Criterion Prestige Pty Ltd and Commissioner of Taxation
[2015] AATA 468
•30 June 2015
[2015] AATA 468
Division Taxation Appeals Division File Number
2014/3372
Re
Criterion Prestige Pty Ltd
APPLICANT
And
Commissioner of Taxation
RESPONDENT
DECISION
Tribunal Senior Member Bernard J McCabe
Date 30 June 2015 Place Brisbane The decision under review is affirmed.
........................................................................
Senior Member Bernard J McCabe
CATCHWORDS
TAXATION – purchase of Lamborghini – no luxury car tax paid upon purchase – increasing luxury car tax adjustment – administrative penalty imposed – purchase of vehicle was not a creditable acquisition – vehicle was not purchased as trading stock – applicant was not carrying on a business – applicant reckless in respect of tax shortfall – reviewable decision affirmed.
LEGISLATION
A New Tax System (Goods and Services Tax) Act 1999 (Cth) ss 9.20; 11.5; 11.15
A New Tax System (Luxury Car Tax) Act 1999 (Cth) s 9.5
Taxation Administration Act 1953 (Cth) s 14ZZK; Sch 1, s 284-75
CASES
McClelland v Federal Commissioner of Taxation (1970) 120 CLR 487
Federal Commissioner of Taxation v Whitfords Beach Pty Ltd (1982) 150 CLR 355
Federal Commissioner of Taxation v The Myer Emporium Ltd (1987) 163 CLR 199
Federal Commissioner of Taxation v Suttons Motors (Chullora) Wholesale Pty Ltd (1985) 157 CLR 277
REASONS FOR DECISION
Senior Member Bernard J McCabe
30 June 2015
This is a tale about a doctor, a Lamborghini, and the Commissioner of Taxation.
On the applicant’s telling, a successful but frustrated surgeon decided to fulfil a boyhood dream of entering the motor trade. He set up the applicant company and became a registered motor dealer. The company commenced business with the purchase of a Lamborghini for the purposes of resale to any one of a network of wealthy professional acquaintances. As a dealer, the company was not required to pay the luxury car tax at the time of purchase, but would eventually pay it when the car was sold. The company was also able to claim input tax credits in its quarterly business activity statement (BAS).
But the car proved hard to sell. Then the Commissioner of Taxation became involved.
The Commissioner doubted the applicant was a genuine dealer. The car was sold at a loss, the luxury car tax was paid, the applicant’s registration for Goods and Services Tax (GST) was cancelled, and the fledgling business was stymied.The Commissioner tells the story differently. He sees it as nothing more than a plot to obtain a cheap Lamborghini. The Commissioner argues the final chapter should include penalties.
I must consider the different factual accounts and address three issues in order to resolve these proceedings. Firstly, I must be satisfied the purchase of the Lamborghini was a creditable acquisition as defined in Division 11 of the A New Tax System (Goods and Services Tax) Act 1999 (“the GST Act”). Secondly, I must be satisfied the applicant acquired the Lamborghini as trading stock pursuant to Division 9 of the A New Tax System (Luxury Car Tax) Act 1999 (“the LCT Act”). If am not satisfied as to those matters, I must consider the question of administrative penalties, which the Commissioner has assessed at the rate of 50 percent of the tax shortfall.
Background to the transaction
Dr Julian Hirst is a successful medical practitioner. He said he has been interested in luxury cars for approximately 30 years: exhibit 3.1 at [2]. Indeed, in cross-examination, he said he recalled hanging around car dealerships (he referred in particular to a Ferrari dealership) as a boy. As an adult, he said he has developed a detailed understanding of vehicle specifications and pricing within the luxury car market: exhibit 3.1 at [2]. In due course, he came to own some of the luxury cars he admired. But in more recent times, he said he found a way to turn his passion into a small business.
Dr Hirst said he saw an opportunity in 2012 to trade profitably in new and used luxury motor vehicles. He believed he could identify and approach distressed sellers of luxury cars and acquire the vehicles at a low price. He would then sell them at a higher price to ‘high net worth’ individuals within his network of acquaintances. His marketing strategy also contemplated promotion through social media and the internet, displays at luxury vehicle collector exhibitions, and accessing collector networks. He said he did not plan on dealing in a large number of vehicles: he wanted to focus “on the…specialist low volume market for luxury vehicle buyers, both local and interstate” exhibit 3.1 at [4].
He anticipated his business would have low overheads. He said he would not need a large car yard, service facilities, staff or large amounts of stock.In 2012, Dr Hirst approached his accountants for advice about his idea. Mr Andrew Taylor, the principal of that firm, gave evidence at the hearing and provided two statements. In his oral evidence, he said Dr Hirst seemed to have a good knowledge of the industry and was serious about the business venture he proposed. Mr Taylor agreed he usually tried to steer his clients away from unlikely business investments:
I understood him to agree that a business venture of this nature was, at first glance, an unlikely prospect for a successful surgeon. But Mr Taylor insisted he was satisfied
Dr Hirst seemed to know what he was doing, and appeared to be serious about the venture. Mr Taylor said he thought Dr Hirst’s idea made sense, by which, I assume,
Mr Taylor meant it made commercial sense.Mr Taylor recalled (in his oral evidence) that he discussed Dr Hirst’s plans for the proposed business when Mr Taylor’s firm was first approached for advice in 2012. In his statement (exhibit 3.3), Mr Taylor said he advised Dr Hirst that the business should be operated by a company, and that it should be registered for GST (at [4] and [6]).
They discussed marketing ideas. Mr Taylor also recalled advising Dr Hirst about the operation of the luxury car tax. During cross-examination, Mr Taylor recalled telling
Dr Hirst that the luxury car tax would be waived if the vehicle was unsold after two years. Mr Taylor confirmed he provided that advice before the company was registered.
I note Dr Hirst said during cross-examination that he first learned about the detail of the operation of the luxury car tax from Mr Taylor.Mr Taylor’s firm did not provide any written advice – none has been produced, at any rate – which seems unusual. A copy of the invoice recording Mr Taylor’s (modest) charge for providing the oral advice and establishing the applicant company was attached to Mr Taylor’s statement (annexure A to exhibit 3.1).
The applicant company was registered in due course. Dr Hirst was the sole shareholder and officer of the company. It was registered for GST and the luxury car tax as of 10 December 2012: exhibit 3.1 at [10].
Dr Hirst commenced a motor dealer registration course in September 2012. He was required to complete an online course of study on aspects of the industry and pay the required fees. He completed the course in December 2012, according to his statement (exhibit 3.1 at [8]). It is unclear whether he immediately applied for formal registration as a dealer. In any event, he was registered as a dealer on 15 March 2013. His certificate is attached to his statement. The applicant company was also registered as a dealer in March 2013. Dr Hirst said in his oral evidence that he had been using an online service that suggested marketing ideas for small businesses.
Events moved quickly once Dr Hirst and the applicant were registered. In his statement, Dr Hirst said that in March 2013 he became aware of a Lamborghini Gallardo LP550-2 Coupe that was for sale at what Dr Hirst believed was a discounted price. In his statement, Dr Hirst explained this particular Lamborghini was attractive because:
To my knowledge, the LP 550-2 was going to be a unique rear-wheel drive Gallardo which would be the last rear-wheel drive Lamborghini and possibly the last naturally aspirated Lamborghini with the replacement car, the Cabrera, being rumoured at the time to be either supercharged or turbocharged. I thus expected the Gallardo LP 550-2 to increase in value similar to the Maclaren F1 and the Ferrari F40.
The Lamborghini in question (“the Gallardo”) was being offered for sale by Lamborghini Brisbane for $461,387 (the drive away price, which included all government charges – including the luxury car tax – and transfer fees). Dr Hirst said in his oral evidence that he thought the vendor might be a willing seller because the vehicle had been sitting in the showroom for some time. (In his statement, Dr Hirst suggested he was acquiring the vehicle from a “distressed vendor”, but there was no evidence Brisbane Lamborgini was “distressed”.)
It is at this point that the details become unclear. Dr Hirst’s statement says he became aware of the Gallardo in March 2013 (exhibit 3.1 at [12]), whereas Mr Giammattei, the Lamborghini sales manager, recalls Dr Hirst discussing the Gallardo during a visit to the showroom at the end of 2012 (exhibit 3.7 at [2]). Mr Giammattei said Dr Hirst was accompanied by a friend on that occasion. Mr Giammattei recalled Dr Hirst asked some questions about the vehicle but did not take it for a test drive. Mr Giammattei said
Dr Hirst asked, “What do I need to buy this car as a dealer?” Mr Giammattei provided information about the necessary paperwork. Dr Hirst then said he would not buy the vehicle until he obtained a dealer’s licence. Mr Giammattei said in his statement that he only learned the purchaser of the vehicle would be the applicant company when Dr Hirst returned in March 2013 (exhibit 3.7 at [6]).
Mr Giammattei seemed clear about the timing of the first enquiry from Dr Hirst because Mr Giammattei said he followed up on the initial conversation in December 2012 by telephone on several occasions. He said Dr Hirst indicated he was ready to buy the vehicle in early March 2013, at which point Dr Hirst took the vehicle for a test drive, produced his dealer’s licence and quoted his Australian Business Number (ABN).
In the course of his oral evidence, Mr Giammattei appeared to have a good recall of his conversation (or conversations) with Dr Hirst in relation to the transaction.
The conversation included an explanation of the servicing regime, which included a service each year, or every 15,000 km. It is unclear why the salesman would discuss the servicing regime with someone who proposed buying the vehicle as a dealer with a view to promptly on-selling it. Mr Giammattei also recalled Dr Hirst asking questions about insurance. Mr Giammattei said they were the same questions that any purchaser would ask about a car they were acquiring for their own use. He did not recall Dr Hirst asking any questions about insurance issues that were relevant to dealers. Mr Giammattei said he provided the same information about insurance options that he provided to all purchasers. Mr Giammattei denied they discussed the need to drive the cars on display on occasion to make sure their batteries did not go flat. He also insisted in his oral evidence that Dr Hirst did not ask questions about the way dealers conducted test drives and dealt with prospective purchasers – although I note he said in his statement (exhibit 3.7
at [9]-[10]) that:
[Dr Hirst] asked how we marketed our cars to prospective customers. He asked whether we offered prospective customers a test drive straight away. I told him that a part of my role involved identifying realistic prospective customers, rather than individuals who just wanted to take a nice car for a test drive.
[Dr Hirst] asked how we went about advertising our cars for sale. I told him that we generally put all of our cars on carsales.com.
Dr Hirst had a different recollection of what he said was the first meeting in relation to the Gallardo. In his statement, he said that meeting occurred in March 2013, although his oral evidence appeared to leave open the possibility of an earlier meeting and conversation. Dr Hirst said he was unsure if he disclosed the existence of the applicant company at that meeting, but said he did ask a lot of questions about the sales process – which included detailed questions about test drives and insurance issues relevant to dealers. He also said he recalled discussing the need to periodically drive the vehicles on display. He resiled somewhat from that assertion during cross-examination. When pressed over his recollection of this aspect of the conversation, he said he was generally aware that cars needed to be moved around and started and test driven. He was less certain that Mr Giammattei was the source of that advice. He insisted he did not recall
Mr Giammattei saying it was only necessary to connect the car to a battery charger while it sat in the showroom (see exhibit 3.7 at [20]-[21]). Dr Hirst said he went away after the meeting and looked into insurance options.
I do not accept Dr Hirst’s account of the timing of the first meeting in relation to the vehicle. The decision to purchase was made on 11 March 2013 when Dr Hirst paid a deposit of $20,000 on the vehicle: annexure F to exhibit 3.1. I note Dr Hirst used his personal credit card to pay the deposit (exhibit 3.1 at [18]). He said the company had a bank account but it did not have any money. It seems unlikely he would have made a snap decision to purchase the vehicle. On his own account, he took some time after the first meeting to look into insurance options. I am satisfied it is more likely that Dr Hirst identified the car and met with Mr Giammattei sometime before the meeting in March 2013 which resulted in a sale. That conclusion is supported by the evidence of
Mr Giammattei, who explained he met with the applicant in December 2012 and then followed up over the next few months with further enquiries that culminated in a test drive and a sale in March 2013.
After Dr Hirst paid a deposit on 11 March 2013, the applicant company entered into an agreement to acquire the car through a finance company from Brisbane Lamborghini on 28 March 2013. The purchase price was $335,500 which included $30,500 for GST. There was no provision for luxury car tax because the applicant quoted its ABN and claimed it was acquiring the vehicle as trading stock for the purpose of resale in the course of its business. A copy of the invoice recording details of the sale is annexure E to Dr Hirst’s statement (exhibit 3.1). The chattel mortgage agreement with BMW Financial Services is reproduced at annexure G to that statement. It is signed by Dr Hirst for the applicant.
The terms of the chattel mortgage were produced under summons from the financier: that document is found in exhibit 2.1 at p 64 ff. The chattel mortgage facility was expressed to be for a two-year term (exhibit 1 at 58). That is surprising, given the vehicle was supposedly acquired for the purposes of resale. I also note clause 3.2(g)(ii) of the Agreement includes an acknowledgment that “the Goods…will not form part of the Borrower’s inventory” (exhibit 2.1 at p 68). Dr Hirst said in his statement that the financier knew the vehicle was to be used as trading stock. He said the financier was told the vehicle was likely to be resold before the end of the finance period, but it had indicated the facility could be simply rolled over as additional vehicles were bought and sold by the applicant. Dr Hirst added that the applicant had little choice in relation to finance as it had no trading history and needed the money (exhibit 3.1 at [19]-[20]).
The terms of the chattel mortgage agreement clearly suggest the applicant was not buying the vehicle for the purposes of resale. While it is not impossible the financier might have agreed to waive some of the terms and indicated it was prepared to accommodate the applicant’s business needs, I would have expected to be provided with evidence to that effect from the financier. The fact I was not provided with that evidence tends to suggest the agreement should be interpreted as meaning what it says.
Dr Hirst takes delivery of the vehicle
Insurance on the vehicle was arranged with effect from 28 March 2013 (see annexure I to exhibit 3.1). Curiously, the confirmation of cover document provided by the broker (exhibit 2.1 at pp 229-230) refers to Dr Hirst rather than the applicant as ‘the insured’, although I note the application for cover records the applicant as the registered owner of the vehicle: exhibit 2.1 at p 220. (The application document also says the vehicle was being acquired for business purposes, and would be used twice a week or less.) In any event, the policy covered Dr Hirst as driver, but no one else. That was an issue for test drives. Dr Hirst said the cover was not as wide as he wanted in order to carry on his business, but it was all he could arrange in the short term (exhibit 3.1 at [24]). In June 2013, the applicant arranged for public liability cover in its own name of the garage attached to Dr Hirst’s home where the vehicle was stored: see annexure J to exhibit 3.1. On 20 September 2013, the applicant was able to secure more extensive insurance coverage in respect of testing and delivery: see endorsement to insurance policy at exhibit 2.2 at p 464. The applicant took out a new policy on 1 November 2013 that explicitly covered test drives. Even then, it was a condition of the insurance policy that Dr Hirst be the driver. Prospective purchasers were not permitted to drive: exhibit 2.2 at p 587. Dr Hirst confirmed in cross-examination that he never sought insurance coverage that would have permitted prospective purchasers to test-drive the vehicle.
The Commissioner’s counsel, Mr Brennan, suggested genuine purchasers of such a vehicle were unlikely to proceed with a purchase unless they had the opportunity to drive the vehicle themselves. Mr Brennan argued the test drive arrangements tended to confirm the applicant was not operating a bona fide dealership. I am not so sure. I recounted to the parties my own recent discussion with a dealer who said around 30 percent of his well-heeled clients did not take the vehicle for a test drive before completing the purchase. Given I was one of the 30 percent the dealer referred to, I do not find the applicant’s case on this point as incredible as the Commissioner suggests.
Dr Hirst’s home included a semi-detached garage that he thought was suitable for display and storage purposes. A floor-plan of the home was included at p 618 of exhibit 2.2. There was no external signage suggesting it was the applicant’s place of business, although that might not have been allowed under council regulations in any event.
Dr Hirst had purchased a banner sign bearing the applicant’s name and corporate logo which hung over the vehicle. Pictures of the banner hanging over the vehicle in the garage are reproduced in annexure H to Dr Hirst’s statement.It emerged during cross-examination that Dr Hirst had purchased his home in around 2011. He said he was particularly attracted to the home because of the garaging arrangements. The garaging arrangements were no accident, according to Dr Hirst: he said the house had been built by a prominent Brisbane car dealer. The pedigree of the house was part of its appeal. That evidence (along with his claim during
cross-examination that he had frequented the local Ferrari dealer as a child to look at the cars and watch the salesmen at work) was apparently led with a view to depicting
Dr Hirst as – to use the vernacular expression – a “motor trade tragic” who loved the idea of being a car dealer. I do not use that language to trivialise the submission: I think that expression is the best way of describing the thrust of the applicant’s case. Dr Hirst explained in cross-examination that he came from a medical family, and that he was always expected to study medicine, even though his real love had always been motor vehicles and the motor trade. He stressed during cross-examination that he did not just enjoy luxury cars: he said he was fascinated by the motor trade. He also said, in effect, that his professional life was boring: although he is apparently a skilful surgeon with a successful practice, he indicated the work was not especially fulfilling. He also referred to spending long hours at work and dissatisfaction in his personal life. He agreed that owning and driving a luxury car was one way of escaping his frustrations, but he insisted the idea of dealing in cars was an essential part of what he was doing. He emphasised the vehicle in question was not purchased for personal use.
Mr Taylor visited Dr Hirst at home in April 2013. Mr Taylor said in his supplementary statement that he inspected the garage where the vehicle was housed during the course of the visit (exhibit 3.4 at [9]). He said it was common for him to meet clients at the premises of a new business to provide advice and develop an understanding of the business and its needs. In the statement, and in his oral evidence, Mr Taylor recalled offering advice about record-keeping requirements and taxation issues during the course of the visit: exhibit 3.4 at [9]. In his oral evidence, Mr Taylor recalled Dr Hirst speculating on the price he might secure for the vehicle on resale. That information was apparently used to calculate the expected liability for the luxury car tax when it was ultimately paid. Mr Taylor recalled seeing the banner displaying the applicant’s corporate logo hanging above the vehicle.
Dr Hirst took Mr Taylor for a test drive during the course of the visit. They did not go far, and Mr Taylor did not get to drive, but he was impressed. In his oral evidence,
Mr Taylor said he thought at the time that some of his other clients might be interested in purchasing such a vehicle. He said as much to Dr Hirst. Mr Taylor confirmed he did alert some of his clients to the opportunity.The applicant’s marketing strategy was discussed at the hearing. There was no formal business or marketing plan produced; I gather those documents were never brought into existence. Dr Hirst did not provide business cards in evidence although he said the company had them, and there is a record in Mr Taylor’s statement of them being purchased (exhibit 3.3 at [8]). The applicant did not have its own telephone number or facsimile line. The applicant did purchase pens with the applicant’s corporate logo
(see exhibit 5). The applicant also had a Facebook page – though not a dedicated website – which featured the Gallardo. That was interesting because Dr Hirst was no stranger to
e-commerce. His medical practice has its own website. Dr Hirst conceded in
cross-examination that he used stock photographs of the vehicle obtained from Brisbane Lamborghini on the Facebook page, and reproduced the generic description of the vehicle that he had been provided. He also agreed he did not adjust the price at which the vehicle was being offered for sale on the Facebook page, even though he claimed he progressively revised the price he was prepared to accept (exhibit 3.1 at [35]).The claim in Dr Hirst’s statement that the applicant proposed using social media as a marketing tool is hard to credit given the evidence that came out about the approach to the Facebook page. But Dr Hirst’s oral evidence placed rather less emphasis on that medium: he said he focussed on ways to access the high net worth individuals who could afford such a vehicle. Advertising in motor trade publications was unlikely to reach the right audience, he said. He preferred to list the vehicle on carsales.com.au, show the vehicle at luxury car exhibitions and approach individuals within his network of acquaintances who he thought would be interested in such a vehicle.
The evidence about the listing of the car on carsales.com.au was limited. A screenshot of the advertisement is reproduced as an annexure to Dr Hirst’s supplementary statement (exhibit 3.2). The advertisement does not refer to the applicant, and the car is not displayed with the banner and corporate logo. In his statement, Dr Hirst said the car was initially listed for sale on the site at $461,387 on 28 March 2013 (exhibit 3.1 at [32]).
He said he had no meaningful enquiries at that price. He said he progressively reduced the price to attract interest. By December 2013, the sale price had been reduced to $410,000 (see exhibit 3.6). The screenshot showed the webpage had been visited by a large number of people, but only a small number of email enquiries were received.
Dr Hirst said in cross-examination that the advertisement did not produce any meaningful leads. He did not recall or record following up any of them – with one exception.
Dr Hirst’s logbook (exhibit 4) notes an email enquiry in May 2013 from someone known as “Wayne” but says Dr Hirst’s reply went unanswered. The logbook includes a small number of names and telephone numbers with no other details. They were almost all individuals known to Dr Hirst from his professional and social network. When pressed to explain what might appear to be a lackadaisical approach to recording and dealing with enquiries, leads and test drives, Dr Hirst said he did not have “hard and fast rules” about the process because “I was just starting my business”.Dr Hirst was questioned about an RACQ MotorFest car show on 14 July 2013 where he displayed the vehicle. Pictures of the vehicle at the show were provided in evidence: annexure L to exhibit 3.1. Mr Brennan, counsel for the Commissioner, pointed out in cross-examination that the vehicle did not appear to be displaying the safety certificate that should have been prominently displayed. Dr Hirst explained in his supplementary statement that the original safety certificate supplied by Brisbane Lamborghini was current from the date of issue until 27 June 2013. A copy of the original certificate was annexed to the statement – but the replacement certificate was not produced in evidence. Mr Brennan suggested the applicant’s claim that it was marketing the car was rather undercut if the applicant did not comply with the rules with respect to dealers which had presumably been explained in the online course of study that Dr Hirst had completed.
Dr Hirst agreed the safety certificate should have been on display in a prominent place – he recollected it may have been in the car, which implies there was an up-to-date certificate – and put his failure to comply with that rule down to inexperience. Dr Hirst added there was a ‘for sale’ sign on a printed A4 sheet in the window of the car. The sign was not clearly visible in the photographs. Mr Giammattei, who was also present at the same exhibition and had a clear view of the applicant’s vehicle from his own adjacent display, said in cross-examination he did not recall seeing any indication that the applicant’s vehicle was for sale.Dr Hirst said he took the vehicle for an occasional “maintenance drive” which was in keeping with what he recalled was the advice of Mr Giammattei. He did not keep a record of those drives in the logbook, but said they were only short drives on a regular route. In his statement, he said the odometer reading was 438 km on 24 May 2013 (exhibit 3.1 at [42]). He also said he began contacting potential purchasers in his network and offered to take them on test drives. He said in his statement he undertook a number of test drives – with him at the wheel – with those individuals. He referred to seven individuals in his supplementary statement; one of them was a prosperous surgeon on the Gold Coast, who participated in two test drives. Dr Hirst said he obtained valuable feedback from that interaction, in particular, about some improvements to the vehicle that might make it more saleable. In cross-examination, he referred to other test drives, including two trips to a winery. On the first occasion, the winery was also the venue for a dentists’ conference, and Dr Hirst said he thought some of the dentists might be interested in purchasing the Gallardo. On the second occasion, the winery was hosting a professional conference that Dr Hirst was attending. Dr Hirst insisted the car was taken to the event so it might be displayed to prospective purchasers.
The records of the test drives are limited. The extracts from the logbook, such as it is, do not provide much more than a few names, dates and phone numbers (see exhibit 4).
Dr Hirst said none of the individuals who participated in the test drives were willing to provide evidence at the hearing because they were reluctant to attract the attention of the Commissioner. That is not really a satisfactory answer, of course: the Tribunal could have issued summonses to those individuals. I note the individuals listed in the second page of Dr Hirst’s logbook – the same people referred to in Dr Hirst’s supplementary statement – all undertook test drives after Dr Hirst became aware the Commissioner was proposing to audit the applicant. The Commissioner had written to the accountant about the audit on 17 September 2013 (annexure A to exhibit 3.4). Mr Taylor, the principal of the accounting firm, said one of his subordinates dealt with the matter but confirmed in his supplementary statement that Dr Hirst was told of the audit by email dated
26 September 2013 (exhibit 3.4 at [6]). The timing of these drives raises questions. It is unclear whether any or all of the individuals referred to on the first page of the logbook actually went on test drives. But even if all of them did, those drives occurred in March, April and May 2013. The burst of activity recorded on the second page of the logbook occurred after the Commissioner signalled his interest – although, in fairness, those drives also occurred around the time the insurance arrangements changed.
The Commissioner’s interest in the applicant’s affairs created difficulties, according to Dr Hirst. He explained in his statement that the Commissioner amended the applicant’s BAS and luxury car tax accounting in December 2013 and cancelled the GST registration with effect from 1 October 2013 (exhibit 3.1 at [49]). Dr Hirst said the applicant was forced to sell the Gallardo on consignment through Brisbane Lamborghini. The vehicle was offered for sale at $330,000 – a substantial discount on the price the applicant had been asking a short while before – and it was eventually sold for $300,000 to another dealer in January 2014. The car had between 1,300 and 1,400 km on the odometer,
Mr Giammattei recalled in his statement (exhibit 3.5 at [26]). The applicant duly paid the luxury car tax in the amount of $82,910 before the sale was completed.Mr
Giammattei confirmed in his statement that Brisbane Lamborghini agreed to sell the vehicle on consignment, but added his firm only agreed to do so because Dr Hirst agreed to purchase a newly released Lamborghini called the Hurracan. In cross-examination,
Dr Hirst said it was originally his intention to purchase the Hurracan in his capacity as a dealer. Curiously, after he became aware of the difficulties of using his status as a dealer, he decided to purchase the Hurracan anyway in his own name – and for his own (presumably) unrestricted use. The Commissioner says that evidence is telling.
Mr Brennan explained in his submissions that Dr Hirst wanted a toy when he bought the Hurracan, and that is what he did. But Mr Brennan said the evidence suggests that is also what Dr Hirst wanted when he bought the Gallardo, the vehicle in question here.
The legal arguments
I begin my analysis by referring to s 14ZZK(b) of the Taxation Administration Act 1953 (“the TAA 1953”). That provision says:
[T]he applicant has the burden of proving:
(i) if the taxation decision concerned is an assessment--that the assessment is excessive or otherwise incorrect and what the assessment should have been; or
(ii) in any other case--that the taxation decision concerned should not have been made or should have been made differently.
That provision is expressed in plain English and its implications are clear.
I turn, then, to the questions I foreshadowed at the outset of these reasons. The first question is whether the applicant made a creditable acquisition when it purchased the Gallardo. A creditable acquisition will only occur if the acquisition was for a creditable purpose: s 11.5. Section 11.15(1) provides a thing will be acquired for a creditable purpose “to the extent that you acquire it in carrying on your enterprise”. Section 11.15(2)(b) goes on to clarify that the thing will not be acquired for a creditable purpose to the extent that “the acquisition is of a private or domestic nature”.
It follows I must determine whether the applicant was carrying on an enterprise.
That expression is defined in s 9.20 of the GST Act. Section 9.20(1) relevantly defines an enterprise as:
an activity, or series of activities, done:
(a) in the form of a business; or
(b) in the form of an adventure or concern in the nature of trade[.]
Section 9.20(2) goes on to clarify that, relevantly, an enterprise:
…does not include an activity, or series of activities, done:
(b) as a private recreational pursuit or hobby; or
(c) by an individual … without a reasonable expectation of profit or gain[.]
The applicant’s submissions focused on the second limb of s 9.20(1)(b). Mr Heinemann, the applicant’s solicitor, argued the venture with the Gallardo answered the description in the sub-section because the applicant was engaged in a profit-making undertaking or scheme. Mr Heinemann’s submissions referred me to the opinion of the Board in McClelland v Federal Commissioner of Taxation (1970) 120 CLR 487 at 491-492 per Lord Donovan, Viscount Dilhorne and Lord Wilberforce (see also Federal Commissioner of Taxation v Whitfords Beach Pty Ltd (1982) 150 CLR 355 and Federal Commissioner of Taxation v The Myer Emporium Ltd (1987) 163 CLR 199). The discussion of profit-making activities in those cases was in the context of an argument over whether the gain yielded from the transaction was properly characterised as income or capital.
But Mr Heinemann said the same analysis was relevant here, which puts the objectives of the transaction front and centre.
The Commissioner approached the case differently. Mr Brennan, in his submissions, focused on s 9.20(1)(a) of the GST Act to argue there was little about the applicant’s venture that had the “hallmarks of a car dealership” business – the only business in which the company claimed to engage. In particular, the submissions referred to the following facts – and I accept they are facts – that the applicant did not:
a)Operate a car yard;
b)Have more than a single vehicle;
c)Employ any staff;
d)Have a dedicated phone or facsimile line;
e)Undertake regular safety inspections of the Gallardo or commission safety certificates as required by law (of a motor dealer);
f)Advertise as a dealership;
g)Keep detailed, contemporaneous records in respect of
i.Sales enquiries;
ii.Maintenance (including, for argument’s sake, maintenance drives);
iii.Consumables;
iv.Odometer readings; or
h)Obtain methods of finance commonly used in the motor vehicle sales industry, such as inventory or lease portfolio financing.
After noting this “unorthodox background” for a company said to be in the business of car dealing, the Commissioner’s written submissions went on to argue the only recognisable aspect of doing business as a car dealer in this case was the applicant’s claim Dr Hirst had conducted a number of test drives with prospective purchasers.
The Commissioner says I should not accept Dr Hirst’s evidence on this point.
Was this transaction an “adventure or concern in the nature of trade”?
The applicant’s story is not inherently unbelievable. Many prosperous professionals invest in what are – given their lack of relevant skills and experience – unlikely business ventures, including farms, restaurants, wineries, racehorses and sporting ventures. Some of those ventures are undoubtedly a means to minimise or even avoid tax, but many are not. Is it really so hard to believe a successful medical practitioner would wish to deal in luxury cars in light of his lifelong interest in the motor trade? I do not reject that possibility out of hand. But nor can I ignore the possibility that the transaction was shaped and driven by the desire to obtain a luxury car for personal use at a significant discount.
The applicant’s case relies on the evidence of Dr Hirst as to his actions and intentions. Most of that evidence is – perhaps inevitably – self-serving: Dr Hirst was the only actor in this drama, apart from Mr
Giammattei and Mr Taylor. There were some inconsistencies between the evidence of Dr Hirst and Mr Giammattei, to be sure:
Mr Brennan pointed out the two individuals had different recollections of the content and timing of their discussions immediately before the vehicle was purchased. Some of those inconsistencies might be the product of honest but differing recollections of a conversation that occurred two years ago, of course. I note the oral evidence of both
Dr Hirst and Mr Giammattei strayed from their written statements. It is also possible
Mr Giammattei simply did not notice a ‘for sale’ sign on the applicant’s car when it was displayed at the motor show in July 2013. Taken at its highest, the evidence of
Mr Giammattei provides some support for the applicant’s explanation, but it also raises questions. At a minimum, I think I can infer Mr Giammattei did not believe Dr Hirst was engaging in a ruse when the applicant bought the vehicle. If Mr Giammattei suspected that, I assume Brisbane Lamborghini would not have been a party to the transaction for fear of the consequences for their own business should the Commissioner become involved.
Mr Taylor’s evidence also lends some weight to the applicant’s claim. In particular, I note his observation during cross-examination that he believed his client had thought through the venture, and appeared to be pursuing it seriously. But I need more than
Mr Taylor’s assessment of his own client before I can be persuaded the applicant’s explanation should be accepted – particularly in circumstances where there was a burst of test drive activity after Dr Hirst learned of the Commissioner’s audit in September 2013.
There are at least two important deficiencies in the applicant’s evidence which suggest I should not be persuaded that (a) the Commissioner’s conclusion was wrong, and (b) the applicant’s explanation ought be accepted. Firstly, I would have expected the applicant to call evidence from at least some of the individuals who went for test drives with Dr Hirst in 2013. A number of them were friends or acquaintances. I have already noted Dr Hirst said those individuals were reluctant to give evidence, but some of them should have been summonsed to appear. The failure to call those individuals invites an inference that their evidence would not have assisted the applicant’s case.
Secondly, the applicant’s chattel mortgage agreement expressly provided in clause 3.2(g)(ii) of the Agreement that the Gallardo did not form part of the applicant’s inventory. Dr Hirst said the applicant did not have any alternative sources of finance available in the circumstances but said he was told the financier would effectively waive that clause and roll-over the arrangement when the vehicle was sold so that it would apply to the next vehicle the applicant bought. Given the clear words of the agreement,
I would have expected the applicant to call a representative of the financier to confirm
Dr Hirst’s evidence that the agreement was not to apply according to its terms. That did not occur.
Given the question-marks that hang over the applicant’s account (e.g., the novel nature of the venture, the lack of documentation and records, the timing of a number of the test drives following notice of the audit, the insurance issues, and the terms of the chattel mortgage), the failure to call the witnesses is a significant shortcoming. In all the circumstances, the applicant has not persuaded me the Commissioner’s decision on this issue was wrong. I am not persuaded there was an enterprise, and therefore there could be no creditable acquisition.
The alternative approach: were the applicant’s activities done in the form of a business?
Mr Brennan pointed out there were few indicia of a business evident in the applicant’s account of its activities. In particular, it was said I should not be satisfied the applicant engaged in the core function of a car dealership business – namely, displaying the vehicle for sale and demonstrating it to prospective purchasers by taking them on test drives.
The Commissioner is right. Dr Hirst said he took a number of individuals for test drives, but the applicant failed to call any of them to corroborate the claim. That calls Dr Hirst’s evidence on this crucial point into question. The evidence about the financing arrangements is also an issue. Given those questions, the rest of the evidence – including the evidence of business cards and pens with a logo, the banner, the advertisement on carsales.com.au, and other minor indicia of a business – does not persuade me the applicant’s activities were done in the form of a business. It follows there was no creditable acquisition for the purposes of the GST Act, and no entitlement to input tax credits.
Was the vehicle acquired as trading stock?
The next question arises in relation to the liability to pay luxury car tax. Section 5.5 of the LCT Act says: “You must pay the luxury car tax payable on any taxable supply of a luxury car that you make.” Section 5.10(2)(a) says one (i.e. the dealer) does not make a taxable supply if the recipient “quotes [its ABN] for the supply of the car”. Section 9.5 of the LCT Act says an entity is entitled to quote its ABN in a case like this where, at the time of quoting, the entity:
·Has the intention of holding the car as trading stock; and
·Does not have the intention of using the car for any other purpose.
If it becomes apparent that luxury car tax was not paid when it should have been, an increasing luxury car tax adjustment will occur and the acquirer will become liable to pay the full amount.
The expression trading stock is not defined in the LCT Act but its meaning in a case like this is clear enough: a car dealer’s trading stock is the automobile or automobiles it acquires for the purpose of resale. It is clear a vehicle will not be regarded as trading stock if the dealer intends making personal use of the vehicle before selling it for a profit.
I have already explained I am not satisfied the applicant was carrying on an enterprise for the purposes of the GST Act. That conclusion is ultimately fatal to the applicant’s contention with respect to trading stock. As the High Court observed in
Federal Commissioner of Taxation v Suttons Motors (Chullora) Wholesale Pty Ltd(1985) 157 CLR 277, the term is ordinarily used to refer to “goods held by a trader …for sale or exchange in the ordinary course of his trade”: at 282 per Gibbs CJ, Wilson, Deane and Dawson JJ (emphasis added). It follows that if the applicant was not carrying on activities in the form of a business or an adventure or concern in the nature of a trade, the items acquired cannot be said to be trading stock. That means the luxury car tax should have been paid at the time the vehicle was acquired, which resulted in an increasing luxury car tax adjustment – and a tax shortfall, at least until the correct amount of tax was paid.
Penalties
That leaves only the question of penalties.
The Commissioner has imposed an administrative penalty pursuant to s 284-75(1) of Schedule 1 to the TAA 1953 in respect of the tax shortfall that has resulted from misleading statements of the applicant.
Those misleading statements are:
·Lodging business activity statements on the basis that the Gallardo was a creditable acquisition within the meaning of the GST Act; and
·Failing to correctly identify and report an increasing luxury car tax adjustment after the applicant wrongly quoted its ABN at the time of the acquisition.
The penalty was assessed at the rate of 50 percent of the shortfall, which is appropriate where the shortfall is the product of recklessness (as opposed to a want of reasonable care, which results in a 25 percent penalty, or intentional disregard of one’s obligations, which results in a 75 percent penalty): s 284-90(1) of Schedule 1 to the TAA 1953.
During submissions, I suggested to Mr Heinemann it was difficult to see any basis for the penalty to be levied at less than 50 percent if I decided the substantive questions against the applicant. Having now found the applicant did not make a creditable acquisition or acquire the vehicle as trading stock, there is a strong case for assessing the penalty at a minimum of 50 percent of the shortfall. That rate of penalty is appropriate where the applicant has conducted its affairs with reckless disregard of the consequences that are reasonably foreseeable as being a likely result of its actions. That seems a fair enough description of what happened here. The applicant was seriously remiss in failing to keep proper records (including records of test drives in particular) that supported its unconventional claim. Recklessness involves more than a simple want of reasonable care or mere inadvertence. Given Dr Hirst was an experienced businessman (he is the principal of a large medical practice, for example) with ready access to professional advice, I am satisfied the applicant’s activities were conducted recklessly.
I did consider whether the applicant intentionally disregarded its taxation obligations.
If I were to make that finding – which would require me to be satisfied the applicant actively disregarded those obligations – the penalty would be levied at the rate of 75 percent. As it happens, I did not have to go so far in my analysis of the evidence to decide the substantive issues. I concluded I was not persuaded by the applicant’s case, which is not the same thing as making a finding of active disregard. I do not think it would be appropriate to make a finding of intentional disregard in the circumstances.
There is no basis for invoking the so-called “safe harbour” provision in s 284-75(6) of Schedule 1 to the TAA 1953, which concerns persons who have engaged tax or BAS agents. I note s 284-75(7) obliges a taxpayer seeking to rely on s 284-75(6) to establish he, she or it provided the agent with all of the relevant taxation information. I am not satisfied the applicant has discharged its onus. Mr Taylor’s firm may well have been provided with all of the relevant paperwork, but I am not persuaded Mr Taylor was provided with the information known only to Dr Hirst about the applicant’s true intentions with respect to the transaction. Mr Taylor’s firm provided advice on the basis of what they were told by the applicant and Dr Hirst about the transaction. That is not the same thing as saying the firm was fully armed with the relevant information to the extent it should excuse the applicant from liability for a penalty.
The applicant’s Statement of Facts, Issues and Contentions did not identify any basis for remitting the penalty, either wholly or in part. The written submissions were silent as well. That is not an oversight: I am not aware of any evidence that refers to the applicant’s circumstances or other matters which suggest remission was appropriate.
CONCLUSION
The objection decision under review is affirmed.
I certify that the preceding 61 (sixty -one) paragraphs are a true copy of the reasons for the decision herein of Senior Member Bernard J McCabe. ...........................................................
Associate
Dated 30 June 2015
Date of hearing 5 March 2015 Solicitors for the Applicant Cooper Grace Ward Lawyers Counsel for the Respondent Mr V Brennan Solicitors for the Respondent Australian Tax Office
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