paid on to the relevant Government Departments by us, on your behalf, and included already fully in your drive away price of ……….[under $20,000] ($……) stamp duty, transfer fee and GST.

  You may consider this unilaterally agreed undertaking on our behalf (without any negotiation by you whatsoever) as quite extraordinary in its own right.

  Make no mistake, this is a carefully considered undertaking to you, and you alone, based on our observations of how well you drove, how carefully you drove and how caringly you treated our motor vehicle in the near thirty kilometre demonstration run, that you did with us as passengers.

  The highest accolade we can pay you in thanking you for the opportunity to allow us to demonstrate our vehicle to you, and for the most courteous manner in which you received us, and flattered the presentation of our motor vehicle, is to accord you this guaranteed undertaking on our part with humility and appreciation.

  Please ring and contact my mobile telephone number, which you have (…….) and let me know if your original high interest in our vehicle is still current, and whether or not you wish to take us up on this undertaking (made only to you and no other purchaser of this vehicle whether by sale or assignment of the vehicle by you to a third party).

  I sincerely hope you appreciate the genuineness of this unique offer, made to you, and you alone, on this vehicle.

  I look forward to hearing from you at your earliest convenience for your decision either way.

  Yours sincerely

  ……

  QCPDP World Automobiles

  P.S. You indicated to us that you had "to make a decision within the next seven days", and therefore this offer and undertaking is held for you for up to seven (7) days following your receipt of this letter.

  As requested by you, we are prepared to deliver and collect the vehicle to/from the RACV office in Oakleigh, should you desire an RACV check on the vehicle. Please ring, should you decide to proceed with this RACV check.

• (v) In May 2009 the ATO began an examination of the Applicant's affairs that led to the present dispute. That Audit was completed in February 2010.

What constitutes an enterprise?

9. The term enterprise is defined.^[9] GST Act, s 9–20. That definition is -

• (1) … 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 or
  • ….
• [but not]
• (2) … 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; or
  • …

10. The first test the Applicant must satisfy if it is to be entitled to ITCs as a result of making a creditable acquisition is that the motor vehicles were purchased for a creditable purpose in carrying on an enterprise.^[10] GST Act, s 11–15(1).

11. Given the structure of the definition of an enterprise, activities that constitute a business will always constitute an enterprise. Therefore, it is necessary to identify what a business is and how activities are tested as part of that characterisation process.

What constitutes a business?

12. There is a non-exhaustive definition of business in s 195-1 of the GST Act. It mirrors the income tax legislation definition. However, on its own, it offers little guidance as to what constitutes a business.

13. Whether an activity or series of activities constitutes carrying on a business and whether a particular activity forms part of any business:

• (a) is a question of fact and degree;^[11] Spriggs v Federal Commissioner of Taxation (2009) 239 CLR 1 French CJ, Gummow, Heydon, Crennan, Kiefel and Bell JJ at 19 [59] ;, Woods v Deputy Commissioner of Taxation [1999] FCA 1589 Sackville J at [34] .
• (b) requires examination of a number of indicators including:
  • (i) whether:
    • (1) the actor has a commercial and/or profit making purpose;^[12] Spriggs v Federal Commissioner of Taxation above at 19 [59] , Woods v Deputy Commissioner of Taxation above at [35] .
    • (2) the transactions have a commercial character;^[13] Spriggs v Federal Commissioner of Taxation above at 19 [59] .
    • (3) the activities are systematic and organised or are undertaken in a business-like manner.^[14] Spriggs v Federal Commissioner of Taxation above at 19 [59] , Woods v Deputy Commissioner of Taxation above at [35] . In this regard whether adequate books and records are maintained and whether a systematic approach is adopted to the conduct of the activities are relevant and necessary enquiries;^[15] Woods v Deputy Commissioner of Taxation above at [35] .
    • (4) ordinary commercial principles, typical of the kind of business said to be being pursued are applied in undertaking the activities under review;^[16] Woods v Deputy Commissioner of Taxation above at [35] referring to Evans v Federal Commissioner of Taxation (1989) 89 ATC 4540 Hill J at 4555 .
    • (5) the activities are undertaken on a continuous and repetitive basis;^[17] Woods v Deputy Commissioner of Taxation above at [35] and the authorities there cited. and
    • (6) the scale of the activities.^[18] Spriggs v Federal Commissioner of Taxation above at 19 [59] , Woods v Deputy Commissioner of Taxation above at [35] . Whether the scale of activities, including the amount of capital employed in the activities, was substantial assists in distinguishing between a business and activities constituting a hobby;^[19] Woods v Deputy Commissioner of Taxation above at [35] and the authorities there cited. and
• (c) requires the scope of the business contended for to be identified.^[20] Spriggs v Federal Commissioner of Taxation above at 20 [60] .

14. In undertaking the examination and characterising the activities in question:

• (a) a wide survey and an exact scrutiny of the activities under review is required;^[21] Spriggs v Federal Commissioner of Taxation above at 19 [60] and the authorities there cited.
• (b) no one of the factors to be examined is necessarily decisive;^[22] Spriggs v Federal Commissioner of Taxation above at 19 [59] referring to Evans v Federal Commissioner of Taxation (1989) 20 ATR 922 Hill J at 939 , Woods v Deputy Commissioner of Taxation above at [34] .
• (c) all factors to be considered are to be taken into consideration in combination as a whole;^[23] Spriggs v Federal Commissioner of above at 19 [59] .
• (d) it is not necessary that relevant profits are intended for a particular year,^[24] Woods v Deputy Commissioner of Taxation above at [35] referring to Ferguson v Federal Commissioner of Taxation (1979) 79 ATC 4261 Bowen C.J. and Franki J. at 4264. or, for some businesses, at all;^[25] E.g. not for profit organisations and government run railways: see State Authorities Superannuation Board v Commissioner of Taxation (1988) 21 FCR 535 at 547–8 Davies J with whom Burchett J agreed. and
• (e) activities may constitute a business even where carried on in a limited way in preparation for larger scale operations,^[26] Woods v Deputy Commissioner of Taxation above at [35] and the authorities there cited. or when carried on with a lack of business efficiency making mistakes along the way;^[27] Thomas v Federal Commissioner of Taxation Walsh J (1972) 72 ATC 4094 Walsh J at 4100 .
• (f) activities that have a commercial character ordinarily involve predominantly consensual business transactions or predominantly contractual business relationships and activities that lack these features lack the essence of commercial activities;^[28] State Authorities Superannuation Board v Commissioner of Taxation above at 548 Davies J with whom Burchett J agreed.
• (g) it is neither the Commissioner's nor the Tribunal's role or function to dictate to a taxpayer how to conduct business or what business to conduct,^[29] Tweddle v Federal Commissioner of Taxation [1942] HCA 40 ; (1942) 180 CLR 1 Williams J at 7, Ronpibon Tin NL & Anor v Federal Commissioner of Taxation [1949] HCA 15 ; (1949) 78 CLR 47 at P 60 and adopted in more contemporary authority in Commissioner of Taxation v BHP Billiton Finance Limited [2010] FCAFC 25 Edmonds J at [18] . and that principle applies notwithstanding that viewed in hindsight the taxpayer's decisions were poor, or, worse, profligate;^[30] Spassked Pty Limited v Commissioner of Taxation [2003] FCAFC 282 Gyles J at [127] . and
• (h) while the required test has regard to objective matters and facts, because intentions and purposes are matters to be examined subjective matters can also be relevant to the enquiry.^[31] Fletcher and Others v The Commissioner of Taxation of The Commonwealth of Australia (1991) 173 CLR 1 at 17–18 Mason C.J., Brennan, Deane, Dawson, Toohey, Gaudron and McHugh JJ., Spassked Pty Limited v Commissioner of Taxation [2003] FCAFC 282 Hill and Lander JJ at [64] and Ell v Commissioner of Taxation [2006] FCA 71 at [111] Emmett J and the authorities there cited and in a GST context see Russell v Commissioner of Taxation (2011) 190 FCR 449 at 465–466 [72] Dowsett J and at 473 [103] Gordon J with whom Edmonds J agreed, Federal Commissioner of Taxation v Swansea Services Pty Ltd (2009) 72 ATR 120 at 141 [73] to [75] . In the ordinary course, matters of characterisation are determined by applying objective tests to objectively observed facts and reference to subjective intentions, purposes and/or motives is not part of the analysis required - particularly where the outcome is clear by reference to those objective factors.^[32] Spassked Pty Limited v Commissioner of Taxation [2003] FCAFC 282 Hill and Lander JJ at [64]. An illustration of the absence of need to refer to subjective matters is the approach taken by Wilson J in Federal Commissioner of Taxation v Whitfords Beach Pty. Ltd. (1982) 150 CLR 355 at 399/400 . Not having regard to subjective matters is not a reflection of the role they play, rather it is because it is not seen as necessary in particular circumstances. Where a clear answer is not given by reference to objective matters alone, subjective considerations have a role to play. Potentially colourable circumstances in which the events to be characterised occur, disproportion between income received and expenditures, or an absence of income of any description invite consideration of subjective matters. Moreover, those considerations may be decisive in a particular case.

15. The Commissioner contends that the common indicia of a business are as outlined in his ruling TR 97/11. In that ruling the Commissioner sets out tests that are substantially consistent with the foregoing. One test articulated in the ruling, whether the activity has a significant commercial purpose, warrants comment.

16. In support the Commissioner refers to what Walsh J said in
Thomas v Federal Commissioner of Taxation.^[33] (1972) 72 ATC 4094 . The phrase significant commercial purpose used by his Honour was used in concluding that growing pine trees did not constitute a business activity. In Thomas, the pine trees had been planted and allowed to become overgrown, there was never an expectation of an average net return of more than $100 per year and the total value of those trees was fairly trivial.^[34] (1972) 72 ATC 4094 at 4099 . His Honour did not suggest that it was necessary to establish that a significant commercial purpose exists before activities can constitute a business. Such a test would tend to contradict authorities to the effect that activities may constitute a business even where carried on in a limited way in preparation for larger scale operations.^[35] Woods v Deputy Commissioner of Taxation above at [ 35] and the authorities there cited. The other authority referred to in the ruling^[36] Hope v The Council of the City of Bathurst (1980) 144 CLR 1 . suggests quite the contrary.^[37] Gibbs and Stephen JJ. at 144 CLR 3. Possibly the rule should be that if there is a significant commercial purpose then there will be a business and without it other matters need to be considered.

17. It should be observed that in
Ferguson v Federal Commissioner of Taxation Bowen CJ and Franki J said:^[38] [ 1979] FCA 29 at [ 15] .

Section 6 of the Income Tax Assessment Act defines "business" stating that it includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee. This does not afford much assistance in the present case. It is necessary to turn to the cases. There are many elements to be considered. The nature of the activities, particularly whether they have the purpose of profit-making, may be important. However, an immediate purpose of profit-making in a particular income year does not appear to be essential. Certainly it may be held a person is carrying on business notwithstanding his profit is small or even where he is making a loss. Repetition and regularity of the activities is also important. However, every business has to begin and even isolated activities may in the circumstances be held to be the commencement of carrying on business. Again, organization of activities in a business-like manner, the keeping of books, records and the use of system may all serve to indicate that a business is being carried on. The fact that, concurrently with the activities in question, the taxpayer carries on the practice of a profession or another business, does not preclude a finding that his additional activities constitute the carrying on of a business. The volume of his operations and the amount of capital employed by him may be significant. However, if what he is doing is more properly described as the pursuit of a hobby or recreation or an addiction to a sport, he will not be held to be carrying on a business even though his operations are fairly substantial

What constitutes an enterprise?

18. Identifying an enterprise requires a similar enquiry. The concept includes activities in the form of a business and/or in the form of an adventure in the nature of trade which are wider than activities that constitute a business simpliciter.^[39] See State Superannuation Board (NSW) v Federal Commissioner of Taxation (1988) 88 ATC 4382 at 4389 Sheppard J. referred to without disapproval on appeal by Davies J in State Authorities Superannuation Board v Commissioner of Taxation above at 548 . While these concepts are wider,^[40] See State Superannuation Board (NSW) v Federal Commissioner of Taxation (1988) 88 ATC 4382 at 4392 Sheppard J. referred to with approval on appeal by Davies J in State Authorities Superannuation Board v Commissioner of Taxation above at 547 . and therefore constitute a lower standard to be satisfied,^[41] See State Superannuation Board (NSW) v Federal Commissioner of Taxation (1988) 88 ATC 4382 at 4389 Sheppard J. it is still necessary for the activities to have the essence of business activities.^[42] State Authorities Superannuation Board v Commissioner of Taxation above Davies J at 547–548 . When used as a noun the term form means, among others, the visible shape or configuration of something, the particular way in which a thing exists or appears, or the type or variety of something^[43] http://oxforddictionaries.com/definition/english/form?q=form. and, depending on the context, can besynonymous with, among others, the terms shape, condition, mode, manner, way, style, guise, complexion, pattern, model, and exemplar.^[44] Roget’s Thesaurus http://www.roget.org/scripts/qq.php. Similarly, when used as a noun the term nature means, among others, basic or inherent features, character, or qualities of something or the innate or essential qualities or character of something^[45] http://oxforddictionaries.com/definition/english/nature?q=nature. and, depending on the context, can be synonymous with, among others, the terms kind, sort, ilk, type, species, genus, genre, designation, description, style, manner, character, the like of, and the likes of.^[46] Roget’s Thesaurus http://www.roget.org/scripts/qq.php.

19. By including agencies of government in the definition of enterprise^[47] GST Act, s 9–20(1)(g). the legislature specifically brought these bodies within the GST system. Accordingly, the concepts of activities in the form of a business or in the form of an adventure or concern in the nature of trade are not meant to embrace merely activities of bodies such as government departments including, for example, the Respondent's organisation, that may operate in a business like way but are not businesses as such.^[48] State Authorities Superannuation Board v Commissioner of Taxation above Davies J at 547–548 . The concepts in the form of a business or in the form of an adventure or concern in the nature of trade are intended to do other work; consistent with two of the presumptions of statutory construction that all provisions of a statute do some work, and are there for a purpose,^[49] Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355 at [ 71] per McHugh, Gummow, Kirby and Hayne JJ and the cases there cited and see in the context of taxation legislation Envestra Limited v F.C. of T. [ 2008] FCA 249 at [ 31] per Mansfield J. and where different wording is used in a statute, it is to be taken that the legislative intent is to denote different things.^[50] See Prestcold (Central) Ltd v Minister of Labour [ 1969] 2 WLR 89 (Court of Appeal) at p 97 per Lord Diplock; Registrar of Titles (WA) v Franzon (1975) 132 CLR 611 at 618 per Mason J with whom Barwick CJ and Jacobs J agreed.

20. Two further considerations bear on the required analysis: first, the impact of the s 9-20(2) limitations on what constitutes an enterprise and, second, the impact of the definition of carrying on^[51] GST Act, s 195–1. in the context of an enterprise which includes steps taken in the course of commencement of the enterprise.

21. The s 9-20(2) limitations on what constitutes an enterprise create two qualifications to what otherwise might be an enterprise.

22. The first s 9-20(2) qualification is that a series of activities undertaken by any entity that constitute a private recreational pursuit or hobby is not an enterprise.^[52] GST Act, s 9–20(2)(b). Possibly, this does little more, if anything, than codify general principles governing what constitutes a business. This limitation applies to all entities. There is a conceptual difficulty in an entity other than an individual carrying on a hobby^[53] As observed by McKerracher J in Federal Commissioner of Taxation v Swansea Services Pty Ltd above at [ 100] . but such an entity can do so if it is a vehicle for an individual's pursuit.^[54] Federal Commissioner of Taxation v Swansea Services Pty Ltd above at [ 100] and [ 101] . In circumstances where the Applicant contends that its activities were a one man business, the Applicant's activities can be regarded as the manifestation of its director Mr Krongold's pursuits, however those pursuits are characterised, and his purposes or intentions for pursuing the activities undertaken by the Applicant, whatever those purposes or intentions were, are to be attributed to the Applicant.

23. The second s 9-20(2) qualification is that a series of activities undertaken by an individual that does not have a reasonable prospect of profit or gain is not an enterprise. This is a discrete test applied to individuals and partnerships comprising individuals or mostly individuals. This test is not expressed to apply to other entities, which begs the question whether other entities are not subject to this qualification, the answer to which is left uncertain by the legislation.

24. As noted above there is a presumption that where the legislature says different things it is to be taken that the legislative intent is to denote different things.

25. The Explanatory Memorandum^[55] A New Tax System (Goods and Services Tax) Bill 1998, Explanatory Memorandum. includes the following comments concerning the additional test for an individual or a partnership of individuals or mostly of individuals:

Certain things are excluded from being an enterprise. For example, hobbies, private recreational pursuits and employee wages are not subject to GST. For individuals and partnerships there must also be a reasonable expectation of profit or gain.^[56] A New Tax System (Goods and Services Tax) Bill 1998, Explanatory Memorandum, page 9. (Emphasis added)

and

2.3 Enterprise has been defined very broadly. Several of the things included as enterprises are included not so that they charge GST on their supplies, but so that they can become registered and obtain input tax credits.

2.4 Hobbies or recreational activities and activities where there is no reasonable expectation of profit or gain are specifically excluded from being enterprises.^[57] A New Tax System (Goods and Services Tax) Bill 1998, Explanatory Memorandum.

26. Paragraphs 2.3 and 2.4 do not track what the legislation says and, as a result, do not achieve what the name of the document in which they appear implies is intended. The extract from page 9 of the Explanatory Memorandum does track the legislation and does assist. This extract suggests that the reasonable expectation of profit test, an objective test, is an additional test for individuals and partnerships of all or mostly individuals. If it is an additional test, the necessary implication is that that test is additional to a testing regime that does not include the added test and is, therefore, not required of other entities.

27. That the definition of carrying on^[58] GST Act, s 195-1. in the context of an enterprise includes steps taken in the course of commencement of the enterprise raises two considerations. First, because something must be taken to exist if it is being carried on, the necessary implication of this definition is that the steps taken in commencement of an enterprise mark the start of the period when an enterprise exists. Second, what is a step taken in the course of commencement of the enterprise as opposed to a step taken outside the scope of the enterprise or before an enterprise is commenced?

28. The enquiry called for is to identify the essential character of the step taken, and, in the present circumstances involving disputed ITCs, the essential character of the acquisition.^[59] Russell v Commissioner of Taxation (2011) 190 FCR 449 at 473 [ 103] Gordon J with whom Edmonds J agreed. It does not matter that the thing acquired might also be used for private or domestic purposes, if the circumstances are such that the thing acquired was for the establishment and/or conduct of an enterprise then ITCs are allowable.^[60] Russell v Commissioner of Taxation (2011) 190 FCR 449 at 473 [ 103] Gordon J with whom Edmonds J agreed.

29. Commencing an enterprise is not always the same thing as preparing for commencing an enterprise.^[61] Russell v Commissioner of Taxation (2011) 190 FCR 449 at 465 [ 71] Dowsett J. Timing becomes an issue. Building up an inventory or collection to the point of eventually being able to sell individual pieces for profit has been accepted as carrying on an enterprise,^[62] Federal Commissioner of Taxation v Swansea Services Pty Ltd above at [ 76], [ 77] and [ 104] . as has acquisition of a capital asset to be used in carrying on an enterprise or business;^[63] Russell v Commissioner of Taxation (2011) 190 FCR 449 at 473 [ 103] Gordon J with whom Edmonds J agreed. the latter as doing something in the course of the commencement or termination of the enterprise. It follows then that acquisition of items that will be the circulating capital and turned over in the course of business activity and held on revenue account, even where the circulating capital is the initial circulating capital of the business,^[64] Vincent v Commissioner of Taxation (2002) 124 FCR 350 at 368 [ 75] Hill , Tamberlin and Hely JJ. must also so qualify.

30. Drawing these considerations together, a series of activities will constitute an enterprise if those activities constitute a business or, having the essential features or appearance of a business, the activities are at the margin of being characterised as a business but do not constitute a business.

The Applicant's Contentions

31. The Applicant contends that:

• (a) it had a purpose and prospect of profit from business activities;
• (b) the business activities had a significant commercial purpose or character;
• (c) the Applicant had more than a mere intention to engage in business from the business activities;
• (d) the Applicant demonstrated repetition and regularity from the business activities;
• (e) the Applicant organised itself in a businesslike manner and used a pre-formulated business purchasing system; and
• (f) the business activities were the carrying on of a business and not a hobby or form of recreation.

The Commissioner's contentions

32. The Commissioner contends that:

• (a) for all ITCs the Applicant did not carry on an enterprise and as a consequence is not entitled to them;
• (b) some ITCs are not available because the Applicant has not demonstrated that it held tax invoices (either at all or in the period of the claim) as required^[65] GST Act, s 29-10(3). before ITCs are allowable;
• (c) for other ITCs, not all of the acquisition consideration was paid in the relevant period;^[66] GST Act, s 29-10(2).
• (d) for others (ITCs claimed in respect of purchases of second hand motor vehicles that were not acquired by way of a taxable supply) there has not been a taxable on-sale of the motor vehicles as required^[67] GST Act, s 66-15. and s 66-17 records have not been not maintained; and
• (e) for others, any ITC entitlement is limited to 1/11^th of the luxury vehicle cap.^[68] GST Act, s 69-10.

The enterprise question

33. The Commissioner's primary contention is:

The Applicant did not acquire the motor vehicles in carrying on an enterprise. The activities, or series of activities that the Applicant claims constituted its "enterprise", did not meet the definition of "enterprise …. amongst other things, the Applicant's activities, or series of activities, were not done:

• (a) in the form of a business; or
• (b) in the form of an adventure or concern in the nature of trade.

34. The Commissioner accepts that the indicia of activities that constitute a business can be used as a touchstone to evaluate whether activities meet the definition of enterprise and that the words in the form of used in that definition may mean that it extends the reach of the term enterprise to include activities that would not otherwise be regarded as a business.

35. The Commissioner supports his contention by reference to the indicia of a business identified in his ruling TR 97/11

• • a significant commercial activity;
• • the purpose and intention of the taxpayer in engaging in the activity;
• • an intention to make a profit from the activity;
• • the activity is or will be profitable;
• • repetition and regularity of the activity;
• • the activity is carried on in a similar manner to that of the ordinary trade;
• • activity is organised and carried on in a businesslike manner and systematically;
• • the size and scale of the activity;
• • the activity is not a hobby, recreation or sporting activity

36. Whether intentionally or otherwise, in one relevant respect the summation of the Commissioner's ruling contended for in his submissions departs from the terms of the ruling in one respect that may have a bearing in the present matter. The summary of the indicia of a business listed in the ruling concerning profitability is:

whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity

37. Prospective profitability, and/or a strong likelihood of it, is a positive indicator of the most important criterion for whether someone is carrying on a business (and by extension an enterprise), namely intention to make profits. However, an objective view that profits are unlikely is not fatal to the analysis that a person is engaging in activities intending to make profits. People can be misinformed, or even misguided, in their thinking or assessment of the prospective financial returns that might be enjoyed as a result of a series of activities. Similarly, onlookers may objectively form a view that the financial prospects of a series of activities are not good, or are even hopeless, and it may transpire that those activities are successful; just as activities that may objectively be thought likely to produce success may transpire to be abysmal failures. History has many stories of unexpected good, and bad, fortunes.

38. The present Applicant should be regarded as an entity that has engaged in a series of activities that have sufficient indicia of business to be regarded as carrying on an enterprise, or to have been carrying out steps in the commencement of an enterprise. The Applicant can and has demonstrated that:

• (a) Mr Krongold had substantial, and successful, experience in the motor vehicle sales industry;
• (b) it held the statutory permit required for the conduct of the activities in question;
• (c) it had an expression of its business plan that revealed a concept that the Applicant at least thought could make profit;
• (d) steps were taken to implement that plan in accordance with its terms;
• (e) a modest scale of inventory holding was acquired that was of a material value;
• (f) the motor vehicles were maintained in a manner consistent with the business concept espoused;
• (g) it had pro-forma agreements to be used in conjunction with its activities;
• (h) it used material amounts of debt funding to acquire the inventory;
• (i) it arranged insurance of the inventory; and
• (j) it had access to business premises,
• albeit those activities also
• (k) showed a (possibly high) degree of disorganisation in activities undertaken;
• (l) included potentially unusual activities when contrasted with what might be expected in the motor car sales sector;
• (m) did not include selling and marketing activities during the Relevant Period;
• (n) had private transactions in the Relevant Period; and
• (o) had a degree of private use of three of the motor vehicles.

39. While finely balanced, where intention to make profits is the most important criterion to be met, and intentions are matters that have subjective elements to them, the conclusion is that the motor vehicles were acquired in carrying on an enterprise. The motor vehicles were acquired with the view that they would be sold at a profit as a part of that enterprise. There is little doubt that if any of the motor vehicles were to be sold at a profit, that profit would be a business profit. Some of those motor vehicles may have been acquired with an additional intention or purpose that they be used privately in the period between acquisition and sale. All motor vehicles other than the VZ Commodore Monaro UFB041, the VZ Commodore HSC coupe UCC592, the Ford GT v-GT066, the Cobra GT WIN665 and the Citroen Diesel WMC482 bear a number of kilometres travelled that suggest private use and the Applicant admits private use of some of them.

40. Private use of assets acquired does not preclude those assets being assets acquired in carrying on an enterprise.^[69] Russell v Commissioner of Taxation (2011) 190 FCR 449 at 473 [ 103] Gordon J with whom Edmonds J agreed What it does prevent is full ITCs being allowed given the apportionment rules.^[70] GST Act, ss 11–5(a), 11–15(2) and 11–25. The extent to which ITCs are allowable is a question of appropriate apportionment. The evidence does not disclose an appropriate basis. Accordingly the Applicant has not established an entitlement to ITCs in respect of all motor vehicles other than the VZ Commodore Monaro UFB041, VZ Commodore HSC coupe UCC592, Ford GT v-GT066, Cobra GT WIN665 and the Citroen Diesel WMC482.

The Commissioner's other contentions

41. Given the conclusion concerning the enterprise question, the remaining bases on which the Commissioner defends his objection decision need to be considered.

Tax Invoices not held as required

42. For the purchases of the motor vehicles listed in Table 4 above, the evidence does not disclose that the Applicant held valid tax invoices either at all or at the requisite time for the ITCs claimed as required by, s 29-10(3) of the GST Act. While contracts for the purchases were held and provided in evidence, no evidence of tax invoices was led for three of the motor vehicles listed and for fourth motor vehicle the tax invoice was dated after the period for which the ITCs were claimed for that vehicle.

43. That being the case, the Applicant has not established an entitlement to the ITCs claimed in respect of those motor vehicles and fails in its challenge to the Commissioner's objection decision in respect of the ITCs for these motor vehicles.

Consideration not paid in relevant period

44. The Applicant was a cash basis GST payer and entitled to ITCs in the period when consideration was paid.^[71] GST Act, s 29-10(2).

45. The evidence discloses that the consideration for the purchases of the motor vehicles in Table 5 above was only paid to the extent shown.

46. Accordingly the Applicant has not established an entitlement to the ITCs to the extent claimed in respect of those motor vehicles. The Applicant fails in its challenge to the Commissioner's objection decision in respect of the ITCs for these motor vehicles to the extent that the purchase prices were not paid.

47. The Commissioner makes similar contentions regarding the Volkswagen Passat UTD757 and the Citroen Diesel WMC482. They cannot be accepted. The evidence shows that before 30 June 2006 and 2008 the Applicant had become a borrower from lenders separate from the vendors of these vehicles for the full balance of the purchase price. A taxpayer on a cash basis who borrows money and pays the purchase price, or consideration for the supply, has paid the amount of the consideration and is entitled to the ITCs associated with the purchase, assuming all other requirements are met, notwithstanding that the loan may not have been paid in full in the relevant period.

Second hand motor vehicles purchased privately

48. Four of the motor vehicles listed in Table 1,^[72] The Holden Astra QTB807, the BMW X5 Wagon TEC828, the Jeep Wagon TNL711, and the Mazda Hatch DHM421 were purchased second hand from people not registered for GST.

49. As such there was not a taxable supply of the motor vehicles as required for ITCs to be allowed under the usual rules.^[73] GST Act, s 11-5. Further, there was not a taxable on- supply of the motor vehicles by the Applicant in the Relevant Period and receipt of consideration in respect of such a supply^[74] GST Act, s 66-15. for ITCs to be allowed under the second hand goods rules.^[75] GST Act, s 66-15.

50. Accordingly the Applicant has not established an entitlement to the ITCs claimed in respect of those motor vehicles and fails in its challenge to the Commissioner's objection decision in respect of these ITCs.

51. In these circumstances it is not strictly necessary to consider the Commissioner's additional contention that the evidence does not disclose s 66-17 records were maintained to allow ITCs in respect of second hand goods. Nevertheless, the Applicant has produced at least some of the purchase contracts for these motor vehicles making it highly likely that it could establish that the s 66-17 records are held.

Luxury car limits

52. The Commissioner contends that for the motor vehicles listed in Table 7, s 69-10 caps the GST entitlement to 1/11^th of the luxury vehicle cap.

53. If the Applicant was entitled to quote in respect of the acquisition of these motor vehicles then any ITC entitlement would not be limited by the luxury vehicle cap. The Applicant would have been entitled to quote in respect of these motor vehicles if, at the time of quoting, it had the intention of using these motor vehicles by holding them as trading stock and for no other purpose.

54. The kilometres travelled by the Jaguar XX Coupe VXK666 are not consistent with an intention of sole use of this vehicle only as trading stock and accordingly the Commissioner's contentions in relation to this motor vehicle must be accepted.

55. The conclusions concerning carrying on an enterprise and the minimalist use of the remaining motor vehicles suggests that the sole use test should be regarded as satisfied for the remaining four motor vehicles. Accordingly, the Commissioner's contentions in relation to the remaining motor vehicles are not accepted.

ITC entitlements conclusions

56. Table 8 (annexed) sets out in a table form the reason why ITCs in respect of the motor vehicles the subject of this review are not allowable based on the foregoing reasons. With the exception of the Ford GT v-GT066, the Applicant is not entitled to any of the ITCs as claimed.

LCT adjustment

57. The Applicant claims a LCT adjustment in respect of the periods and motor vehicles listed in Table 9 below.

58. The Commissioner denies entitlement to the adjustment on two grounds. First, that the Applicant was not entitled to quote its ABN in respect of these purchases of these motor vehicles as it did not intend to acquire these motor vehicles for a quotable purpose and did not use them solely for that quotable purpose, namely to be held as trading stock. Second, because the Applicant is only entitled to a decreasing adjustment for the period it becomes aware of the adjustment entitlement and, if that is a later period than the period in which the purchases were made then the entitlement arises in the later period. The Commissioner contends that the evidence shows that the Applicant became entitled to the adjustment in the period after the Relevant Period when revised BAS were lodged, namely April 2009.

59. For the reasons set out above, the Applicant should be taken to have established that all of these motor vehicles except the Jaguar were acquired for the requisite purpose and was entitled to quote. Further, the Applicant should be regarded as having used those motor vehicles consistently with that purpose. But for considerations below, the Applicant would be entitled to the LCT adjustment sought.

60. Again for reasons set out above, the Applicant has not established that the Jaguar vehicle was not at least partly acquired for private purposes. Further, the Applicant has not established that that vehicle was used only as trading stock in the period since acquisition. The test for LCT relief is strict. It does not allow relief if the vehicle is used for multiple purposes. Accordingly the Applicant is not entitled to the adjustment sought.

61. The Commissioner's second contention concerning the timing of entitlements to LCT adjustments is conclusive. Any entitlement to an adjustment is not in the Relevant Period.

Penalty

62. The forgoing conclusions mean that the Applicant had tax shortfalls.

63. As noted in Stewart and the Commissioner of Taxation^[76] [ 2013] AATA 845 the Administration Act creates a penalty regime for false or misleading statements that lead to shortfall amounts.

64. Subsection 284-75(1) of Schedule 1 to the Administration Act applies if:

• (a) the taxpayer or its tax agent makes a statement to the Commissioner;
• (b) the statement is false or misleading in a material particular; and
• (c) because of the statement there is a tax shortfall.

65. As noted above there have been false or misleading statements and there have been tax shortfalls as a consequence. The Applicant is therefore potentially liable to a penalty.^[77] Administration Act, Schedule 1, s 284-75(1).

66. The Commissioner has assessed administrative penalty at the base rate of 25% of the tax shortfall based on his calculation of what that shortfall was at the lack of reasonable care level.

67. It is apparent that the Applicant consulted his accountant and tax agent.

68. In these circumstances the Applicant cannot be criticised for failure to make an attempt to have his tax affairs dealt with properly. It will be recalled that that system of penalties is not designed to punish tax short falls per se. As noted by Hill J in
Walstern v Commissioner of Taxation^[78] 2003 ATC 5076 at [ 106] . in recounting the explanation given at the time of introduction of the earlier, but similarly structured, tax penalty regime:

The Minister assisting the Treasurer, Mr Baldwin said, inter alia:

The whole idea of the new understatement penalties is to ensure that people do not get penalised when they have made an honest and genuine attempt to correctly determine their taxable income.

69. The Applicant consulted a tax agent. That constitutes a reasonable attempt to comply with the law, or in other words, reasonable care.

70. The remaining question is whether the Applicant's tax agent took reasonable care. The evidence led does not disclose what steps the Applicant's agent took. Accordingly on the evidence led, the Applicant has not discharged the onus of showing that both he and its tax agent took reasonable care.

Penalty remission

71. Again as noted in Stewart and the Commissioner of Taxation, the Commissioner and the Tribunal on review have a discretion to remit penalties. The Administration Act does not set out any guidelines for exercising that discretion. The issue is simply whether it is appropriate in the circumstances to remit penalties in whole or in part. A significant consideration in the exercise of this discretion is whether, having regard to the particular circumstances of the taxpayer, the outcome would otherwise be harsh or produce an unjust, inappropriate or unreasonable outcome.^[79] Sanctuary Lakes Pty Ltd v Commissioner of Taxation [ 2013] FCAFC 50 at [ 248]–[ 249] Griffiths J with whom Edmonds J agreed.

72. On the evidence led, a penalty calculated by reference to the reduced shortfall at the 25% rate for failure to take reasonable care or failure to have adopted a reasonably arguable position does not produce an inappropriate result.

Decision

73. The Tribunal sets aside the objection decision in relation to ITCs claimed in respect of the Ford GT v-GT066 and penalty in respect thereof and in lieu thereof allows the objection in part and otherwise affirms the decision under review.