Tribunal affirms GST liability for the sale of land by corporate taxpayer

A common, but difficult, GST issue is whether the seller of vacant lots of land is carrying on an “enterprise” and is subject to GST. There is no simple answer, and the question must always be addressed by reference to the facts. In many cases, the question arises where the land is owned by one or more individuals – for example, a holiday home on a large piece of land that has been held by a family for a long time and is to be subdivided and sold as vacant blocks. Yesterday, the Tribunal handed down its decision in San Remo Heights Pty Ltd and Commissioner of Taxation [2020] AATA 4023 where the issue arose in the context of land that had been owned by a company for a long period of time.

While the Tribunal ultimately found in favour of the Commissioner, mainly because of deficiencies in the available evidence, the decision illustrates the following matters:

  • In seeking to prove that an enterprise is not carried on, a company will generally face a more difficult task than an individual. Of course, this also means that it should generally be easier for a company to establish that it is carrying on an enterprise – for example, where there is a dispute as to the entitlement to input tax credits.
  • If a company is registered for GST on the basis that it carries on an enterprise, not every supply made by the company will necessarily be taxable as a supply made in the course or furtherance of an enterprise. Each case involves a question of fact.

The facts were not in dispute:

  • The company acquired the land in 1962. Because of the effluxion of time, no evidence was provided as to the company’s object of acquiring the land. Over time, parts of the land were subdivided and sold.
  • In April 1987, four lots were created and sold.
  • In November 1987, four lots were created. One was sold in 1989, another in 1995 and the remaining two lots in 1998.
  • In June 2000, four lots were created. One lot was sold in 2002 and another in June 2019. The two lots which were the subject of the dispute were sold in October and November 2018. The Commissioner assessed GST on the sales of the two lots in the company’s December 2018 quarterly tax period.
  • The company was registered for GST and held three commercial rental properties, four residential rental properties and land used for grazing purposes.
  • The evidence was that no income tax deductions and no input tax credits were claimed with respect to the two lots and the company had not sought previously to have the land rezoned, apply for permits or previously attempted to sell the lots. The sole purpose of the sale was said to be to facilitate the closure of the estates of deceased relatives who held shares in the company and to whom there was a debt owed by the company. There was no evidence of a business plan and the 2017 and 2018 financial accounts showed there were no employees and no wages or salary expenses.
  • The Tribunal observed that the evidence was silent as to the manner in which the sales took place, therefore no findings could be made whether that was systematic, organised or businesslike, other than to note that the lands were not treated as trading stock in the company’s 2018 financial statements.

Two issues arose:

  1. Whether the sales were made in the course or furtherance of the enterprise constituted by the rental and grazing activities of the company
  2. If not, whether the company had established that the sales were not made in the course or furtherance of an enterprise carried on by the company.

The Tribunal observed that the concept of “business” included the well-known indicia of profit making purpose, scale, repetition and regularity, the amount of capital invested, and the organisation of activities in a business-like way with books and records. The Tribunal also observed that it had been held in previous cases that:

  • where  company is incorporated for the purpose of making profits for its shareholders any gainful use to which the company puts its assets prima facie amounts to carrying on a business; and
  • it is easier to draw an inference that activities of a company constitute a business than when similar activities are carried on by an individual.

In this context, I note that the definition of enterprise in s 9-20 of the GST Act excludes activities carried on by an individual without a reasonable expectation of profit or gain, but there is no exclusion for other entities such as companies. In Davsa Forty-Ninth Pty Ltd as Trustee for the Krongold Ford Business Unit Trust and Commissioner of Taxation [2014] AATA 337 the Tribunal observed that this begs the question whether other entities are subject to this qualification, the answer to which is left uncertain by the legislation.

The Tribunal found in favour of the taxpayer on the first issue, being satisfied on the evidence that the sales of the lots had no connection with the property rental or grazing enterprises carried on by the company. In coming to this conclusion, the Tribunal made some observations on the approach taken by the Commissioner in his Objection Decision which suggested that once a company is registered or required to be registered for GST, any supply it makes will be in the course or furtherance of an enterprise. The Tribunal made the following observation on this suggestion:

That, with respect, is not correct as a matter of statutory language – s 9-5(b) of the GST Act requires determination of whether the particular supply was made in the course or furtherance of an enterprise carried on by the relevant entity, whether a company or otherwise. A company may face a particular challenge in discharging its burden of proving a supply was not made in the course or furtherance of an enterprise, but that is not say it is an impossible task – for whether any entity’s activities constitute an enterprise is ultimately a question of fact – but it requires an evidentiary foundation on which to do so.”

The Tribunal found against the taxpayer on the second issue, finding that it was not satisfied that the series of activities by the company in relation to the land did not constitute an enterprise. In coming to this view, the Tribunal noted that the taxpayer’s activities with respect to the land were carried out over an extended period of time but it could not determine that those activities were undertaken other than for commercial purposes. There was no evidence of the purpose of the controlling minds of the company in subdividing and selling blocks of land over this period. There was insufficient evidence upon which the Tribunal could determine the issue and the taxpayer had not discharged its burden of proof.

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