In Bryxl Pty Ltd as Trustee for the Kypu Trust and Commissioner of Taxation  AATA 89 the Tribunal found that the taxpayer did not establish that it was carrying on an enterprise of land development and was entitled to input tax credits in respect of certain acquisitions.
The Tribunal observed that the documents provided by the taxpayer were unsatisfactory, some were incomplete, some simply absent and some appeared to be inconsistent with statements made to the ATO in the course of discussions following assessment. Given that the onus falls to the taxpayer to show that an enterprise was being carried on, in light of these observations the taxpayer faced a difficult task.
In particular, a critical issue appeared to be the circumstances in which the taxpayer purportedly purchased the land which was to be subdivided and sold. The taxpayer only put parts of the contract of sale into evidence, and those parts were did not support what was said in oral evidence before the Tribunal. Further, there was no objective evidence of any deposit being paid or that settlement ever took place. The title search produced by the Commissioner showed that the land remained in the name of the vendor. The Tribunal also found that the taxpayer could not raise the purchase price.
The Tribunal concluded that until such time that the land was conveyed to the taxpayer, it could not have commenced an enterprise involving the subdivision of that land. The Tribunal’s conclusion was as follows (at ):
The evidence in this case regarding Bryxl conducting a business or enterprise involving the subdivision and sale of land discloses that while Bryxl may have had the intention to carry out such a business or enterprise, the steps it undertook in obtaining a planning permit and a market valuation cannot properly be described as being steps taken in the course of commencement of an enterprise. Until such time as it acquired the right to deal with the land in such a way that subdivision and sale could occur, it is artificial to suggest it was conducting the enterprise involving the subdivision and sale of land. The steps taken were clearly precursors or preparatory to the possible commencement of business, whether that be subdivision of the land or a quick sale to a syndicate of buyers.
The Tribunal also found that the Commissioner had properly cancelled the GST registration of the taxpayer and affirmed the Commissioner’s imposition of penalties on the basis that the taxpayer was reckless.
In Cronan and Commissioner of Taxation  AATA 745 the Tribunal has found that the ebay activities of the applicant were sufficient to constitute an enterprise and that the applicant was liable for GST (and also for income tax).
The decision is a reminder for those persons who transact with any sort of regularity on a site such as ebay, as reflected in the following observations of the Tribunal:
It seems the Applicant has misunderstood the legal position in regard to his circumstances. In particular the Applicant has allowed the situation regarding his eBay activities to proceed without giving proper consideration as to whether he is subject to income tax with respect to the profits on his trading and GST on his sales.
These are fundamental matters which anyone who transacts with even a small degree of regularity must turn their minds to.
In determining whether the applicant was carrying on an enterprise, the Tribunal considered the following “critical factors”:
- the applicant had a clear commercial objective to make a profit
- it could not be said that the trading activities could have had the character of a recreational pursuit or hobby
- the contention that the applicant lost money on many items sold does not preclude a finding that he was engaged in carrying on a business
- that he did not pay “wholesale” prices afforded to dealers does not require that he was not carrying on a business
- the trading activities were carried on in a commercial or business-like manner
- the trading activities were characterised by repetition and regularity
- the activities were carried out on a commercial scale.
The decision is also a reminder for persons to retain documents and records. In this case, the Commissioner issued default assessments based on industry benchmarks (which the Tribunal observed were second best estimates), but in the absence of contemporaneous records the applicant was unable to show what the actual assessments should be.
In Guru 4U and Commissioner of Taxation  AATA 740 the Tribunal has found that the applicant was not carrying on an enterprise. The Tribunal found that the taxpayer had intended to start an enterprise but had not yet done so. Accordingly, the Commissioner was required to cancel its GST registration and it was not liable to pay GST and not entitled to input tax credits.
The applicant contended that its main business activity was “lifestyle counselling and advisory services”. The applicant was incorporated on 25 November 2010 and it lodged BASs for the quarterly tax periods from October-December 2010 to April-June 2012. Each of the BASs claimed input tax credits and three reported a liability for GST, although in each case the applicant was in a refund position. In total the Commissioner paid refunds of $9,678 to the applicant.
The Tribunal found that the applicant was a corporate vehicle set up by its controller for his family to conduct activities in the future, but that it had not yet started to do so. Further, any activities during the relevant period were conducted by the controller personally. The Tribunal was also not satisfied that the applicant had made the acquisitions claimed, and that the mere assertion that administration services were provided is not persuasive, in the absence of independent evidence.
In finding that the applicant was not carrying on an enterprise, the Tribunal observed that the commencement of the enterprise is not necessarily the same thing as taking a step in preparation for such commencement: referring to Russell v Federal Commissioner of Taxation  FCAFC 10; (2011) 190 FCR 449 at 465, . The Tribunal also observed that the intention of the taxpayer is a relevant, but not determinative, consideration.
The Tribunal concluded as follows (at -):
It is plain from the above findings that the Company intends to carry on an enterprise in the future when the family members are ready. It is also the case that some initial steps have been taken in the Relevant Period…to prepare the Company for the commencement of activities, but they are very preliminary.
I have concluded that the promotional activities undertaken in the Relevant Period, including the uploading of a video on a YouTube channel about the Company’s plans and the establishment of a website, did not demonstrate that these steps were done “in the course of the commencement … of the enterprise”, which is the expanded meaning of enterprise by virtue of the definition of “carrying on” in s 195-1 of the GST Act. They were merely preparatory steps to advertise and showcase Guru 4U, and the enterprise had not commenced by June 2012.
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  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 : 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 : Identifying whether an “enterprise” is carried on involves a lower standard than identifying whether a “business” is carried on.
- At : 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 -: 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 -: 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 : 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.