In VGGL and Commissioner of Taxation [2013] AATA 867 the Tribunal affirmed the Commissioner’s objection decision that the applicant was not entitled to claim input tax credits for certain costs incurred by the applicant, who carried on a property development business.

The applicant operated a property development business and was also a director of a company which sold and maintained water filtration systems. The claims related to the following expenses:

• Amounts incurred in respect of the construction of a townhouse, where the Contract of Sale expressly indicated that the sale was not a taxable supply and was not sold in the course or furtherance of an enterprise carried on by the applicant (two other townhouses had been sold as taxable supplies).
• Legal fees in respect of proceedings brought by a shareholder of a company of which the applicant was also a shareholder.
• Other expenses purportedly incurred in the course of the property development enterprise

Acquisitions relating to the construction of the townhouse

The Tribunal noted that the Contract of Sale specifically made it clear that the sale was not made “in the course or furtherance of an enterprise that the vendor carries on”. Further, a box on the contract was ticked, indicating that the sale was not a taxable supply and that the margin scheme would not apply. This could be distinguished from the contracts from two other townhouses sold by the Applicant which were clearly sold as taxable supplies.

The Tribunal observed that there was noting to suggest that any of these markings on the Contract were in any way inappropriate or failed to reflect the true position – noting that it appeared that the contract was prepared by competent solicitors who would have known the significance of the markings. The Tribunal observed that “the position seems to be that the Applicant intended from the outset that the sale of Lot 3 would not be a taxable supply and this was properly reflected in the markings on the Contract of Sale”.

Implicit in the observations of the Tribunal appears to be that the applicant failed to discharge its burden of showing that the sale was a taxable supply, particularly given the express terms in the Contract of Sale. I do not think that a taxpayer can “intend” that a sale is not a taxable supply or can contract out of the GST Act by including a term in a contract that the supply is not a taxable supply or that the supply is not made in the course of its enterprise.

Acquisition of legal expenses

In early 2005 the applicant sold one of the two issued shares in the company to B, which in April 2005 brought proceedings against the applicant alleging oppression and misleading and deceptive conduct. The applicant claimed an input tax credit for the legal fees.

The Tribunal found that the evidence did not provide a clear connection between the legal services acquired and the conduct of a business of property development. The applicant contended that the legal fees were largely incurred so as to protect the Applicant’s reputation as a director and that any adverse findings against the Applicant would have resulted in a complete collapse of the townhouse development. The Tribunal rejected this contention, finding that the reality was that the legal fees had nothing whatsoever to do with property development – rather they were connected a company whose business was in the maintenance and sale of water filtration systems.

Other expenses

The Tribunal found that the applicant was not entitled to input tax credits for the other expenses claimed. The applicant did not produce tax invoices and very little evidence was produce to substantiate the claims or to demonstrate how the expenses were creditable acquisitions.