The Married Couple and Commissioner of Taxation
[2013] AATA 888
•13 December 2013
[2013] AATA 888
Division TAXATION APPEALS DIVISION File Number(s)
2011/5071, 2012/2132
Re
The Married Couple
APPLICANT
And
Commissioner of Taxation
RESPONDENT
DECISION
Tribunal Ms G Lazanas, Senior Member Date 13 December 2013 Place Sydney The decisions under review are affirmed.
...................[sgd].....................................................
Ms G Lazanas, Senior Member
CATCHWORDS
TAXATION AND REVENUE – goods and services tax – registration of partnership for GST purposes – whether couple were a partnership for GST purposes – whether the couple was carrying on an enterprise – whether acquisitions were made for a creditable purpose – whether premises were commercial residential premises – whether applicant liable for administrative penalty – whether penalty should be remitted – decisions affirmed
LEGISLATION
A New Tax System (Goods and Services Tax) Act 1999 (Cth) ss 9-20, 11-5, 11-15, 23-5, 23-10, 40-35, 69- 5, 184-1, 195-1
Income Tax Assessment Act 1997 (Cth) s 995-1
Partnership Act 1958 (Vic) s 5Taxation Administration Act 1953 (Cth) s 14ZZK; Sch 1 ss 284-75, 284-90, 298-20
CASES
Case N101 (1981) 81 ATC 560
ECC Southbank Pty Ltd as trustee for Nest Southbank Unit Trust & Anor v Commissioner of Taxation [2012] FCA 795; (2012) 205 FCR 505
Federal Commissioner of Taxation v Walker [1984] FCA 194
Goodman Fielder Wattie Ltd v Commissioner of Taxation (1991) 29 FCR 376
Inglis v Federal Commissioner of Taxation (1979) 10 ATR 493
Re AT84/20 and Commissioner of Taxation (AAT 3845, 19 October 1987)
Re Wynnum Holdings No 1 Pty Ltd & Anor and Commissioner of Taxation [2012] AATA 616
Russell v Commissioner of Taxation [2011] FCAFC 10; (2011) 190 FCR 449
South Steyne Hotel Pty Ltd v Federal Commissioner of Taxation [2009] FCA 13; (2009) 71 ATR 228
Spriggs v Commissioner of Taxation [2009] HCA 22; (2009) 239 CLR 1
Thomas v Federal Commissioner of Taxation (1972) 3 ATR 165Yacoub v Commissioner of Taxation [2012] FCA 678
REASONS FOR DECISION
Ms G Lazanas, Senior Member
13 December 2013
INTRODUCTION
The applicant is an individual that claims to be a partner of a partnership for GST purposes and is accordingly seeking review on behalf of the partnership. I will refer to him and his wife as the Married Couple or Mr and Mrs C. The Married Couple bought a rural property in 2006, constructed a residential building on the property and also did some other works, including clearing of some of the land. They intended to make the building available for short-term holiday letting. They also intended to grow olive trees on the property for production of table olives and olive oil. At one stage, Mr and Mrs C also intended to farm goats.
In or about early October 2009, Mr and Mrs C executed a partnership agreement and became registered for GST purposes, initially with a date of effect of 29 September 2009. However, the partnership’s registration was subsequently backdated by the Commissioner of Taxation, at the request of the Married Couple’s accountant, to 1 January 2007. This was because Mr and Mrs C wanted to claim input tax credits (ITCs) for their acquisitions, including in relation to the construction of the residential building.
The Commissioner conducted an audit shortly after backdating the GST registration of the Married Couple as a partnership and concluded that the Married Couple was not a partnership and was not carrying on an enterprise within the meaning of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). The Commissioner stated the partnership was not entitled to be registered.
The Commissioner also stated that the input tax credits that had been claimed by the partnership in respect of the tax periods between 1 January 2007 and 30 June 2010 (Relevant Period) were incorrect because the Married Couple was not carrying on an enterprise. Even if the Married Couple was carrying on an enterprise during the Relevant Period, the Commissioner stated that the acquisitions were not made in the course of carrying on an enterprise or even if they were, they were excluded from being acquired for a creditable purpose because they related to making supplies that would be input taxed supplies of residential premises. In addition, the Commissioner stated that the acquisitions were of a private or domestic nature or some acquisitions were otherwise not creditable because they were entertainment expenses.
The Commissioner issued assessments for the input tax credits claimed by the partnership and, in addition, for penalties at the rate of 25% for a failure to take reasonable care.
The Married Couple lodged objections to the assessments but the objections were disallowed. The question for the Tribunal is whether the objection decisions are correct.
I have concluded that the Commissioner’s objection decisions are correct. I consider that Mr and Mrs C were not a partnership for GST purposes during the Relevant Period. I am also not satisfied that they were carrying on an enterprise, as defined. I have therefore decided that the acquisitions made by the Married Couple are not creditable acquisitions as they did not acquire things for a creditable purpose.
I also agree with the Commissioner’s decisions on penalties.
THE ISSUES BEFORE THE TRIBUNAL
The dispute between the parties involved the following questions:
(a)Was the Married Couple a partnership, as defined, for the purposes of the GST Act, during the whole or any part of the Relevant Period (namely, between 1 January 2007 and 30 June 2010)?
(b)Was the Married Couple carrying on an enterprise, within the meaning of s 9-20 of the GST Act?
(c)Was the Married Couple entitled to claim input tax credits?
(d)Was the building commercial residential premises? (If not, it was not in dispute that the acquisitions were not acquired for a creditable purpose).
(e)Is the Married Couple liable to an administrative penalty for lack of reasonable care, at the rate of 25% of the shortfall amount, for the quarterly tax periods from 1 July to 31 December 2009, pursuant to ss 284-75(1) and 284-90(1) of Schedule 1 to the Taxation Administration Act 1953 (TAA)?
(f)If so, should all or part of the administrative penalty imposed be remitted under s 298-20(1) of Schedule 1 to the TAA?
I propose to deal with the issues in the same order as the questions listed above, but first set out below the relevant facts.
FACTUAL BACKGROUND
The following findings of fact are based on the evidence given by Mr and Mrs C. Their accountant at the relevant time of registering themselves as a partnership for GST purposes was not called to give evidence even though it is alleged by the Married Couple that he advised them in relation to these GST matters.
Purchase of Rural Property
In June 2006 Mr and Mrs C (who at that time were not married) together purchased a rural property close to a beach in Victoria of approximately 200 acres. The property was vacant land, predominantly wooded or scrub, having been previously used as a cattle station. Mr C gave evidence that it was their intention “as a partnership to start a mixed business which would have elements of agriculture and of commercial accommodation”. He said “we began the planning around that in 2005 and we began the investment in that in 2006”.[1] He conceded under cross-examination that no external commercial or tax advice was sought at the outset in relation to the structure of their proposed business and that instead he relied on Mrs C who, he said, gave “top notch advice”.[2] Mrs C has university degrees in science, majoring in economics and computer science. She also has extensive business experience including senior leadership roles.[3]
[1] Transcript P-6
[2] Transcript P-15
[3] Proceedings 2011/3463, T4-58
Mr C has qualifications in landscape architecture and law. He said that growing up in Cyprus meant that goats and olives were a way of life to him. He also knew that the property that they purchased was suitable for goats as the neighbour of their property had 30 goats and used to graze them on their property. There were also olive groves in the area. He further said that the “commercial accommodation fitted in very, very, nicely because – and even to this date there are very, very few competitors around, you know, for the high level end”.[4] I accept Mr C’s evidence that he and Mrs C intended to rent the property but, for the reasons given further below, I reject the suggestion that it was “commercial accommodation”.
[4] Transcript P-14
Works to the Property and Construction of the House
In March 2007 the Married Couple connected electricity to the property at a cost of $56,992.10 and a year later, in March 2008, the Married Couple signed a building contract for the construction of a building on the property, which Mr C had designed. The total construction cost was $282,648.75 and that amount was paid by way of instalment payments broadly referable to works carried out in the period from about March 2008 to December 2009. The various tax invoices from the construction company to Mr and Mrs C describe the project as a “new house”.[5]
[5] Proceedings 2011/5071, T4-79. See also Exhibit A2, Witness Statement of Mr and Mrs C dated 25 October 2012, Annexures E10-E13
In April 2008 a dirt track road of approximately 800 metres was constructed to allow vehicular access to the property at a cost of $4,589.20.
In October 2008 the Married Couple applied for an “investment home loan” from a bank.[6] The purpose of the loan was stated as being “Construction of a dwelling – House”. The loan application states that Mr and Mrs C would not be living there, describing the use of the property as an “investment”.[7] I accept that Mr and Mrs C did not intend to reside there as Mrs C had full-time employment in Melbourne in the Relevant Period and the property was approximately three hours’ drive from Melbourne.
[6] Proceedings 2012/2132, T1-41
[7] Exhibit A2, Witness Statement of Mr and Mrs C dated 25 October 2012, Annexure E54
On 23 November 2009, the occupancy certificate for the completed building was issued. The description relevantly set out under the heading “Building Details” is “Residence” and under the heading “BCA [Building Code of Australia] Class” is the reference “1a”. That classification relevantly refers to “a single dwelling being an attached house, or...” whereas class 1b relevantly refers to “a boarding house, guest house, hostel or the like”. Mr C tried to persuade me at the hearing that the BCA classes changed in 2009 and that what is now class 1b used to be class 1a. In other words, at the time of the certificate, class 1a encompassed a guest house, hostel or the like and that the building on the property was of that class because, amongst other things, “it has a higher spec than a normal residential house”.[8] I found Mr C to be unconvincing especially in light of the 2008 Building Code of Australia extracts tendered by counsel for the Commissioner which contradicted him. As one of the issues concerns whether the premises are residential premises or commercial residential premises, I will deal with the building and Mr C’s evidence in that regard, in more detail below.
[8] Transcript P-56
GST Registration, Other Filings and Bank Account
On 18 October 2009, the Married Couple registered as a partnership for an Australian Business Number (ABN) and for GST with effect from 29 September 2009, with two trading names also listed on the Australian Business Register, one referencing the beach and the other one, referencing olive oil. The main activity of the partnership as completed on the registration form was said to be “agriculture and accommodation”. At about the same time, the Married Couple also obtained a Tax File Number (TFN) for the partnership, and also registered the accommodation as a business name as well as a domain name, but without any website at that domain address.
Both Mr and Mrs C gave evidence that they saw an accountant in or about October 2009 about the GST issues, specifically, as to them being a partnership and registering for GST purposes, however, as noted above, their accountant was not called to give evidence nor was it entirely clear what information Mr and Mrs C gave their accountant.
At the request of their accountant, in early 2010, the start date of registration for both the ABN and GST was backdated by the Commissioner to 1 January 2007. As noted above, this was because Mr and Mrs C wanted to claim ITCs on the construction costs, amongst other things. When asked by counsel for the Commissioner why GST registration had not been attended to earlier, Mr C stated that he “assume[d] you could just simply backdate everything”.[9] Mrs C explained that “we didn’t see it as being a priority at that stage”.[10]
[9] Transcript P-15
[10] Transcript P-83
On 6 October 2009 a bank account was opened with a bank in the business name of “[Place] Beach T/A [Mrs C’s surname] Olive Oil”. With a single exception of a small deposit during the Relevant Period, the only amounts deposited into this bank account are the GST refunds (representing ITCs) paid by the Commissioner.[11] No income was earned as the premises were not let to any person during the Relevant Period or, for that matter, in the three years after the Relevant Period. Nor had the premises been advertised for letting at any time.
[11] Proceedings 2011/5071, T8-106-118
Mr and Mrs C explained that they had not rented the property due to a variety of reasons, the main one being the fact of the Commissioner having audited them and required them to repay the ITCs that they had claimed together with penalties and, therefore, they had not fully furnished the building. Other reasons, beyond the control of Mr and Mrs C, included that Mrs C was made redundant at work and a close family member passed away. Nor had Mr and Mrs C planted any olive trees on the property, even though Mr C’s evidence was that they would take some three to four years to grow and produce crops. They also had not acquired any goats. Mr C explained that he was “not going to invest in livestock until the governments sort out the live export prohibition bill”.[12]
[12] Transcript P-49
Partnership Agreement
Mr and Mrs C also executed a partnership agreement dated 6 October 2009, apparently, at the suggestion of the accountant, which states that the partners are Mr C and Mrs C and that “[t]he Business is commercial farming with the provision of accommodation”. Further, it also states that “[t]he Partners share profit and loss as follows; [Mrs C] 90% and [Mr C] 10%” and “[u]pon Partnership dissolution asset distribution shall be [Mrs C] 50% and [Mr C] 50%”.[13]
[13] Exhibit A2, Witness Statement of Mr and Mrs C dated 25 October 2012, Annexure E26
Counsel for the Commissioner submitted that the existence of a partnership relationship between Mr and Mrs C was questionable. He further submitted that the Commissioner maintains that the real purpose of the partnership agreement was a tax planning tool and points to the fact that Mr C could not think of any other reason why Mrs C would share in 90% of the profits and losses of the partnership under the partnership agreement.[14] I will return to this issue below when discussing the “enterprise” concept. There is an inconsistency in the Commissioner’s position as he seemed to acknowledge the existence of a partnership between Mr and Mrs C which, for the reasons given below, I do not accept.
[14] Commissioner’s Written Outline of Submissions dated 12 March 2013, [14]
The Activities of Mr and Mrs C
I did not find Mr and Mrs C compelling witnesses and, therefore, had some doubts about their business intentions but I had no doubts about their activities, or lack thereof, in relation to their alleged business. I examined the documents carefully and also distinguished between those brought into existence before and after they started lodging Business Activity Statements (BASs) on the premise that they were carrying on an enterprise and entitled to claim ITCs.
Most significantly, I found that the documents produced in or after October 2009 including the partnership agreement, the credit application to finance the purchase of equipment and their business plan (see further below) sought to paint a picture of an existing business of primary production and related accommodation which, in my view, was not founded on the actual activities that had occurred. This is because the activities of Mr and Mrs C were essentially preparatory in nature. Also, they are the kinds of activities that they would have probably undertaken as landholders, regardless of whether they were carrying on a business. I find that they constructed the building and planned to rent it in the future, that is, it was an investment property. But the fact that no rental income was earned either during the Relevant Period or in the three years after the Relevant Period, and that they were not even close to earning income shows that the business had not yet commenced. Accordingly, I find that Mr and Mrs C had not commenced carrying on business in relation to the accommodation component.
The same is true of the primary production component as they had not planted olive trees nor acquired any goats during the Relevant Period or in the following three years. Accordingly, I do not accept their evidence in relation to carrying on a business comprising primary production and related accommodation during the Relevant Period (and, it follows, that neither component was a business on its own). However, I accept that the Married Couple had the intention to commence a business in the future.
ASSESSMENTS OF NET AMOUNTS AND PENALTIES
It is necessary to briefly set out the background of the Commissioner’s GST audit of the Married Couple and the details of the assessments which ensued.
By letter dated 21 June 2010, the Commissioner confirmed to the Married Couple following on from an earlier telephone call, that the Married Couple’s BASs for the quarterly tax periods ended 31 March 2007, 31 March 2008 and 30 June 2008, would be audited. The scope of the audit was later expanded to the tax periods from 1 January 2007 to 30 June 2010 (the Relevant Period). The Commissioner requested the Married Couple to provide certain information and documents by 6 July 2010.
By letter dated 9 July 2010, the Married Couple provided answers to questions, and provided documents, including the business plan titled “[The Beach]: Business Plan – revised for financial year 2010/2011”. The Married Couple’s Business Plan is discussed in further detail below.
By letter dated 6 September 2010, the Married Couple was notified of the audit decision. The decision resulted in a total reduction in the GST net amounts for the Relevant Period of $38,024. The GST assessments essentially represent the reversal of ITCs claimed by the Married Couple on numerous acquisitions during the Relevant Period. Besides the ITCs on the construction costs and works to the property described above, some of the other acquisitions for which the Married Couple claimed ITCs included the following[15]:
(a)a sport utility vehicle purchased in the name of Mrs C at a cost of $42,000 including a GST amount of $3,663.43;
(b)a chipper and a push lawnmower;
(c)furniture, bedding and tableware;
(d)car related expenses such as fuel, parking, road tolls and servicing;
(e)accommodation at a motel, mobile phone expenses;
(f)stationery, books and postage;
(g)confectionery;
(h)meals and entertainment variously described as “partnership dinner”, “business dinner”, “partnership lunch”, “partnership brunch” and “partnership breakfast”.
[15] Proceedings 2011/5071, T9-147-150
The auditor also concluded that the shortfall amount of $38,024 had resulted from lack of reasonable care having been taken. However, an administrative penalty was not imposed on the shortfall amounts arising from the BASs lodged on or after 1 March 2010 due to the operation of the safe harbour provisions. For the shortfall amounts arising from the BASs lodged prior to 1 March 2010 an administrative penalty at the rate of 25% was imposed, giving rise to a total administrative penalty of $5,992.25 which is the only amount of penalty in issue in these proceedings.
On 9 September 2010 the Commissioner issued Notices of Assessment of GST net amounts for the Relevant Period.
On 18 April 2011, the Married Couple lodged an Objection to the assessments, taking issue only with the Commissioner’s decision of whether they were carrying on an enterprise based on primary production. On 21 May 2011 the Commissioner issued a Notice of Objection Decision, disallowing the Married Couple’s objection.
In August 2011, Mr C on behalf of the Married Couple filed in the Administrative Appeals Tribunal an Application for Extension of Time for Lodging Application for Review of Decision. The extension was granted by the Tribunal and in November 2011 Mr C filed an Application for Review of Decision.
On 21 February 2012, Mr C on behalf of the Married Couple lodged a further Objection, including an objection to the Commissioner’s audit decision so far as it concerned the finding that the building on the property was not commercial residential premises. This is referred to as the Second Objection. On 4 April 2012 the Commissioner issued his Notice of Objection Decision, disallowing the Married Couple’s Second Objection.
On 28 May 2012 the Married Couple lodged an Application for Review of Decision relating to the Notice of Objection Decision regarding the Second Objection, and both Tribunal applications were later joined and heard at the same time.
WAS THE MARRIED COUPLE A PARTNERSHIP?
A threshold issue is whether Mr and Mrs C were a partnership. The term “partnership” is defined in s 195-1 of the GST Act as having the same meaning given by s 995-1 of the Income Tax Assessment Act 1997 (ITAA). Section 995-1 of the ITAA relevantly defines “partnership” in the following manner:
partnership means:
(a)an association of persons (other than a company or a *limited partnership) carrying on business as partners or in receipt of *ordinary income or *statutory income jointly; or
(b)...
A partnership is an “entity” for the purposes of s 184-1 the GST Act and, therefore, if the partnership is carrying on an enterprise it can register for GST purposes.
The key issue in this case is whether Mr and Mrs C were a general law partnership, that is, carrying on business as partners during the Relevant Period as they had not received any income jointly (that is, they were not a tax law partnership).
I note that the definition of “partnership” in s 995-1 of the ITAA (which is incorporated, as noted above, for the GST Act) differs from the traditional definition found in s 5 of the Partnership Act1958 (Vic) (and the equivalent provision in the NSW partnership legislation) where partnership is defined as “the relation which subsists between persons carrying on a business in common with a view of profit”. Significantly, the definition in the ITAA incorporated into the GST Act does not contain the “with a view of profit” requirement set out in the partnership legislation. The taxation statutes, relevantly, refer only to persons carrying on business as partners – which is the test to be satisfied here. A possible implication of this is that an intention to make a profit is not critical to a finding of a partnership relationship in tax law, as it is under the partnership legislation. However, even if this is the case which I doubt because of the reference in any event to persons carrying on business, this appears to not matter for GST purposes. This is because paragraph (c) of s 9-20(2) of the GST Act expressly excludes from the definition of “enterprise” a partnership carried on “without a reasonable expectation of profit or gain”. I will discuss the enterprise issue separately below but first deal with what is a partnership.
In Yacoub v Commissioner of Taxation [2012] FCA 678 at [23] – [25] Jagot J helpfully summarised the principles in relation to the existence and indicia of a partnership, in the following manner:
[23] “The existence of a partnership is determined by reference to the true contract and intention of the parties as appearing from all of the facts and circumstances relevant to the relationship of the parties” (Amadio Pty Ltd v Henderson (1998) 81 FCR 149 at 172).
[24] The indicia of the existence of a partnership include: – (i) a mutual interest in the carrying on of the business for the purpose of profit or gain (in this regard, it has been said that all partnerships involve a joint venture but not all joint ventures involve a partnership, for example, Whywait Pty Ltd v Davison [1997] 1 QdR 225 at 231), (ii) mutual confidence that the parties will engage in the venture for joint advantage only (for example, Birtchnell v Equity Trustees, Executors & Agency Co Ltd (1929) 42 CLR 384 at 407-408), (iii) sharing of profits and losses from the venture or a so-called community of profit and loss (Fenston v Johnston (1940) 23 TC 29 at 34), and (iv) mutual agency in the sense that each party is a principal of the business and may bind the other (for example, Momentum Productions Pty Ltd v Lewarne (2009) 174 FCR 268; [2009] FCAFC 30 at [36]-[44] (Momentum Productions)).
[25] Statements of intention by the parties may be relevant but do not determine whether a partnership exists, as the issue is determined by reference to the “substance and reality of the transaction being adjudged to be a partnership” (Fenston v Johnston at 35-36).
Whether or not there is a partnership is, therefore, a question of fact, dependent in part on whether there is a business. Whether or not an activity is a business is also a question of fact commonly arising in taxation cases. The decision of the High Court in Spriggs v Commissioner of Taxation [2009] HCA 22; (2009) 239 CLR 1, although concerned with the issue of deductibility in the income tax context, offers useful guidance. The majority of the High Court stated at 19 [59] that:
The existence of a business is a matter of fact and degree. It will depend on a number of indicia, which must be considered in combination and as a whole. No one factor is necessarily determinative. Relevant factors include, but are not limited to, the existence of a profit-making purpose, the scale of activities, the commercial character of the transactions, and whether the activities are systematic and organised, often described as whether the activities are carried out in a business-like manner.
It is noted that one of the relevant factors which informs the analysis as to the existence of a business and, therefore, of a partnership is the existence of a profit-making purpose. The intention of a taxpayer is clearly another relevant consideration in determining whether a particular activity constitutes the carrying on of an enterprise: Russell v Commissioner of Taxation [2011] FCAFC 10; (2011) 190 FCR 449, 465 [72] (Dowsett J). That said, “[a]n intention to carry on a business will not determine that a business is in fact carried on”: Goodman Fielder Wattie Ltd v Commissioner of Taxation (1991) 29 FCR 376 at 385; (Hill J). See also Russell, 468 [87] (Gordon J).
As counsel for the Commissioner submitted, that must no doubt be correct because, as Brennan J observed in Inglis v Federal Commissioner of Taxation (1979) 10 ATR 493 at 496-497:
The carrying on of a business is not a matter merely of intention. It is a matter of activity… At the end of the day, the extent of activity determines whether the business is being carried on. That is a question of fact and degree.
Intention, as Davies J explained in Federal Commissioner of Taxation v Walker (1984) 2 FCR 283 at 297-298 is only one factor to be taken into account:
It is not to be overlooked, nevertheless, that the plans of the taxpayer for the future are only factors to be taken into account. As Lord Buckmaster said in J. & R. O’Kane & Co. v The Commissioner of Inland Revenue (1922) 12 TC 303 at 347, “…the intention of a man cannot be considered as determining what it is that his acts amount to; …”. Whatever the taxpayer’s plans for the future, he will be held not to be carrying on a business if his business activities are miniscule. See Thomas v Federal Commissioner of Taxation (1972) 46 ALJR 397, in which the growing of pine trees was considered not to have “a significant commercial purpose or character” (p.401) and Case R1, 84 ATC 101, in which it is held that the taxpayer merely performed acts preparatory to the carrying on of a business.
Mr and Mrs C both gave evidence that they had purchased the property because it was suitable for mixed usage and they had the intention to carry out a business of primary production and related accommodation and I accept their evidence in that regard. They set about constructing a building on the property with a view they said, to letting it out for short-term holiday accommodation even though this did not come to fruition in the Relevant Period.
Mrs C gave evidence that she and Mr C had settled on a partnership as their business structure. The following exchange between counsel for the Commissioner and Mrs C during cross-examination, sets out her explanation:
Mr Kasep: So you settled on a partnership. And was that as a consequence of the advice that you received from [your accountant]?
Mrs C: I wouldn’t call it as a result of. Certainly the reality and the day-to-day we operate is that we are partners in life and if you’re partners in life I think that gives you a different approach to how you would view setting up an enterprise together. So, you know, any of you who have a partner will know that the way in which you think about things in a different way. So if I was setting up a business with somebody who, you know, was an acquaintance, I would have a very different approach to it as setting up with my husband. So, you know, our expectation from the outset would be that it will be a partnership. In the end we got, I would say, some confirmation that it was a sensible approach, from the accountant. But we didn’t get – he didn’t put that thought in our head. That’s how I would put it.[16]
[16] Transcript P-82-83
Mr C also said “it’s a family partnership… we’re a family, it just ultimately merged into the family partnership, which is what it is”.[17] Mr C, having no other employment, did the “actual [work] on the ground” as he put it[18], and Mrs C “financed most of it”.[19]
[17] Transcript P-17
[18] Transcript P-16
[19] Transcript P-43
Mr and Mrs C also relied on their business plan document to show that they were carrying on a business and partners of a partnership. They both said that this had been prepared by them collaboratively, with Mr C taking responsibility for the narrative whereas Mrs C had the forte in the financial information. As noted above, it was provided by the Married Couple to the Commissioner in early July 2010, in response to the Commissioner’s request for relevant documentation and it covered the financial years ending 30 June 2011 to 2020. It had even been described by the Commissioner, at one time, as “comprehensive”. At the hearing, however, there was extensive cross-examination by counsel for the Commissioner of both Mr C and Mrs C as to the genuineness of this document, in particular, whether it had only been created in response to the Commissioner’s request for a business plan, whether there were earlier versions of it and what were the details and assumptions behind the revenue projections, including as to projected occupancy rates and olive oil production costs. It emerged from the responses of Mr C and Mrs C that many aspects had not been considered in detail and that they had only done some general research on the internet. For example, they had not considered the costs in relation to a managing agent in the area for the property,[20] they had not discussed the tariffs with any agent[21] and there were no relevant details about the various expenses involved in producing olives and olive oil, except for references to published figures about processing costs.[22] I conclude that the revenue and profit projections contained in the business plan were short on substance and the business plan did not reference any business-like activities by Mr and Mrs C during the Relevant Period.
[20] Transcript P-61
[21] Transcript P-97
[22] Transcript P-100
In arriving at that conclusion, I accept the evidence of Mr and Mrs C in relation to planning on being a partnership, and that their written agreement was also intended to reflect a partnership, however, I do not accept that they were carrying on business as partners and, therefore, in my view Mr and Mrs C are not a partnership at general law or for GST purposes during the Relevant Period. Both the written partnership agreement and their business plan overstated the true position. The fact is that their activities in the Relevant Period did not constitute them carrying on business, notwithstanding their intentions and their written agreement. Furthermore, their business plan did not advance their position. Not only was it unrealistic, it did not support any actual activities being undertaken by them that corroborated their claims about an existing “agriculture and accommodation” business.
WAS THE MARRIED COUPLE CARRYING ON AN ENTERPRISE?
As I have concluded that the Married Couple was not a partnership, it cannot register as a partnership under the GST Act (s 184-1 of the GST Act). However, I propose to address the balance of the issues on the basis that the Married Couple was a partnership and the relevant entity for GST purposes.
An entity cannot be registered for GST unless it is “carrying on” an “enterprise” (s 23-5; s 23-10 of the GST Act). The issue is therefore whether the Married Couple (if it were a partnership) was carrying on an enterprise during the Relevant Period. The definition of “enterprise” is contained in s 9-20. The relevant paragraph for present purposes is as follows:
9‑20 Enterprises
(1)An enterprise is an activity, or series of activities, done:
(a)in the form of a *business; or
...
The word “business” is defined in s 195-1 of the GST Act as including “…any profession, trade, employment, vocation or calling, but does not include occupation as an employee.”
The other important part of the definition of enterprise that is relevant is paragraph (c) of s 9-20(2) which provides an exclusion in the following terms:
(2) However, enterprise does not include an activity, or series of activities, done:
…
(c)by an individual (other than a trustee of a charitable fund, or of a fund covered by item 2 of the table in section 30‑15 of the ITAA 1997 or of a fund that would be covered by that item if it had an ABN), or a *partnership (all or most of the members of which are individuals), without a reasonable expectation of profit or gain; or [emphasis added]
…
Further, “carrying on” is defined in s 195-1 to include “doing anything in the course of the commencement or termination of the enterprise”.
It is noted that an entity can carry on more than one enterprise. An entity can also carry on some activities that are an enterprise and some that are not.
Furthermore, while s 195-1 might extend the definition of enterprise to “doing anything in the course of the commencement”, there is still an important distinction to be made between commencement and preparation for commencement, which is key in the present case where, as set out above, Mr and Mrs C have undertaken some activities, including the construction of a residential building on the property. As Dowsett J said in Russell at [71]:
[C]ommencement of the enterprise is not necessarily the same thing as taking a step in preparation for such commencement.
A case which has some resemblance to the present situation, although concerned with income tax, is Case N101 (1981) 81 ATC 560 where the taxpayer purchased land for the purpose of growing macadamia trees. During the same year he had taken soil depths of the property, drawn up plans and mapped out plant and irrigation layouts. In the following year, the taxpayer planted macadamia trees and constructed a shed. In confirming the Commissioner’s assessment in relation to 1978, Chairman Stevens and Member Harrowell said at 561:
We accept the taxpayer desired to commence a business of growing macadamia nuts but we do not accept that, during the relevant year, he had commenced such a business. He was preparing to commence but that does not, in our view, constitute actual commencement.
In Re AT84/20 and Commissioner of Taxation (AAT 3845, 19 October 1987), Case N101 was distinguished on the basis that the taxpayer had actually acquired trees. In the High Court decision of Thomas v Federal Commissioner of Taxation (1972) 3 ATR 165 at 169 Walsh J appeared to also recognize a similar distinction:
It is common ground that the appellant did not obtain any income from primary production before or in the tax year. No harvest had yet been obtained from any of the trees. But, in my opinion, that fact does not necessarily preclude a finding that the appellant was carrying on a business of primary production. This was not a case in which land was being improved in order to bring it to a condition in which it might be used for primary production for which it was not yet suitable. …Trees had been planted and were growing, although they had not yet grown to an age at which they would yield marketable produce.
These cases are consistent with the proposition that merely reclaiming land, which is essentially all the Married Couple has done with respect to the primary production component of their intended enterprise, in the absence of any other activities such as acquiring or planting trees, cannot be characterised as business-like activities. These activities were not undertaken “in the course of the commencement … of the enterprise”, which is the expanded meaning of enterprise by virtue of the definition of “carrying on”. Rather, at their highest, they can only be described as preliminary steps. The Married Couple’s activities were essentially preparatory in nature and lacked commercial character. While they also constructed a building on the property, they did not finish furnishing it nor take any steps to rent it. On their own, these steps were not enough to meet the definitions of “carrying on” an “enterprise” in the GST Act. I am not satisfied that Mr and Mrs C were carrying on an enterprise during the Relevant Period.
Even if they were carrying on an enterprise, the exclusion in paragraph (c) of s 9-20(2) of the GST Act would apply as it carves out from the definition of enterprise, an activity or series of activities done by a partnership, where all or most of the members are individuals, without a reasonable expectation of profit or gain. While the Married Couple’s business plan stated that one of their overall business goals was to reach profitability by June 2013, that was obviously inflated, even in July 2010, in circumstances where the accommodation had not been advertised for rent and no olive trees had been planted. Additionally, those factual circumstances had not changed three years after the Relevant Period.
Furthermore, Mrs C acknowledged that the likelihood of making losses rather than profits informed the decision made by her and Mr C to settle on the partnership structure (and to execute the partnership agreement in October 2009), in order to reduce her own tax. In other words, it appears that Mrs C and Mr C did not believe their business plan and, specifically, the achievement of profitability by June 2013, as Mrs C planned on setting off those losses from her own taxable income. The following exchange is relevant in this regard:[23]
Mr Kasep: ... Can I ask you to have a look at this document [the partnership agreement], the line:
Partner shares profit and loss as follows –
Why is 90 per cent of the profit and loss of the partnership given to you?
Mrs C:-We were told that given the likelihood of a - a small business having more loss than profit in early years that that would probably be a more sensible way of structuring it, so we took that advice.
Mr Kasep: So that was purely for tax planning purposes?
Mrs C: Yes.
[23] Transcript P-102-103
WAS THE MARRIED COUPLE ENTITLED TO CLAIM INPUT TAX CREDITS?
The issue of whether the presumed partnership is entitled to claim ITCs depends on whether the partnership made a “creditable acquisition”. Section 11-5 of the GST Act relevantly provides that “[y]ou make a creditable acquisition if: (a) you acquire anything solely or partly for a *creditable purpose” … and (d) you are registered, or *required to be registered.”
The meaning of “creditable purpose” is given by s 11-15 of the GST Act. Relevantly, subsection 11-15(1) states that “[y]ou acquire a thing for a creditable purpose to the extent that you acquire it in *carrying on your *enterprise”.
The consequence of my conclusion that Mr and Mrs C were not carrying on an enterprise during the Relevant Period means that the Commissioner must cancel the partnership’s GST registration from 1 January 2007 (the fact that the Commissioner had not done so, even though he had reached the same conclusion on the audit, was apparently due to an oversight). Accordingly, as the partnership will not be registered, it will not be entitled to claim any input tax credits. Additionally, it means that Mr and Mrs C did not acquire a thing for a creditable purpose. Therefore, even if Mr and Mrs C were a partnership they are not entitled to claim input tax credits on any of their acquisitions.
WAS THE BUILDING “COMMERCIAL RESIDENTIAL PREMISES”?
The issue of whether the premises were “commercial residential premises” is not an issue that I have to answer, given my decisions that the Married Couple was not a partnership and was not carrying on an enterprise and, therefore, not entitled to claim any input tax credits. Nevertheless, as the parties addressed me at some length about the nature of the premises, it is appropriate to set out some of my observations.
The issue of whether the premises are “commercial residential premises”, as defined, is relevant for an entity’s “creditable purpose”, amongst other reasons. The term “creditable purpose” is defined in the GST Act (to the extent presently relevant) in s 11-15 as follows:
11‑15 Meaning of creditable purpose
(1)You acquire a thing for a creditable purpose to the extent that you acquire it in *carrying on your *enterprise.
(2)However, you do not acquire the thing for a creditable purpose to the extent that:
(a)the acquisition relates to making supplies that would be *input taxed: or
(b)the acquisition is of a private or domestic nature.
As noted above, I have concluded that Mr and Mrs C were not carrying on an enterprise during the Relevant Period so the acquisitions made cannot have been made in carrying on an enterprise and acquired for a creditable purpose (s 11-15(1)). Also, even if they were acquired in carrying on the entity’s enterprise, the acquisitions would not be creditable acquisitions if they related to making supplies that would be input taxed (s 11-15(2)(a)). On the other hand, if the acquisitions related to making taxable supplies of commercial residential premises, the acquisitions would be creditable.
Section 40-35 of the GST Act is concerned with input taxed supplies of residential premises, by way of lease, hire or licence. Subsection 40-35(1) relevantly provides that:
(1)A supply of premises that is by way of lease, hire or licence (including a renewal or extension of a lease, hire or licence) is input taxed if:
(a)the supply is of *residential premises (other than a supply of *commercial residential premises or a supply of accommodation in commercial residential premises provided to an individual by the entity that owns or controls the commercial residential premises); or
…
However, paragraph 40-35(2)(a) provides that “the supply is input taxed only to the extent that the premises are to be used predominantly for residential accommodation (regardless of the term of occupation)”.
Therefore, if the premises are “residential premises”, but not “commercial residential premises”, the supply of the premises will be input taxed and the related acquisitions not acquired for a creditable purpose, to the extent that the premises are to be used predominantly for residential accommodation (regardless of the term of occupation).
Section 195-1 of the GST Act defines “residential premises” as:
residential premises means land or a building that:
(a) is occupied as a residence or for residential accommodation; or
(b) is intended to be occupied, and is capable of being occupied, as a residence or for residential accommodation;
(regardless of the term of the occupation or intended occupation) and includes a *floating home.
Section 195-1 of the GST Act relevantly defines “commercial residential premises” as:
commercial residential premises means:
(a) a hotel, motel, inn, hostel or boarding house; or
…
(f) anything similar to *residential premises described in paragraphs (a) to (e).
…
The residential building on the property is indisputably a house, as ordinarily understood, as evident from the photos and plans in evidence. I have also referred to the construction contract entered into in March 2008 and the various tax invoices from the construction company which described the project as a “new house”. The house has two storeys with three bedrooms, one upstairs and two downstairs. There are two bathrooms, one on each floor, one of these being described as an en suite to the main bedroom. There is one kitchen on the top level and an internal lounge/living/dining area on each floor. Access to the upstairs part of the building is via the main entrance, which is off the downstairs lounge area, that is, there is no separate entry to the first level. None of the bedroom doors are lockable from the outside, only from the inside.
The house is “residential premises”, as defined. It is also to be used predominantly for residential accommodation because the legislation prescribes that the term of occupation or length of stay at the premises is to be ignored in determining the characterisation of the premises as residential premises. This means that whether someone stays in the house for a weekend as a tourist or for six months under a residential tenancy agreement, it is still “residential premises”, as defined. The key issue is whether the premises are also “commercial residential premises” that is, are the premises similar to residential premises that have a likeness or resemblance to, a hotel, motel, inn, hostel or boarding house?
The terms “hotel”, “motel”, “inn”, “hostel” and “boarding house” are not defined terms within the GST Act and, therefore, take their ordinary meanings. The features of these types of premises were considered in ECC Southbank Pty Ltd as trustee for Nest Southbank Unit Trust & Anor v Commissioner of Taxation [2012] FCA 795; (2012) 205 FCR 505. The terms were also considered by the Tribunal in Re Wynnum Holdings No 1 Pty Ltd & Anor and Commissioner of Taxation [2012] AATA 616. Furthermore, as observed by Stone J in South Steyne Hotel Pty Ltd v Federal Commissioner of Taxation [2009] FCA 13; (2009) 71 ATR 228 at paragraph [44], “[i]n addition to providing accommodation they [hotels, motels, inns, hostels and boarding houses] also have in common that, large or small, they provide for multiple occupancies. The terms [hotel, motel, etc] are not used where only one apartment, room or other space is provided”.
The Married Couple submitted that the house was commercial residential premises because it is an investment property and they intended to rent it and because they considered it to be similar to a hotel. The fact that it is an investment property is irrelevant because of the statutory definition of commercial residential premises in the GST Act. I agree with the submissions of the Commissioner that the physical characteristics of the house demonstrate that the premises are not, nor sufficiently similar to, a hotel, motel, inn, hostel or boarding house as per paragraphs (a) and (f) of the definition of “commercial residential premises” in s 195-1 and, furthermore, the premises cannot be operated in such a way that would display the features of a hotel, motel etc as discussed by the Federal Court in ECC Southbank at paragraphs [51] to [68], nor those discussed by the Tribunal in Wynnum Holdings at paragraphs [65] to [77]. Most significantly, the house also lacks the multiple occupancies factor.
Despite Mr C’s endeavours to convince me that the house can be occupied by up to three separate groups of guests staying at the house at one time (as it has three bedrooms), I do not consider that it was designed to provide for multiple occupancies. For example, the four different entry points of the house on the ground floor are not different entry points to self-contained rooms or spaces. Moreover, one of those entry points is from the garage which is not how one would ordinarily enter a hotel. Also, access to the bedrooms upstairs is only through the lounge downstairs. While there are two living and dining areas (one on each floor), there is only one kitchen and only two bathrooms (one of them being an en suite off the master bedroom). Also, none of the bedrooms lock from the outside, only from the inside. These are features commonly associated with a luxury residential home not “high end commercial accommodation”. Accordingly, I find the premises are not commercial residential premises, as defined.
It follows that if the Married Couple were a partnership and carrying on an enterprise, contrary to my conclusions above, any acquisitions that relate to making input taxed supplies of residential premises would not be acquired for a creditable purpose: s 11-15(2)(a).
WAS THE MARRIED COUPLE LIABLE TO PENALTIES? IF SO, SHOULD ALL OR PART OF THE PENALTIES BE REMITTED?
The Commissioner formed the view that the Married Couple was liable to pay penalties at the rate of 25% on the basis that there had been a failure to take reasonable care to comply with a taxation law. I was not satisfied that the penalties imposed at that rate were excessive nor that they should be remitted to any extent.
In this case, the factors that I consider to be relevant to the question of penalty were as follows:
(a)Mrs C is an experienced businesswoman holding senior positions in companies, including a multinational enterprise in the past. Indeed, Mr C said that he relied on the advice of his wife because of her extensive business experience. Having regard to her experience, she should have known about the complex issues involved and sought specialist tax and commercial advice at the outset when they purchased the property. She should have also known that some of the claims for ITCs were questionable, for example, in relation to her car and related expenses, and the “partnership dinners”. The latter would also be precluded from being creditable acquisitions on the basis that that they are non-deductible expenses under s 69-5 of the GST Act.
(b)The Married Couple had retained an accountant to advise them from about October 2009 but the precise nature of the advice that was given at that time by the accountant was not in evidence except that, in broad terms, he had suggested the terms of the written partnership agreement and later requested the Commissioner to backdate their GST registration. He also lodged some of the BASs in question. This is clear from a letter that Mr C wrote to the Commissioner dated 24 August 2010 in which he stated that he and Mrs C had provided to their accountant “raw data in spreadsheets of our expenditure and related GST” for the purpose of the accountant preparing and lodging the BASs. There was also a tax invoice in the T-Documents for the amount of $110 in relation to the lodgement of the December 2009 quarterly BAS.[24] It was not clear, however, what instructions and information were given to the accountant by Mr and Mrs C. In any event, it appears at least from the accountant’s invoice for that quarterly period ($110) that the scope of the advice was very limited.
(c)In the same letter dated 24 August 2010 addressed to the Commissioner, as referred to above, Mr C stated as follows:
On the basis of correspondence from you [Commissioner] regarding GST claims on capital costs of construction, in particular GST Ruling 2000/20 paragraph 83 and our business activities [sic] lack of multiple occupancy, I believe the Partnership ... has received negligent advice from [the accountant]... As it is not in the best interests of the Partnership to receive negligent and unrealistic advice, the partners have today terminated our relationship with [the accountant].
Most tellingly, Mr C then sought to re-characterise much of the expenditure in respect of which ITCs had been claimed, as being in fact for the primary production activities and not for the accommodation enterprise. For example, he stated to the Commissioner that the expenditure on works relating to the provision of electricity, water, the building of the access road, the “company car” and the “garage and production processing block” (being a reference to the double garages attached to the house), as well as the professional fees, travel and accommodation were referable, in their entirety, to the primary production activities. He proceeded to argue that he and Mrs C should be entitled to claim full ITCs with respect to those expenses, notwithstanding his earlier representations that they related to the accommodation enterprise. It is not surprising that the Commissioner decided to expand the scope of the audit and to then closely scrutinise the primary production activities.
(d)Mr and Mrs C initially claimed 100% of the GST included in the price of the car purchased in the name of Mrs C as well as 100% of the car related expenses such as fuel, tolls and servicing and only proposed to reduce the claim to take into account non-business usage, during the course of these proceedings.
(e)Mr and Mrs C claimed to have been advised by their accountant that they could claim ITCs on their various partnership meals but even Mr C conceded under cross-examination that it looked “odd” that he could claim the ITCs for the “partnership dinner” on Mrs C’s birthday.
[24] Proceedings 2012/2132, T1-35
Having regard to those factors, Mr and Mrs C failed to discharge the onus that they bore pursuant to s 14ZZK of the TAA of establishing that the assessment by the Commissioner of a 25% administrative penalty was excessive. Accordingly, I find that the administrative penalty of 25% is the correct or preferable one as they failed to take reasonable care.
The final issue to be considered is whether the penalty should be remitted. Taking into account all of the circumstances of the case, I am not satisfied that the penalty should be remitted in whole or part. In particular, there is nothing in the circumstances outlined in sub-paragraphs (a) to (e) of paragraph [82] that warrants a reduction in the penalties or that lends any credence to the views of the Married Couple that the penalties are inappropriate and should be remitted.
I certify that the preceding 84 (eighty four) paragraphs are a true copy of the reasons for the decision herein of Ms G Lazanas, Senior Member ................[sgd]........................................................
Associate
Dated 13 December 2013
Dates of hearing 18 and 19 February 2013 Date final submissions received 22 March 2013 Applicant In person Counsel for the Respondent Mr B Kasep Solicitors for the Respondent Legal Services Branch, Australian Taxation Office
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