Decision impact statement
Touram Pty Ltd atf the GKA Family Trust and Commissioner of Taxation
Venue: Administrative Appeals Tribunal
Venue Reference No: 2008/365
Judge Name: Senior Member McCabe
Judgment date: 23 December 2008
Appeals on foot:
No
Impacted Advice
Relevant Rulings/Determinations:
Subject References:
GST
Sale of Land
Enterprise
In the form of a business
Précis
Outlines the Tax Office's response to this case which concerned whether the sale of a vacant block of land, held by the vendor in an unimproved state for 11 years, was a taxable supply being a supply in course or the furtherance of an enterprise.
Decision Outcome:
Adverse
Brief summary of facts
The case concerned whether the applicant was entitled to an input tax credit of $20,612 on its acquisition of a vacant allotment in 2006. The issue turned upon whether the sale to the applicant was a taxable supply by the vendors of the land.
The vendors, who were husband and wife, acquired the property in 1994 as vacant residential land and in 1997 made a successful application to change the zoning from residential to business. The rezoning application included a development proposal but the Tribunal accepted that the vendors had no intention of developing the property themselves and during the eleven year period that the vendors owned the property the land remained vacant and unused. They acquired the land with a view to selling it in due course at a profit and had no other objective in relation to the land.
While the vendors were registered for GST purposes as a partnership, the Tribunal accepted that their dealing with this land was separate from their other activities. However, the vendors recorded the purchase price and holding and other costs in respect of the land in the partnership's financial accounts. The wife gave evidence that the vendors tended to put all of their assets (apart from the family car) in the partnership accounts but she did not appreciate the significance, if any, of doing so. However, the Tribunal noted that it did not accept that the land was included in the partnership accounts 'by accident'.
The contract of sale between the vendors and the applicant specified that the price 'includes any GST payable on the supply of the Property to the Buyer'. The vendors' solicitor, at the request of the applicant and without instructions from the vendors, provided a tax invoice to the applicant, but advised 'we are not representing that our client does have a GST liability'.
Issues decided by the court or tribunal
The Tribunal identified the relevant issue to be whether the vendors were carrying on an enterprise in relation the land pursuant to the definition of "enterprise" in subsection 9-20(1) of the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act). Subsection 9-20(1) relevantly states:
(1) An enterprise is an activity, or a 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...
The Tribunal considered the critical question to be:
'[Paragraph 9-20(1)(a)] refers to activities done "in the form of a *business" (emphasis added by Tribunal). Is there any evidence of this activity - the acquisition and sale of the vacant land - being carried on in a business-like way?' (at [23])
In considering the evidence, the Tribunal determined that the vendors were carrying out activities in the form of a business and therefore were conducting a property investment enterprise as:
- •
- they had acquired the property for the sole purpose of selling it for a profit;
- •
- while they did not intend to develop the property themselves they went about doing the groundwork for a development in a business-like way; and
- •
- (describing this as 'the more important indicia'), the practice of recording the purchase price, holding costs and 'development' costs in the partnership financial reports exhibited 'the sort of system and regularity one expects to see in a business'.
Accordingly, the Tribunal concluded that the vendors made a taxable supply of the land and the applicant, having acquired the land in the course of its enterprise, was entitled to an input tax credit.
Tax Office view of Decision
The Tribunal placed particular importance on the activity of recording the purchase, 'development' and holding costs of the land in the partnership accounts. The Tax Office understands that it is common practice for investment assets, which are unrelated to the partnership business, to be included in the financial accounts of small family partnerships, particularly husband and wife partnerships.
The Tax Office notes that it does not necessarily follow from the adoption of this practice that a subsequent sale of the asset is to be characterised as in the course of carrying on an enterprise. The accounting treatment may be relevant, but a conclusion regarding the nature of relevant activity will depend upon all of the facts in the particular case. Because it was not anticipated that the Tribunal would place such weight on the accounting practices, evidence on this point was not adduced at the hearing. However, it is noted that the Tribunal also took into account other factors, including the evidence, which it accepted, that the property was acquired with the intention of resale at a profit, the undertaking of rezoning and development plans and the engagement of professional assistance.
The Tax Office accepts that the conclusion of the Tribunal was open to it on the evidence accepted by the Tribunal.
The Federal Court's recent decision in Commissioner of Taxation v Swansea Services Pty Ltd [2009] FCA 402, also was concerned with the definition of 'enterprise' for GST purposes.
Administrative Treatment
Implications on current Public Rulings & Determinations
Nil
Implications on Law Administration Practice Statements
Nil
Court citation:
[2008] AATA 1167
2008 ATC 10-070
70 ATR 991
Legislative References:
A New Tax System (Goods and Services Tax) Act 1999
9-20(1)
Case References:
Ferguson v Commissioner of Taxation
[1979] FCA 29
9 ATR 873
79 ATC 4261
Re Body Corporate, Villa Edgewater Cts 23092 and Commissioner of Taxation
[2004] AATA 425
55 ATR 1162
2004 ATC 2056