In The Trustee for the Seabreeze Estate Unit Trust and Commissioner of Taxation [2019] AATA 1395 the tribunal found that the taxpayer was entitled to apply the margin scheme to work out the GST payable on the sale of real property because the property was eligible for the margin scheme.

The issue before the Tribunal was whether the vendor, who sold the property to the taxpayer more than 10 years previously, chose to apply the margin scheme in working out the GST on the supply of the property. While there was no direct evidence available to support this conclusion, the Tribunal was nevertheless satisfied, on the balance of probabilities, that the taxpayer did acquire the property under the margin scheme and therefore the sale of the property was eligible for the margin scheme.

The decision provides a useful example of the operation of the legislative regime in Part IVC of the Taxation Administration Act, where the onus of proof falls on the taxpayer to establish, on the balance of probabilities, that the assessments made by the Commissioner are excessive. As observed by the Tribunal (at [5]), “the taxpayer must persuade the Tribunal of its position and show the assessments issued by the Commissioner are excessive or otherwise incorrect and what the assessments should have been”.

The making of inferences – some general principles

The decision illustrates that a taxpayer  does not necessarily require direct evidence to be successful in review proceedings and that it can be successful if sufficient evidence is produced whereby the Tribunal can draw the necessary inferences to support the taxpayer’s position. In McCormack v Federal Commissioner of Taxation (1979) 13 CLR 284 Murphy J said as follows (at 323):

A taxpayer might discharge the burden of proof placed on him by s. 190 (b) in any of several ways. He may prove all relevant circumstances and from these establish that an inference should be drawn that the property (from the sale of which by the taxpayer a profit arose) was not acquired by him for the purpose of profit-making by sale. Or he may prove by direct evidence that such a purpose did not exist. The burden might also be discharged by a combination of direct evidence and inference from other circumstances. He may, of course, rely upon any evidence or any inference from evidence adduced by the Commissioner.

Where direct evidence is not available, it is open to a Tribunal to make an inference that is a reasonable deduction from the evidence (Tisdall v Weber [2011] FCAFC 76 at [129]). In this context,  the following guiding principles were identified by the Tribunal in Armithalingam and Commissioner of Taxation [2012] AATA 449 at [119]:

• The search is always for the existence of a body of evidence which might, reasonably, sustain a relevant finding of fact or conceivably, permit a particular inference to be drawn: Tisdall v Webber [2011] FCAFC 76 at [127];
• It is important to bear in mind also that the inferential process is not one where speculation, guesswork or mere assumption is involved: Tisdall v Webber [2011] FCAFC 76 at [128];
• A conjecture may be plausible, but it is effectively still a mere guess. An inference is a deduction from the evidence, and if reasonable can be treated as part of the legal proof to be considered in making a factual determination in any particular proceeding: Bell IXL Investments Ltd v Life Therapeutics Ltd [2008] FCA 1457 at [14];
• In questions where direct proof is not available, it is enough if the circumstances appearing in evidence give rise to a reasonable and definite inference – they must do more than give rise to conflicting inferences of equal degrees of probability so that the choice between them is one of conjecture. But if circumstances are proved in which it is reasonable to find a balance of probabilities in favour of the conclusion sought, though the conclusion may fall short of certainty, it is not to be regarded as mere conjecture or surmise: Bradshaw v McEwans Pty Ltd [1951] HCA 480 quoted with approval in Luxton v Vines [1952] HCA 19; (1952) 85 CLR 352 at 358 per Dixon, Fullagar and Kitto J.

The facts

The property was acquired by the taxpayer in January 2005. The vendor had acquired the property in October 2003 for $1,200,000 and sold the property to the taxpayer in January 2005 for $1,080,000, therefore making a loss. The Activity Statement of the vendor was in evidence and it showed that no GST was reported by the vendor.

A copy of the front page of the contract was in evidence, in the form of the NSW 2000 edition of the standard contract of sale of land, but the balance of the contract was not available, despite searches being made. More than 10 years had passed and the vendor’s business records had been disposed of or could not be found. The Tribunal noted that the front page of the contract referred to a purchase price of $1,080,000 and that a note above the signature block stated “NOTE: Subject to Clause 13, the price INCLUDES goods and services tax (if any) payable by the vendor”.

The second page of the standard contract of sale included a box that could be ticked if the  margin scheme applied to the property. However, as noted by the Tribunal, that page was not available and a director of the taxpayer could not recall whether the box was ticked. The director also gave evidence that the only thing he ever looked at was “the top line”, and because GST was not payable he did not ask for a tax invoice. Evidence was also given that the taxpayer was not registered for GST until January 2006 because at that time the taxpayer started to incur expenses on the development of the property. The Tribunal found that the director was a reliable witness and was satisfied with his recollection that no GST was payable on the sale and there was no need to register the taxpayer to claim an input tax credit.

The contentions of the parties and the findings of the Tribunal

The taxpayer contended that the margin scheme must have been used by the vendor because there was no margin made on the sale, the property being sold at a loss. If GST was paid, this would have required the vendor to pay 1/11th of the sale price as GST. The taxpayer contended that this conclusion was entirely consistent with the evidence of the director. The taxpayer also relied on the fact that the vendor did not report GST in its activity statement.

The Tribunal observed that the Commissioner’s contentions centred on the onus of proof borne by the taxpayer as it was unable to adduce direct evidence of the vendor’s choice to use the margin scheme. The Commissioner also stated that, within supporting documentation, or any other evidence, it was impossible to know the basis of the vendor lodging a nil BAS.

The Tribunal noted that the unchallenged evidence was as follows:

• the vendor sold the property to the taxpayer for less than it acquired it – in other words, it had a negative margin
• the vendor did not report the sale in its BAS
• the taxpayer did not register for GST at the time of the purchase of the property but did so approximately a year later

Having regards to these matters, the Tribunal concluded (at [58]) that “I was persuaded that the Trustee acquired the Land from the Partnership under the GST margin scheme on the evidence before me supported by the strong inferences able to be drawn from the conduct of the Partnership and the Trustee. Accordingly, my finding is that the Partnership chose to use the margin scheme in working out the amount of the GST on the supply”.