Heinrich and Commissioner of Taxation
[2011] AATA 160
•10 March 2011
Administrative Appeals Tribunal
DECISION AND REASONS FOR DECISION [2011] AATA 160
ADMINISTRATIVE APPEALS TRIBUNAL )
) No 2010/2430
TAXATION APPEALS DIVISION ) Re
A TAXPAYER
Applicant
And
COMMISSIONER OF TAXATION
Respondent
DECISION
TribunalDr G. Hughes, Member
Date10 March 2011
PlaceMelbourne
DecisionThe decision under review is affirmed
.................[signed].......................
Member
CATCHWORDS – GST adjustment – methodology – what amounts to "fair and reasonable" – estimated effective life of premises not reasonable
A New Tax System (Goods and Services) Act 1999 Div 129
Income Tax Assessment Act 1997 Div 43
GST Ruling GSTR 2006/4
GST Ruling GSTR 2009/4
Ronpibon Tin NL & Tong Kah Compound NL v Federal Commissioner of Taxation (1949) 78 CLR 47
REASONS FOR DECISION
10 March 2011 Dr G. Hughes, Member BACKGROUND
1.The Applicant is in the business of property development. The Applicant needed to calculate the increasing adjustment, required under Division 129 of the A New Tax System (Goods and Services) Act 1999 (GST Act), for the tax period ended 30 June 2008, in respect of a property complex. It sought to use a particular apportionment methodology, based on effective life, for its calculations. The issue in dispute was whether the methodology was fair and reasonable.
2.The complex constructed by the Applicant comprised retail shops, a commercial car park and residential apartments (and associated car parks). The Applicant intended to sell the complex on completion.
3.The complex was completed in June 2007. In its monthly Business Activity Statements, over the period relating to the development, the Applicant had claimed input tax credits totalling $4,800,000. Most of this figure reflected GST payments made to suppliers in respect of construction costs. The balance reflected other fees associated with the development.
4.In February 2008, after the Applicant had been unable to secure a sale of the entire complex, it sold the retail shops and commercial car park and was left with 92 residential apartments and 32 associated car parks. Securing a sale of the apartments proved difficult.
5.In May 2008, the Applicant began leasing the apartments. However, they remained available for sale. By so doing, the Applicant was no longer using the apartments solely for a creditable purpose and was required to make an adjustment under section 129-40 of the GST Act.
6.For the tax quarter ended 30 June 2008 (the relevant period), the Applicant received rent from the residential apartments of $455,487. However, the Applicant did not make a GST increasing adjustment to account for the change in creditable purpose. The Applicant had treated this income as being consideration for input taxed supplies (that is, residential rent) and hence paid no GST on that amount.
7.The Respondent conducted an audit in mid-2009. The Respondent determined that an adjustment event had occurred in May 2008 when the basis of holding the residential apartments changed from being for a creditable purpose (that is, for sale as new residential premises) to a non-creditable purpose (that is, deriving rental income which involved it making input taxed supplies). The Applicant was notified that an increasing adjustment of $23,271 would be made to its GST net amount for the relevant period. That sum was calculated using the output-based indirect method. The GST net amount was changed by Notice of Assessment from a credit of $205,278 to a credit of $182,007.
8.The Applicant acknowledged that it was required to make an increasing adjustment attributable to the relevant tax period and that the issue for determination was the correct basis for apportionment.
9.The Applicant had been registered for goods and services tax (GST) purposes since 1 September 2002.
10.The Applicant calculated that, of the construction costs of $44,584,397, a total of $13,860,041 was attributable to the residential apartments. In order to calculate the appropriate adjustment, the Applicant first identified what proportion of the construction costs of the complex applied to the residential apartments. This was calculated at $13,860,041, meaning that $1,386,004 had been claimed as input tax credits in its Business Activity Statements over the construction period.
11.The figure for the construction costs was subsequently increased by $341,560. This meant total construction costs of $48,000,000 and total input tax credits of $4,800,000. The Applicant contended that the additional costs of $341,560 should be apportioned, for the purpose of recalculating the income tax credits, by determining the total value of the apartments.
12.The Applicant calculated the total value of the complex to be $115,315,000, of which approximately 24.6% represented the residential apartments. On this basis, a further amount of $83,868, being 24.6% of $341,560, was added to the amount of $1,386,004 as being income tax credits relevant to the construction costs of the residential apartments, making a total of $1,469,872.
13.Applying GST Ruling (GSTR) 2009/4, the Applicant divided the amount attributable to the residential apartments ($28,315,000) by the amount of input taxed residential rent ($455,487) for the period May to 30 June 2008 and determined that a creditable percentage for that period was 98.4168%, meaning that there would be an increasing adjustment amount of $23,271 for the period, being 1.5832% of $1,469,872.
14.This calculation was accepted by the Respondent.
15.The Applicant, however, subsequently objected to this calculation after forming the view that GST Ruling 2009/04 was too narrow in its interpretation of Division 129 of the GST Act.
16.The essential question became whether the effective life of the apartments in question provided an appropriate methodology to determine a fair and reasonable basis of apportionment.
17.The Applicant contended that as the Respondent accepted that it had incurred the construction costs as being for a wholly creditable purpose at the time they were incurred, this meant, for the purposes of Step 2 of the Method Statement in section 129-40(1) of the GST Act, that the intended or former application of the residential apartments could be said to be 100% for a creditable purpose.
18.The Applicant argued that its intended application of the residential apartments should be viewed as being for a maximum of 40 years, not indefinitely. This was consistent with the apportionment adopted in Division 43 of the Income Tax Assessment Act 1997, which deems buildings to have a life expectancy of 40 years. Hence, the Applicant should be regarded as having an intended creditable use for the residential apartments of 40 years or 480 months. The actual purpose should, the Applicant contended, be measured on the same basis. Therefore, the extent to which the Applicant applied the residential apartments for a creditable purpose should be measured over the maximum possible use of the residential apartments, or 40 years.
19.Applying this approach, the Applicant's actual non-creditable use of the residential apartments should be calculated as two months (May and June 2008), or 2 out of a maximum of 480 months. Using this calculation as a fair and equitable basis for adjustment, the Applicant considered it was entitled to 99.58337% and not 98.4168% of the income tax credits accepted by the Respondent as being wholly referable to the residential apartments.
20.The Respondent referred to Ronpibon Tin NL & Tong Kah Compound NL v Federal Commissioner of Taxation (1949) 78 CLR 47 in which it was held that the words to the extent referred to a need to apportion and that any apportionment methodology must be fair and reasonable.
21.The Respondent further contended that what constitutes fair and reasonable in the current context is set out in GST Rulings GSTR 2006/4 and GSTR 2009/4.
22.GSTR 2006/4 acknowledges that a taxpayer may choose its own apportionment method so long as it is fair and reasonable in all the circumstances.
23.GSTR 2009/4 expressly states that an apportionment method based on an effective life method is not fair and reasonable. Specifically paragraphs 128 and 129 provide:
128. An apportionment method based upon the estimated effective life of the premises is one of the methods that the Commissioner does not accept as being a fair and reasonable method of apportionment. Division 129 requires an entity to look back over the relevant period and apportion the application of the premises during that period between creditable and non-creditable purposes. Contrary to this, an apportionment method based on the effective life of the premises contemplates the entire life span of the premises rather than the actual use of the premises by the entity in the relevant period. Furthermore, residential premises include the land on which the relevant building is constructed. Land is generally an appreciating asset, and the effective life of the relevant building is considered too remote and arbitrary to reasonably reflect the application of the residential premises, comprising both the land and buildings, during the relevant period.
129. The Commissioner would reject this method notwithstanding that the estimated effective life may be based upon the statutory rates provided for the purpose of calculating capital works deductions under Division 43 of the Income Tax Assessment Act 1997 ("ITAA 97").
24.The Respondent cited paragraphs 128 and 129 of GSTR 2009/4 in support of its contention that the apportionment adopted by the Applicant was unreasonable. It also emphasised that the Applicant assumed that the revenue-based apportionment is based on an indefinite intended application of the residential apartments, with the further assumption that the intended creditable use for the residential apartments could only be for a maximum of 40 years or 480 months. The Respondent rejected this assumption on the basis that the apartments would have reached the end of their life expectancy once the 40 years had passed.
25.Relevant paragraphs of the ruling include the following:
83. If the premises have been applied in relation to the Creditable purpose of sale and the non-creditable purpose of making input taxed supplies during the relevant period and the premises have been sold prior to the end of the relevant adjustment period, one reasonable method of apportionment is an output based indirect method. This method is based on the consideration received or liable to be received in respect of any taxable supply as compared to any input taxed supply. Thus, the extent to which new residential premises were applied for a creditable purpose under Division 129 can be determined by the following formula:
Consideration for the taxable supply of the premises
Consideration for the taxable supply of the premises plus consideration for the input taxed supplies of residential premises by way of lease
87. If the premises remains unsold at the end of the relevant adjustment period the actual consideration for the taxable supply of the premises on sale will not be known. Where the premises have been applied for a creditable purpose, to some extent, for the entire relevant period, using estimated consideration for the taxable supply of the premises on sale (rather than the actual consideration for the sale) in the output based indirect formula set out in paragraph 83 of this Ruling will be an appropriate basis of apportionment.
88. For example, during the relevant period between the time of acquisition and the end of the adjustment period being considered, there may be a period of time, when the premises are being applied solely in carrying on the enterprise for a creditable purpose, and then for the remainder of the relevant period there may have been a dual concurrent application of the premises to the creditable purpose of sale as well as to the non-creditable purpose of making input taxed supplies. In these circumstances, the output based indirect method using the estimated sales consideration will be an appropriate basis of apportionment.
89. The output based indirect method using estimated sales consideration will also be an appropriate basis of apportionment when there has been a dual concurrent application of the premises to the creditable purpose of sale as well as ·the non-creditable purpose of making input taxed supplies for the entirety of the relevant period.
TRIBUNAL’S DECISION
26.The Tribunal does not accept the Applicant's contention. Specifically, the Tribunal does not accept that GST Ruling 2009/4 fails to reflect the intention of Division 129 of the GST Act.
27.GST 2009/4 contains a cogent explanation as to why an apportionment method based on the effective life of the premises is not considered fair and reasonable. The Tribunal adopts that reasoning and sees no need to elaborate further.
28.The Tribunal also accepts the Respondent's contention that the application is misconceived in its assumption that the revenue-based apportionment is based on an indefinite intended application of the residential apartments, and that the intent of a creditable use for the residential apartments could only be for a maximum of 40 years. As the Respondent pointed out, the Applicant's revised proposed percentage appears to be based on holding the apartments for sale for 40 years. This is an unreasonable contention, given that the apartments would have reached the end of their life expectancy once the 40 years had passed.
29.For the above reasons, the Tribunal affirms the decision under review.
I certify that the twenty-nine [29] preceding paragraphs are a true copy of the reasons for the decision herein of
Dr G. Hughes, MemberSigned: ...........................[signed].............................................
Associate Grace HorzitskiDate of Hearing on the papers 7 February 2011
Date of Decision 10 March 2011
Solicitor for the Applicant Mr J. Young
Solicitor for the Respondent Ms A. Tawadros
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