Simon Clayton and Monica Clayton and Commissioner of Taxation
[2013] AATA 428
[2013] AATA 428
Division Taxation Appeals Division File Number
2012/4010
Re
Simon Clayton and Monica Clayton
APPLICANT
And
Commissioner of Taxation
RESPONDENT
DECISION
Tribunal Senior Member Bernard J McCabe
Date 25 June 2013 Place Brisbane (heard in Lismore) The objection decisions under review are affirmed.
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Senior Member Bernard J McCabe
CATCHWORDS
TAXATION – Carrying on an enterprise – Input tax credits – Creditable acquisitions incurred in carrying on an enterprise – Cancellation of GST registration – Delay in generating income – Objection decisions under review affirmed
LEGISLATION
A New Tax System (Goods and Services Tax) Act 1999 (Cth) ss 9-20(1) & (2), 11-15(1), 195-1
REASONS FOR DECISION
Senior Member Bernard J McCabe
The taxpayers were registered for GST and claimed input tax credits on a number of purchases made following the acquisition of a rural property in northern NSW in 2003. They claimed they were in the process of establishing a business in connection with the property. The Commissioner of Taxation conducted an audit and concluded the taxpayers were not carrying on an enterprise within the meaning of the GST Act between September 2007 and July 2011. The Commissioner said the taxpayers were not entitled to claim input tax credits, and their GST registration was cancelled. The taxpayers asked the Tribunal to review the decision.
BACKGROUND FACTS
The taxpayers said they are members of a partnership. I was told they have a written partnership agreement. (The agreement was not produced however I have no reason to doubt it existed.) The applicants purchased a rural property adjoining an area of national park in northern NSW in July 2003. The property had been logged in the past in some areas but it included old-growth forest and supported a wide range of animals and plants. Mr Clayton has extensive experience in bird watching and he spoke of the richness and biodiversity of the habitat. Mrs Clayton pointed out the property was located within a few hours of Brisbane.
I had the benefit of viewing the property in the course of a site visit on the day before the hearing in Lismore. The taxpayers conducted a tour of the main part of the property, and we saw the various improvements they had made together with some of the wildlife.
They said – and I accept – it was their intention in 2003 to start a business focused on eco-tourism. On the advice of their accountant, they registered a business name and registered for GST.
Mrs Clayton gave evidence about her background, which included qualifications and experience in marketing. She conducted market research and prepared a business plan which featured several components: accommodation for visitors, which would be constructed on the property; tours; and the production of bush foods. Mrs Clayton said in her evidence that the accommodation component was the initial priority as it was more likely to generate real income. The taxpayers lodged a development application with the local council in late 2004 or early 2005 for permission to build four cabins and a reception building. They obtained the assistance of consultants who told them about how to site the cabins and how they should be provided with services like water and sewerage and power (the site was not serviced by power lines; the taxpayer said they proposed using solar power to meet their energy needs).
The taxpayers conducted market research and met representatives from the local council, tourist organisations, potential investors and the National Parks and Wildlife Service. They participated in organisations of bird watchers and attended conferences. They established a website talking about their plans. The taxpayers also started making improvements to the property. Over time, they built dams and an irrigation system and improved the access driveway. They acquired a few items of farm machinery and cleared parts of the property and set about eradicating noxious weeds. In due course, they built a shed and acquired a caravan (they moved into the caravan as their permanent abode in early 2006). They also commenced a course of study in conservation and land management (and several other courses, like a first aid course, that were thought to be useful in running a tourist business). Mr Clayton went on to study a diploma course in conservation and land management that he completed in 2012.
Progress towards the establishment of the business was slower than the taxpayers had hoped. The local council took ages to process the development application in respect of the cabins: consent was not forthcoming until January 2008, and even then there were a number of conditions that had to be satisfied at considerable expense before the cabins could be erected and occupied. There were fires and floods and drought, and the taxpayers did not have enough working capital. The situation worsened in 2007-2008 when the "global financial crisis" struck. Mrs Clayton said she realised they were unlikely to attract foreign investors or even many foreign tourists, and the Australian banks had become much more conservative in their lending.
In 2008, Mrs Clayton said the taxpayers decided to change the focus of their efforts. While they had not abandoned the plan to build accommodation, they knew they were unlikely to achieve that goal in the foreseeable future. They re-wrote the business plan to place more emphasis on organising tours on the property and to local areas for wildlife enthusiasts (as opposed to tours pitched at the narrower market of bird-watchers) and the production of bush foods. They also decided to offer environmental consultancy services, like preparing land use and bush-fire management plans. (Most of the consulting work was to be done by Mr Clayton, as he had the relevant expertise.) In the period that followed, Mrs Clayton said she continued to develop the partnership brand and network with potential clients or business partners, and the website was refined. She described a range of other marketing activities designed to promote their business, including the publication of a YouTube clip featuring platypus in the dam on the property that was viewed by a large number of people around the world. A small orchard was established in the main paddock of the property and a small number of fruit-bearing trees were planted elsewhere on the property in suitable soil. Some of the trees have been planted recently. The taxpayer continued to experiment with plants and she and her husband continued with landscaping and maintenance activities.
The trees have not yet born any fruit and there is, as yet, no clear idea as to precisely what products are to be produced or how or where they are to be packaged and sold. The taxpayers continue to research this issue.
The taxpayers did not have any paying tourists stay on the property until 2012, after the period under review. Mr Clayton was approached by a contact to prepare a fire management plan for a nearby property in 2010, with a follow-up in 2011. He did not provide any other consulting services in the period under review, although that is not surprising given he did not complete his diploma in conservation and land management (a standard qualification for someone engaged in this sort of work) until 2012.
The cabins have not been built, and there are no plans to erect any accommodation on the site in the foreseeable future in the absence of fresh capital – although the local council was told construction had commenced (I assume this was a reference to the work on the drive way that was a condition of the development consent). I understand the consent would have lapsed if work had not commenced within five years of the consent being given, so no doubt it was a prudent step.
THE LAW
The Commissioner disputed that the acquisitions made by the taxpayer (and referred to in exhibit two at pp 7-11) were creditable acquisitions for the purposes of sub-section 11-15(1) of the A New Tax System (Goods and Services Tax) Act 1999. Whether this is right turns on whether the acquisitions were incurred in carrying on an enterprise within the meaning of s 11-15(1).
Section 9-20(1) defines an enterprise as "an activity, or series of activities, done…in the form of a business". Section 9-20(2) expressly excludes from that definition an activity which is done "as a private or recreational pursuit or hobby; or…without a reasonable expectation of profit or gain". I note s 195-1 (the dictionary) says "carrying on an enterprise includes doing anything the in the course of the commencement or termination of the enterprise."
Whether or not an activity is a business is a question of fact. The expression business is undefined: it is a widely used word, and its meaning does not require elaboration. Suffice to say the cases state one must look for features one commonly associates with a business when making an assessment. I should add that I am focusing on what occurred during the period under review, although what happened before and after might shed light on whether there was a business in operation or in the process of being commenced between 2007 and 2011.
There are a number of features of this course of conduct that bear the hallmarks of a business. I have already noted the taxpayers had an intention to make a profit. They retained the services of an accountant and registered their business for GST purposes at an early stage. They have a business plan, a website which promotes their brand, and they have stationery and business cards. The applicants have gone about the marketing of the business in a relatively business-like way: they have undertaken promotional activities and sought out business contacts. They have kept records. On the property, there has been some improvement work including clearing and tree-planting – although they may have undertaken some of those activities (eg clearing the lantana) as landholders in any event.
But the business had not come into existence by 2011. It was not providing services or generating income, with the exception of one piece of consulting work. For a variety of reasons – some of them beyond the taxpayers’ control, like the delays in the development application – the activities that occurred prior to 2011 were essentially preparatory in nature. There was no expectation of earning any income in the foreseeable future from the accommodation activities. The bush fruit production process was still in the experimental stage. There were no tours being conducted and only one bit of consulting work which arose by chance: it was not a regular activity during the period under review. While there are more signs of life in recent times, the business has still not gotten off the ground.
Every business has to start somewhere. Where the business progresses from its foundations to operation within a reasonable time frame, it is easier to see how initial expenditures can be seen as part of a course of conduct that amounts to carrying on an enterprise. But where there is delay – where the momentum of the activities is lost – it becomes harder to make a connection between initial expenditure and the operations which result. That connection is even more difficult to establish where the business has not, or does not, commence trading in due course.
While there were some features of a business present during the period under review, the activities are better described as preparatory and exploratory in nature. They may yet lead to the establishment of an enterprise; one hopes so, for the taxpayers appear to be genuine in their desire to contribute to the growth of tourism in their local area. But that is not enough to meet the definition in the Act. I am not satisfied they were carrying on an enterprise. That means they were not entitled to claim they made creditable acquisitions during that period.
That leaves only the question of whether the taxpayer's GST registration was properly cancelled with an appropriate date of effect. Given my findings that the taxpayer was not in fact carrying on a business during the period of review, and given I am satisfied from the evidence that the taxpayer was unlikely to carry on an enterprise within 12 months of that period of review, I accept it was appropriate that the cancellation occur. I am satisfied the date of effect of 30 June 2011 was appropriate in the circumstances: that is the point at which the Commissioner would have achieved the required level of satisfaction about what had happened so far, and what was likely to occur (or not occur) in the course of the next 12 months.
I note the taxpayer has subsequently re-applied for registration for GST, and I am told that application has been accepted. But for now, the objection decisions under review must be affirmed for reasons I have given.
I certify that the preceding 20 (twenty) paragraphs are a true copy of the reasons for the decision herein of Senior Member Bernard J McCabe ........................................................................
Associate
Dated 25 June 2013
Date of hearing 4 June 2013 Applicants In person Advocate for the Respondent Stephen Aftanas
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