Tribunal finds applicant not carrying on an enterprise

Yesterday the Tribunal handed down its decision in Clayton and Commissioner of Taxation [2013] AATA 428 where the Tribunal affirmed the decision of the Commissioner that the applicant was not entitled to input tax credits because it was not carrying on an enterprise.

In 2003 the applicant purchased rural land with the intention to start a business of eco-tourism. A business plan was prepared, the applicant conducted market research and in 2004 a development application was lodged with the local council for permission to construct four cabins and a reception building. Consultants were engaged to advise on how to site the cabins and how they should be provided with services like power, water and sewerage. A website was established and the applicant started to make improvements to the property as well as studying a diploma course in conservation and land management.

Having regard to the above matters, the activities of the applicant certainly looked like an enterprise. However, progress towards establishment of the business was slower than hoped and the local council was slow in processing the development application, with a decision not being made until 2008. The global financial crisis then struck in 2008 and the applicant decided to change the focus of their efforts and re-wrote their business plan to focus more on organising tours of the property and to offer environmental consultancy services.

The applicant did not have any paying tourists until 2012, which was after the period under review (being 2007 to 2011). Also, no consultancy services were provided during the period under review. Further, the cabins had not been built and there were no plans to do so in the absence of fresh capital.

The Tribunal acknowledged that a number of features of the applicant’s course of conduct had the hallmarks of a business, but found that the business had not come into existence by 2011. For a variety of reasons, some beyond the control of the taxpayer, the activities that occurred prior to 2011 were essentially preparatory in nature. Further, noting that the definition of “carrying on an enterprise” includes “doing anything in the course of the commencement or termination of the enterprise”, the Tribunal stated as follows:

17. Every business has to start somewhere. Where the business progresses from its foundations to operation within a reasonable time frame, it is easier to see how initial expenditures can be seen as part of a course of conduct that amounts to carrying on an enterprise. But where there is delay – where the momentum of the activities is lost – it becomes harder to make a connection between initial expenditure and the operations which result. That connection is even more difficult to establish where the business has not, or does not, commence trading in due course.

18. While there were some features of a business present during the period under review, the activities are better described as preparatory and exploratory in nature. They may yet lead to the establishment of an enterprise; one hopes so, for the taxpayers appear to be genuine in their desire to contribute to the growth of tourism in their local area. But that is not enough to meet the definition in the Act. I am not satisfied that they were carrying on an enterprise. 

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