Australia: Lance v Commissioner of Taxation [2024] AATA 11: GST on sale of property

Lance v Commissioner of Taxation (Taxation) [2024] AATA 11 (Lance)

In Lance, Mr Paul Lance (Applicant) contested the Commissioner's decision that the Applicant was required to pay goods and services tax (GST) on the sale of his property in Western Australia, known as 'Sutton Farm & Graveyard' (Sutton Farm).

The Commissioner's decision was based on his view that the sale of Sutton Farm was a "taxable supply" for the purposes of the A New Tax Sydney (Goods and Services Tax) Act) (GST Act).

The Applicant disputed the Commissioner's decision on two grounds:

1. The sale of Sutton Farm was not a "taxable supply" as it wasn't made "in the course or furtherance of an enterprise" carried on by the Applicant; and
2. Sutton Farm was the Applicant's "residential premises" and was therefore, an "input taxed" supply under s 40-65(1) of the GST Act which doesn't attract GST.

At the hearing, the Applicant dropped his second argument because Sutton Farm couldn't be a "residential premises" because it was incapable of being occupied through shelter and basic living facilities.

Background facts

The following facts are relevant to the issues in the case:

• The Applicant purchased Sutton Farm, 1.47 hectares of land, for $1.6m on 13 June 2013. It contained Victorian Georgian style structures and a graveyard of cultural historical significance.
• To enable him to afford Sutton Farm and subsequent development works, the Applicant sold another property he owned. He also took out a $1m loan from a bank and borrowed $1.5m from his brother in-law, which he characterised as "helping family" – not a "commercial arrangement."
• Various articles were written about the purchase of Sutton Farm, including the Applicant's plans to commercialise Sutton Farm through a restaurant, wine bar etc.
• The Applicant argued that whilst he was initially an "excited purchaser," his true intention was to subdivide the land into four lots, where he and his wife would live on one, his daughter and son would each receive one, and the fourth would be a memorial for his deceased child.
• Sutton Farm was initially zoned "Tourist." The Applicant rezoned it to "Special Use" in March 2016, to allow him to renovate and live in it.
• The Applicant encountered significant hurdles, such as navigating the heritage site requirements, and a requirement for a walkway to be built for pedestrian access to the heritage site.
• In September 2017, the Local Development Plan was approved by the City of Mandurah Council allowing for the creation of a single residential lot in the centre of Sutton Farm.
• In 2018, a further subdivision application was provisionally approved, subject to the Applicant undertaking significant capital works expenditure, including for the pedestrian access.
• The Applicant claimed the input tax credits on the capital works, which at objection he stated was correct, but at hearing argued they were incorrectly claimed as he was confused at the time.
• After attempting to sell Sutton Farm in 2017, where it was marketed as being available for various commercial uses, the Applicant eventually sold Sutton Farm in 2021 for $4,250,000, excluding GST.

GST Law

GST is payable on "taxable supplies".¹ Entitlements to input tax credits arise on creditable acquisitions.²

You make a "taxable supply" if the supply is made for consideration in connection with Australia and "in the course or furtherance of an enterprise" carried on by the taxpayer.³ A taxpayer must pay the GST payable on any "taxable supply" made.⁴

A supply is not a "taxable supply" to the extent it is "GST-free" or, relevant in this case, "input taxed". If a supply is "input taxed," then:⁵

• No GST is payable on the supply; and
• The taxpayer is not entitled to input tax credits for purchases involved in the supply.

You make a "creditable acquisition" if you acquire anything at least partially for a "creditable purpose," meaning it is acquired in the course or furtherance of carrying on of an enterprise.⁶

An "enterprise" is an activity or series of activities done in the form of a business, or in the form of an adventure or concern in the nature of trade. It excludes activities done by an individual without a reasonable expectation of profit or gain.⁷

It has been accepted at common law that "enterprise" is to be construed very broadly.⁸

Applicant's position

The Applicant argued that Sutton Farm was not a commercial enterprise because it was his home, and that even though he had initial ideas for development, ultimately: ⁹

[t]he end goal was for myself and my wife to retire and live in Sutton Farm with a portion of the land given to my son and daughter respectively.

He maintained that the subdivision was for himself and that if he intended to sell the land for profit, he would have subdivided the land into further lots and sold them individually.

The Applicant also contended that he was required to undertake an exhaustive list of work to satisfy the various stakeholders, which whilst giving the impression of commerciality, was merely a realisation of the property.

The Applicant further argued that he "carried out development on the Property without the expectation of making a profit," and that while he made a profit on the sale of Sutton Farm, he only sold it reluctantly because he was tired of dealing with the council and the stress was affecting his health.

Tribunal decision

The Tribunal found that the Applicant was not a reliable witness, and that he had always contemplated the commercialisation of Sutton Farm.

The Tribunal drew attention to the Applicant's written statement to the ATO in June 2021 (June Statement), and his objection letter to the ATO in February 2022, where he expressed that he intended to subdivide and sell parts of Sutton Farm to repay his loans and pay for developments on Sutton Farm.

Whilst the Applicant later disputed this at the hearing, the Tribunal felt this revealed that the Applicant's real intention was always to subdivide and sell off some of the property to allow him to fund the building of his home and pay off loans.

The Tribunal compared this to Example 29 in the ATO's , where an individual who purchases land with the idea of building a duplex and selling one of the units to allow him to afford it, is viewed as "carrying on an enterprise" for GST purposes.

The Tribunal also found the Applicant's credibility to be undermined by the fact he failed to mention his plans in the June Statement to give each of his children a lot.

Whilst the Applicant argued he didn't intend to write what he wrote in the June Statement, as he was under stress, the Tribunal disagreed, finding the June Statement to be "a more authentic account of events as it is coherent with other contemporaneous documents."¹⁰

The Tribunal ultimately took the view that the development works were in the form of a business, especially when considering the scale of the operations through the rezoning, subdividing, development applications, and various capital works.

The Tribunal also disagreed that the sale was a mere realisation of property, as there was substantial value added to the property.

The Tribunal concluded that "[The Applicant] engaged in an enterprise of developing Sutton Farm to enhance its value and make a profit by way of selling Sutton Farm as subdivided lots."

Takeaways

Lance case is an important reminder of the broad interpretation of the term "enterprise" and the phrase "carrying on an enterprise" under the GST Act, which is substantially broader than the income tax concept of "carrying on a business." It also demonstrates how a Tribunal will assess a taxpayer's activities prior to the sale of land, to form the view as to whether a taxpayer was "carrying on an enterprise," and had the requisite profit making intention. When selling a property, a taxpayer should have a thorough understanding of how the GST law operates to prevent the sale from being a "taxable supply" for GST purposes.

Footnotes

¹ Section 7-1(1) of the GST Act.

² Section 7-1(2) of the GST Act.

³ Section 9-5 of the GST Act.

⁴ Section 9-40 of the GST Act.

⁵ Section 40-1 of the GST Act.

⁶ Section 11-15(1) of the GST Act.

⁷ Section 9-20 of the GST Act.

⁸ Commissioner of Taxation v Swansea Services Pty Ltd [2009] FCA 402, McKerracher J at [66].

⁹ Lance Case paragraph 69.

¹⁰ Lance Case paragraph 77.

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