Introduction

In Cyonara Snowfox Pty Ltd v Commissioner of Taxation [2012] FCAFC 177  the Full Federal Court unanimously dismissed the taxpayer’s appeal from the decision of the Tribunal ([2011] AATA 124) where the Tribunal held that in respect of a number of sales of real property:

• the taxpayer could not chose to use the margin scheme
• the taxpayer had not established that a supply had been GST-free as a supply of a going concern; and
• the Commissioner was barred from recovering the GST because it had not issued a valid notice under s 105-50 of Schedule 1 to the TAA.

Facts

The proceeding mainly concerned the GST treatment of the sales of certain lots in a property development conducted by the taxpayer.  The taxpayer purchased land in 1997 and subdivided the land for sale, including:

• Lot 1 was sold for a sale price of $1.5m.  No contract of sale was produced, by the Settlement Statement showed that the amount of $1,655,981 paid on settlement which took place on 16 September 2004, which included the amount of $150,534 in respect of GST.  The taxpayer did not account for GST on this sale in its BAS.  After audit, the Commissioner issued an assessment increasing the GST by $150,543 to bring to account GST on the sale of Lot 1. The Commissioner also imposed penalties of 50% (reckless) which were remitted to 20%.
• Lot 9 was sold for a price of $1.5m.  The Settlement Statement showed that settlement took place on 1 November 2004 and GST of $150,000 was payable by the purchaser.  The taxpayer accounted for GST of $150,000 in its BAS. The Commissioner increased the GST payable from $150,000 to $151,778 to bring into account the adjusted sale price for Lot 9, rather than its sale price.
• Lot 6 was sold for $2,205,611 (excluding GST) in January 2006.  The taxpayer accounted  for GST on that sale price in its BAS. The Commissioner decreased the GST from $220,561 to $215,561 to reflect an adjustment of the price at settlement.
• Lot 10 was sold for $1,075,000 (excluding GST) in September 2006.  The Settlement Statement shows that GST of $107,966 was paid by the purchaser on settlement which took place on 31 October 2006.  The taxpayer did not account for GST in its BAS. The Commissioner increased the GST payable from nil to $102,481 on account of GST.  The Commissioner also imposed penalties of 50% (reckless) which were reduced to 20% and then remitted by 50%.
• Lot 8 was sold for $3.7m in October 2005 as a “going concern” and subject to a condition that the taxpayer would have a two year lease over the property commencing 6 December 2005.  The contract completed on 7 December 2005 and the purchaser became registered for GST on 1 January 2006.  On 31 March 2007 the taxpayer issued a tax invoice to the purchaser showing GST payable of $370,299.  The Commissioner increased GST payable from nil to $370,299 as the Commissioner rejected the taxpayer’s contention that the supply was GST-free as a going concern.  The Commissioner imposed penalties of 25% but the penalty was remitted in full.

The proceeding also concerned an acquisition of property (Lot 202) in December 2005 for $3.4m, settlement occurred on 23 December 2005.  On 21 March 2007 the taxpayer lodged a BAS for February 2007 in which it claimed input tax credits of $3.4m.  The Commissioner reduced the input tax credits to nil on the basis that he did not accept that the taxpayer was entitled to claim the credits.

The Tribunal

Three substantive matters were brought before the Tribunal:

• whether the taxpayer was entitled to “choose” to use the margin scheme for the sales of Lots 1 and 9, where that choice was made some two years after the taxpayer had worked out the GST payable on the supplies at the purchase price “plus” 10%
• whether the taxpayer had discharged its onus of demonstrating that the sale of Lot 8 was GST-free as the supply of a going concern
• whether the Commissioner was entitled to recover unpaid GST by operation of s 105-50 of Schedule 1 to the TAA – the taxpayer contended that the GST had ceased to be payable because the Commissioner had failed to give Cyonara a notice requiring it to pay GST – central to this contention was that the Notices of Assessment did not constitute valid notices by the Commissioner

Before the Tribunal the Commissioner conceded that the taxpayer was entitled to input tax credits for the acquisition of Lot 202.

The choice to use the margin scheme

The first thing to note is that Division 75 was amended in 2005, with effect that the parties must now agree in writing before the supply is made to use the margin scheme. The issue raised in the proceeding dealt with the provisions in force prior to that time, which allowed the supplier to “choose” to apply the margin scheme in working out the amount of GST payable on the supply.

The taxpayer’s contention was that the words “you may choose to apply the margin scheme in working out the amount of GST on the supply” should be construed so that the taxpayer retains this choice until the amount of the GST is “finally” worked out – this may be at the point of objecting to an assessment or during the course of a review of an objection decision before the Tribunal.

The Tribunal concluded that the scheme of the GST Act suggests that the time when a supplier would ordinarily “work out” the amount of GST on a taxable supply is the time of accounting to the Commissioner by lodging a Business Activity Statement which identifies the net amount for that tax period.  Accordingly, the choice to use the margin scheme must be made before the supply is made.

The going concern issue

The Tribunal found that the taxpayer had failed to establish, on the facts, each of the integers required by s 38-325 of the GST Act, for there to be a GST-free supply of a going concern.

The taxpayer contended that Lot 8 (which was partitioned into three units) was previously leased to entities which subsequently defaulted on the lease.  However, no evidence was put before the Tribunal that the leases were registered and only one of the three purported leases was put into evidence.  Oral evidence was given on behalf of the taxpayer, but the Commissioner contended that this did not discharge the taxpayer’s burden of demonstrating that it was carrying on a leasing enterprise prior to the sale of Lot 8. Further, the Commissioner contended that given the failure by the taxpayer to call witnesses the Tribunal should infer that such evidence would not have assisted the taxpayer: Jones v Dunkel (1959) 101 CLR 298.  The Tribunal found that such inferences should be drawn given the absence of appropriate witnesses and “perhaps, more importantly, critical documents”.

The Tribunal found that it was not satisfied that the taxpayer carried on a leasing enterprise at any time prior tot he day of supply.  The Tribunal recognised that the taxpayer was “at various times, attempting to obtain a tenant to take a lease but Cyonara did not suggest that the enterprise of leasing could be carried on by merely seeking to obtain a tenant”

The limitation issue

The Tribunal dealt with the limitation issue as a preliminary question ([2010] AATA 137).  The taxpayer contended that the Commissioner did not provide the taxpayer with a notice under s 105-50 within for years of the GST becoming payable.  Further, the Commissioner’s Notice of Assessment was not a “notice” because s 105-5 of Schedule 1 to the TAA provides that the liability to pay GST does not depend on, or is any way affected by, the making of an assessment.The Tribunal rejected this contention and found that the Notice of Assessment was a notice within s 105-50.

At the substantive hearing, the applicant raised an additional contention.  This was that because the Commissioner conceded that the taxpayer was entitled to input tax credits on the acquisition of Lot 202, the Notice of Assessment asserted an amount was payable which was incorrectly inflated by the amount of those credits.  Accordingly, while the Notice of Assessment was “capable” of being a notice for the purposes of s 105-50 of Schedule 1 to the TAA, it could not constitute a valid notice as it failed to require payment of the correct amount.  The taxpayer relied on principles found in the invalidity of bankruptcy notices.

The Tribunal rejected the taxpayer’s contention and relied on the principles derived from Walsh v Deputy Commissioner of Taxation (1984) 156 CLR 337 and Deputy Commissioner of Taxation v McCardle [2004] 2 Qd R 495 that the function of the notice is to inform the recipient of the amount of the debt then known by the Commissioner to be payable notwithstanding that the amount may change by reason of concessions made later by the Commissioner.  Accordingly, the validity of the notice was not affected by the Commissioner’s subsequent conduct of change position on the question of entitlement to input tax credits.

On appeal

The choice issue

The Court found that the Tribunal did not make an error of law in its construction to s 75-5.  As noted by the Court (at [93]:

Section 75-5 has a clear purpose of providing a supplier with a choice of a method of calculating or “working out” the amount of GST payable in making a taxable supply of real property that avoids the unfairness of the amount of GST being worked out on the whole of the supply price where no input tax credits arise on the upstream acquisition, with a view to providing for the calculation of the GST on only the margin as described at [36] of these reasons.  The section is directed to a facultative methodological calculation in making a taxable supply, if the taxpayer chooses to engage the calculus of the method when making the taxable supply.  The Tribunal correctly determined the construction of s 75-5.

And further at [95]:

Under the amended form of s 75-5, the use of the margin scheme must be agreed in writing between the supplier and the recipient of the supply.  The vice agreed by the amendment and the adoption of the new provision are consistent with an underlying notion that the margin scheme, if it is to apply, was and is to apply at least by the date of supply, being the date of settlement.  

The Court found that by the time the taxpayer lodged each BAS, it had well and truly completed “working out” the GST on each supply.  Also, in effect, the taxpayer was now seeking to apply the margin scheme with the result that a lesser sum will be payable to the Commissioner notwithstanding that on settlement the taxpayer received from the buyer an amount of GST calculated by supplier on the whole of the purchase price.

The going concern issue

The Court noted that the difficult confronting the taxpayer in the appeal (which is restricted to errors of law) was that the Tribunal was not persuaded on the balance of probabilities that the taxpayer had leased Lot 8 prior to the sale.  The reasons for this included the failure of the taxpayer to put the executed lease into evidence.  The following extract from the Court’s judgement (at [105]-[106]) shows the importance of providing contemporaneous documents and the difficulties faced by taxpayers when relying solely on oral evidence:

There were a number of reasons identified by the Tribunal in its exposed reasons for decision, and they included the failure, at the most fundamental level, of Cyonara to put the executed lease into evidence.  The executed lease is the best evidence of the contended document that is said to go to the foundation of its leasing enterprise.  Mr Smits gave oral evidence of the lease, the arrangements with Mr Hastings, the conversation (in or about December 2004 it seems) for Solartech’s surrender of the premises on 6 December 2005 and the surrounding contextual circumstances.

The Tribunal, however, is not bound to accept Mr Smits’ evidence as determinative of the question in issue and Cyonara cannot necessarily discharge its persuasive burden by Mr Smits simply “swearing the issue”.  The proof of the issue is made good in discharge of the dispositive burden by Cyonara adducing evidence that satisfies the Tribunal, on the balance of probabilities, that such a lease was entered into, for the relevant term, on particular conditions….

Also, in response to the taxpayer’s contention that it was not required to corroborate uncontradicted evidence and that, as a matter of law, a director’s evidence on the questions in issue is necessarily dispositive of the taxpayer’s burden in the absence of contradictory evidence adduced by the Commissioner, the Court said as follows (at [107]):

The discharge of Cyonara’s burden before the Tribunal is not made good simply as a function of the director giving oral narrative of a contended fact (without producing to the tribunal of fact the central document that speaks to critical aspects of the matter in  issue), on the contended footing that oral narrative evidence must be persuasive because the Commissioner has not adduced evidence to contradict the director’s oral evidence.

The Court rejected the taxpayer’s appeal on this issue and found that the contentions rose no higher than an attempt to re-agitate the merits of the factual findings made by the Tribunal.

The limitation issue

The taxpayer’s appeal was limited to the question of whether the Tribunal was correct in finding that the Commissioner’s overstatement of the Notice of Assessment rendered the notice invalid.  Nevertheless, the Court found that the submissions put by the taxpayer sought to re-agitate the question raised before the Tribunal on the preliminary question (namely whether the Notice of Assessment should be characterised as requiring payment of unpaid GST within the meaning of s 105-50(3)).  The Court found that this issue was not properly before it.

As to the issue of the effect of overstatement in the Notice of Assessment, the Court made the following observations:

• the Commissioner makes an assessment and gives notice, acting in good faith and in discharge of his statutory functions.  The taxpayer may contend, and seek to demonstrate on the balance of probabilities, that the assessment in relation to one or more taxable supplies or creditable acquisitions in the relevant tax period is “excessive”
• the Commissioner may amend the assessment because of further facts that emerge, either by the Commissioner exercising is compulsory information gathering powers or the taxpayer providing further information
• it would be an odd result if a Notice of Assessment (and thus a notice for the purposes of s 105-50) was rendered invalid in respect of every aspect of its content at the date of issue, by reason of the Commissioner’s assertion in the notice of assessment that an amount of unpaid GST was payable which is later shown not to have been payable at the issue date, or is otherwise conceded by the Commissioner, at a later date, not to have been payable at the date of issue

The Court found that the overstatement of the net amount in the Notice of Assessment (by reason of the later concession as to input tax credits) did not render the notice invalid for the purposes of s 105-50.  There is nothing in the statute to suggest such an outcome.

The Court rejected the taxpayer’s contention that, as a matter of construction of s 105-50(3), the notice of a requirement to pay the amount of any unpaid GST must necessarily mean notice to pay the correct amount of any unpaid GST and , like a bankruptcy notice issued under the provisions of the Bankruptcy Act 1966, a failure to recite a claim in the notice for the correct amount owing, renders the notice invalid.  The Court rejected this analogy on the basis that the Bankruptcy notice acted as final judgment or final order, whereas a notice of assessment is subject to the objection process.

Notices of Motion

The first Notice of Motion was for a declaration that any GST payable in relation to Lots 1 and 10 is not recoverable because of the operation of s 105-50 of Schedule 1 to the TAA.  The Court agreed with the Commissioner that the Notice was inappropriate and should be dismissed because the taxpayer had filed an application for review to the Tribunal.

The taxpayer filed review proceedings pursuant to s 5 of the Administrative Decisions (Judicial Review) Act 1977 challenging the decision of the Tribunal on the preliminary question re the construction of s 105-50.  The Commissioner filed a Notice of Motion seeking the dismissal of these proceedings.  The Court proceeded on the ground that the issues raised in the Review Application and the substantive appeal would be heard together, and on that basis considered the question of whether the Tribunal erred at law in adopting its construction of s 105-50 in the preliminary question.

After reviewing the scheme of Part 3-10 of Chapter 3 to Schedule 1 of the TAA, in conjunction with the GST Act, the Court found that a liability to pay arises under the GST Act and the provision of a Notice of Assessment operates as a “notice” by the Commissioner of his or her requirement that the taxpayer pay to the Commissioner on behalf of the Commonwealth the net amount of any unpaid GST – thus the Notice of Assessment operates as a notice for the purposes of s 105-50(3) so as to displace the prohibition otherwise arising under s 105-50(1).  The Court saw no error of law in the Tribunal’s construction.

Concluding thoughts

This proceeding raised a number of complex issues, all of which were found in favour of the Commissioner.

With regards to the margin scheme issue, one can see the reasoning behind requiring the supplier to make the choice to apply the margin scheme prior to the supply being made. The point being that there should be finality to the GST consequences at the time the taxpayer comes to complete its BAS.  This is consistent with the following observations of the Full Federal Court in Commissioner of Taxation v Multiflex Pty Ltd [2011] FCAFC 142 at [25] (this decision was handed down after the Full Federal Court had reserved its decision in this case:

Not only does s 17-15(1) provide that the amount “worked out”on the approved form is treated as the entity’s net amount for a period but s 17-15(2) also underscores the primacy of the amount so worked out by providing that the section has effect despite s 175.

With regards to the going concern issue, the case illustrates the evidentiary burden placed on taxpayers in proceedings before the Tribunal.  It is usually very difficult to succeed where reliance is placed on oral evidence – it is the production of contemporaneous documents which usually carries the day.

Finally, the limitation point was an interesting one.  In my view, the Tribunal and the Court were correct. If not, even a partial success in objecting to a Notice of Assessment  (or a partial concession by the Commissioner), would have the effect of invalidating the entire Notice of Assessment for the purposes of s 105-50, and potentially causing the entire GST liability to fall away if more than four years had passed.