Tribunal hands down decision on what constitutes an enterprise

Yesterday the Tribunal handed down its decision in Davsa Forty-Ninth Pty Ltd as Trustee for the Krongold Ford Business Unit and Commissioner of Taxation [2014] AATA 337. The question was whether the applicant was entitled to input tax credits for the acquisition of motor vehicles and whether the applicant was carrying on an enterprise.

The interesting context in which the enterprise question arose was noted by the Tribunal in the first paragraph of the judgment:

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.

After a detailed review of the facts and the legislation, the Tribunal found that an enterprise was being carried on. Unfortunately for the applicant, save for one vehicle, credits were ultimately not available because most the motor vehicles were used at least partly for a private purpose and no evidence was given to determine an appropriate apportionment and tax invoices were not held.

The decision illustrates that the question of whether an enterprise is being carried on involves a detailed factual enquiry and in many cases (as in this one), the decision will be finely balanced. There is no bright line test.

Some of the observations of the Tribunal in undertaking its enquiry included the following:

  • At [16]: In determining whether a business is carried on, 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.
  • At [18]: Identifying whether an “enterprise” is carried on involves a lower standard than identifying whether a “business” is carried on.
  • At [22]: the qualification in s 9-20(2) that activities which constitute a private recreational pursuit or hobby is not an enterprise applies to all entities – however, there is a conceptional difficulty in an entity other than an individual carrying on a hobby unless an entity does so as a vehicle for an individual’s pursuit.
  • At [23]-[26]: the qualification in s 9-20(2) that activities undertaken  by an individual that do not have a reasonable prospect of profit or gain is not an enterprise is a discrete test which applies to individuals and partnerships comprising of individuals – this test does not apply to other entities.
  • At [27]-[29]: determining whether an acquisition is made in the course of commencement of an enterprise requires the identification of the essential character of the step taken and the essential character of the acquisition.
  • At [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.

Having regards to the evidence, the Tribunal found that, while finely balanced, the Applicant had 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.

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