The Trustee for the Seabreeze Estate Unit Trust and Commissioner of Taxation (Taxation)
[2019] AATA 1395
•21 June 2019
The Trustee for the Seabreeze Estate Unit Trust and Commissioner of Taxation (Taxation) [2019] AATA 1395 (21 June 2019)
Division:TAXATION AND COMMERCIAL DIVISION
File Number(s): 2018/2661
Re:The Trustee for the Seabreeze Estate Unit Trust
APPLICANT
AndCommissioner of Taxation
RESPONDENT
DECISION
Tribunal:Ms G Lazanas, Senior Member
Date:21 June 2019
Place:Sydney
The objection decision is set aside and, in substitution thereof, the objection is allowed so that the supplies made by the Applicant in the quarterly tax periods ending 30 September 2015 and 31 December 2015 are eligible for the margin scheme and the administrative penalty imposed is applied to the reduced tax shortfall.
.........................[SGD]...............................................
Ms G Lazanas, Senior Member
CATCHWORDS
TAXATION – GST – sale of property – application of margin scheme – whether supply is ineligible for the margin scheme – whether the vendor chose to apply the margin scheme in working out the amount of GST on the supply of the property to the taxpayer – whether the vendor made a choice – meaning of GST worked out without applying the margin scheme - objection decision set aside and matter remitted for reconsideration
LEGISLATION
Administrative Appeals Tribunal Act 1975 (Cth), s 35
A New Tax System (Goods and Services Tax) Act 1999 (Cth), ss 40-2, 40-35, Division 75, Division 129, s 195-1
Taxation Administration Act 1953 (Cth), ss 14ZZE, 14ZZK
CASES
Cyonara Snowfox Pty Ltd v Federal Commissioner of Taxation (2012) 208 FCR 471
Danmark Pty Ltd v Federal Commissioner of Taxation (1944) 7 ATD 333
Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614
Imperial Bottleshops Pty Ltd & Egerton v Federal Commissioner of Taxation 91 ATC 4546
Macmine Pty Ltd v Federal Commissioner of Taxation (1979) 9 ATR 638
Re Cyonara Snowfox Pty Ltd and Commissioner of Taxation [2011] AATA 124
Tisdall v Webber [2011] FCAFC 76
Trautwein v Federal Commissioner of Taxation (1936) 56 CLR 63Vidler v Commissioner of Taxation [2010] FCAFC 59
SECONDARY MATERIALS
Business Activity Statement Instructions, Australian Taxation Office, Commonwealth of Australia, 12 May 2000
REASONS FOR DECISION
Ms G Lazanas, Senior Member
21 June 2019
INTRODUCTION
The taxpayer in this proceeding is referred to by the pseudonym Seabreeze Estate Pty Ltd as Trustee for the Seabreeze Estate Unit Trust (Trustee) because, following the hearing, it asked for a confidentiality order restricting the disclosure of the taxpayer’s name and the name of its witness, in the reasons for decision. The Commissioner of Taxation did not object to that course and I granted the confidentiality order pursuant to s 35(3) of the Administrative Appeals Tribunal Act 1975 (Cth). The Trustee would have been entitled to a private hearing under s 14ZZE of the Taxation Administration Act 1953 (TAA) if that request had been made before or at the hearing.
The Trustee is in dispute with the Commissioner as to whether it is entitled to use the margin scheme in working out the GST payable on the sales of two townhouses, pursuant to Division 75 of the A New Tax System (Goods and Services Tax) Act 1999 (Cth) (GST Act). The Commissioner issued amended assessments to the Trustee for the quarterly tax periods ending 30 September 2015 and 31 December 2015 (Relevant Tax Periods) on the basis that the supplies were “ineligible for the margin scheme”. The Trustee argued that the supplies of the two townhouses made by it were eligible for the margin scheme and, therefore, that the assessments are excessive.
Accordingly, the key issue for determination by the Tribunal is whether the supplies are eligible or ineligible for the margin scheme. The resolution of that issue depends on whether the vendor who supplied the property to the Trustee, (referred to as the Partnership), chose to apply the margin scheme in working out the GST on the supply of the property to the Trustee under the former s 75-5(1) of the GST Act. The determination of that threshold issue informs whether the Trustee’s subsequent supplies of the two townhouses were eligible for the margin scheme under the current s 75-5(1) of the GST Act.
The difficulty in this case and the reason it came before the Tribunal is because the Commissioner had requested the Trustee to provide evidence to support its position that the GST margin scheme had been applied by the Partnership. Despite its efforts, the Trustee had not been able to obtain a full copy of the sale contract or any other direct evidence to support the Partnership’s GST choice in using the margin scheme on the sale of the property to the Trustee. The Trustee’s direct evidence was limited essentially to the effect that it had purchased the property on the basis that no GST was payable by it and it was not entitled to claim an input tax credit on the purchase. The Commissioner had also been unable to verify the Trustee’s position through numerous inquiries he made of third parties.
The Trustee as the taxpayer bears the onus of proof in review of objection decisions before the Tribunal: s 14ZZK(b)(i) of the TAA. The onus of proof is on the balance of probabilities. The Trustee as the taxpayer must persuade the Tribunal of its position and show the assessments issued by the Commissioner are excessive or otherwise incorrect and what the assessments should have been.
I am satisfied on the balance of probabilities that the Trustee did acquire the property from the Partnership under the margin scheme and, therefore, its subsequent supplies of the two townhouses are, in turn, eligible for the margin scheme. It follows that the assessments of net amount and administrative penalty issued by the Commissioner on the basis the Trustee made taxable supplies under the basic GST rules and was not allowed to use the margin scheme are excessive.
As the margin scheme provisions in the GST Act applicable to the determination of the issue were amended between when the Trustee purchased the property from the vendor and subsequently sold the newly constructed townhouses, it is necessary to have regard to the different iterations of the margin scheme provisions in the GST Act. Before doing so, it is convenient to set out the factual background and the evidence before the Tribunal.
THE ISSUE
The key issue for determination by the Tribunal is whether the Trustee was eligible to use the margin scheme on its sales of two townhouses. Pursuant to s 75-5(2) of the GST Act, the Trustee is eligible to use the margin scheme on its supplies unless it acquired the entire freehold interest of the land through a supply that was ineligible for the margin scheme.
THE FACTUAL BACKGROUND
In January 2005, the Trustee acquired a property at the Entrance North (Land) from two unrelated companies who were carrying on business as a partnership – being the Partnership referred to in [3] above.
A copy of the front page of the contract for sale of land, being in the form of the NSW 2000 edition of the standard contract of sale of the land was in evidence but the balance of the sale contract was not available (Land Sale Contract).[1] The Trustee says that it has been unable to locate copies of any other pages of the Land Sale Contract either in its records or those of other persons involved in the transaction.
[1] T11-86.
Neither the Partnership (the vendor) nor the lawyers for the Partnership could produce a copy more than ten years after the transaction had occurred. One of the partner’s representatives had advised the Trustee that the Partnership’s business records had been disposed of. The Trustee had also been informed the Partnership’s lawyers had retired, and their records could not be found. Additionally, the lawyers for the Trustee had sold their practice and the person who had acquired the legal practice could not find a copy. The Trustee’s advocate at the hearing, Mr Stephen Baxter, also credited the Commissioner’s auditor with pursuing every possible source to find a copy of the complete contract, but to no avail.[2]
[2] Transcript p-16.
Relevantly, the front page of the Land Sale Contract states the following:
(a) The contract date is 24 January 2005 and the completion date is 31 January 2005.
(b) In the row titled Improvements, it is identified that the land is vacant land.
(c) The vendor’s solicitor is listed as being Sylvia Liddle and Associates and the purchaser’s solicitor as Manna & Flammia.
(d) The purchase price is $1,080,000.
(e) The version of the contract provided is signed by the vendor but not by the purchaser.
(f) A note above the signature block states “NOTE: Subject to clause 13, the price INCLUDES goods and services tax (if any) payable by the vendor”. Otherwise, no information as to GST is included.
In the template NSW 2000 edition of the standard contract for sale of land (a blank copy of which was tendered by the Commissioner at the hearing), the GST information was contained on the second page of the sale contract under a bold heading “GST information (A New Tax System (Goods and Services Tax) Act 1999 (clause 13)”.[3] This is where numerous statements then appeared underneath that heading together with boxes indicating “NO” or “YES” which were required to be crossed by the parties, as appropriate. Relevantly, a few of the statements read as follows:
This sale is a taxable supply (sections 9-5 and 195-1) □ NO □ YES
..
Margin scheme applies to property (division 75 and section 195-1) □ NO □ YES
[3] Exhibit R1.
As already noted above, the second page of the Land Sale Contract was not produced and no-one, including one of the Trustee’s former directors who gave oral evidence, referred to by the pseudonym “Mr Fabio”, could specifically recall what box, if any, was crossed on the second page of the Land Sale Contract. In particular, Mr Fabio could not say whether the margin scheme “yes” box was crossed. Other information which was uncontroversial is as follows.
The Partnership, being the vendor of the property to the Trustee, had earlier acquired the property in October 2003 for $1,200,000, before selling it, at a loss, to the Trustee in January 2005 for $1,080,000.[4]
[4] T11-86.
The Trustee was not registered for GST at the time of the purchase of the property from the Partnership in January 2005. The Trustee obtained an Australian Business Number (ABN) with effect from 1 July 2005 and registered for GST effective 1 January 2006.
The Trustee developed four townhouses on the Land in the period between March 2009 to March 2011. Upon completion of construction, all four townhouses were rented out as residential premises. For GST purposes, the Trustee made input taxed supplies of residential premises, by way of lease: s 40-35 of the GST Act. If a supply is input taxed, no GST is payable on the supply and there is generally no entitlement to claim an input tax credit for anything acquired, such as construction services, to make the supply: s 40-1.
On 25 September 2015, townhouse 4 was sold by the Trustee for $730,000. The GST information on the front page of the sale contract in the 2005 edition stated that the sale was a taxable supply and that the margin scheme will be used in making the taxable supply.[5] However, the sale was not reported in the Trustee’s GST return for the tax period ending 30 September 2015, that is, the Trustee failed to pay GST on the taxable supply.
[5] Transcript pp 2-3.
On 23 October 2015, townhouse 3 was sold by the Trustee for $670,000. The GST information on the front page of the sale contract in the 2005 edition stated that the sale is a taxable supply and that the margin scheme will be used in making the taxable supply.[6] This sale was also not reported by the Trustee in its subsequent GST return for the tax period ending 31 December 2015.
[6] Transcript pp 2-3.
The Trustee accepts that GST was payable on the supply of both townhouses 3 and 4 and that the Trustee had made false and misleading statements in its Business Activity Statements (BASs) by not reporting the sales.[7] The sales of the two other townhouses occurred after the Relevant Tax Periods and are not in issue in these proceedings.
[7] Transcript p-3.
On 27 July 2016, the Commissioner advised the Trustee it was undertaking a GST review of certain BASs lodged by the Trustee. Unsurprisingly, after the Commissioner found the Trustee had not disclosed any GST on its sales of two townhouses in its BASs, the Commissioner wrote to the Trustee on 12 September 2016 notifying it that a GST audit would be commenced.
On 21 March 2017, the Commissioner wrote to the Trustee attaching an audit position paper setting out the findings of the audit. The audit position paper recorded the Commissioner’s finding that “all supplies of new residential property have not been correctly treated for GST purposes nor have they been correctly reported in your BASs for the tax periods 1 July 2015 to 30 September 2015 and 1 October 2015 to 31 December 2015”. The Commissioner further noted as follows:
(a)The Partnership was registered for GST at the time it made the sale of the freehold interest in the property and would have to charge GST on the sale.
(b) As the remaining pages of the contract had not been provided evidencing the GST treatment of the sale by the Partnership to the Trustee, the Commissioner did not accept that the GST was worked out under the margin scheme.
(c) The Trustee was therefore ineligible to apply the margin scheme on its subsequent supplies of the townhouses.
On 21 April 2017, the Commissioner wrote to the Trustee notifying the completion of the audit.
In summary, the Trustee was found to be liable for adjustments to various quarterly BASs under Division 129 of the GST Act relating to changes in creditable purpose for acquisitions made in relation to the construction of the townhouses which were used to make input taxed supplies of residential premises by way of lease. The Trustee was also liable to an administrative penalty for making false or misleading statements that resulted in tax shortfall amounts. It was determined that the Trustee’s behaviour demonstrated a failure to take reasonable care and a penalty amount of 25% of the tax shortfalls was imposed.
On 19 April 2017, the Commissioner issued a notice of amended assessment of net amount to the Trustee in respect of the Relevant Tax Periods. The assessments imposed GST liabilities on the sales of the two townhouses referred to above, equal to 1/11th of the respective selling prices, that is, on the basis that the margin scheme did not apply and instead the basic GST rules applied.
On 21 April 2017, the Commissioner issued the Trustee with a notice of assessment of administrative penalty.
On 19 June 2017, the Trustee objected to the GST assessments with respect to the sales of the townhouses, the calculation of adjustments for change in creditable purpose regarding the acquisitions made by the Trustee and the related administrative penalty.
On 5 March 2018, the Commissioner issued an objection decision to the Trustee in which he disallowed the Trustee’s objection in relation to the application of the margin scheme to the sales of the two townhouses but allowed the objection in respect of the adjustment calculations required for the purposes of Division 129 of the GST Act. The Commissioner relevantly stated that as the Trustee had been unable to provide any evidence in support of its claim that the margin scheme had been applied on its acquisition of the property from the Partnership, the Trustee was ineligible to apply the margin scheme to its downstream sales of the two townhouses.
THE EVIDENCE
Mr Fabio, a former director of the Trustee and the only person who gave evidence at the hearing, said that he didn’t have a copy of the entire Land Sale Contract as the events occurred before documents were emailed to him and he relied on his lawyer and accountant to keep these documents.[8] In his witness statement dated 11 December 2018, Mr Fabio stated he could recall the circumstances surrounding the signing of the Land Sale Contract. He said the real estate agent had met him at his home to review and sign the contract for the purchase of the Property and in the course of his review, he confirmed with the agent and with reference to the contract at hand, that the sale was not a taxable supply. He also stated he could not recall “whether any of the margin scheme boxes had been checked”.[9]
[8] Transcript p-28.
[9] Exhibit A1.
At the hearing, Mr Fabio further explained his recollection and stated the only thing he ever looked at when reviewing sale contracts was “the top line”, which he referred to as “the situation with respect to the GST”.[10] He said he satisfied himself there was no GST payable with respect to the purchase of the Property and “because there was no GST on this, I didn’t ask for a tax invoice ... if there was GST payable I would expect one, but I didn’t ask for one”.[11] Mr Fabio also stated that the decision to register the Trustee for GST purposes (in January 2006) was because the Trustee started incurring expenses, for example, for consultants regarding the development of the Land.[12] The Trustee registered for GST to claim input tax credits for the GST charged. He said, in his witness statement, “we did not apply for GST registration to cover the period of the sale. We knew there was not a credit that was claimable for the land purchase”.[13] He said he relied on his former tax agent for advice in relation to GST registration.
[10] Transcript p-23.
[11] Transcript p-23.
[12] Exhibit A1.
[13] Exhibit A1.
Mr Fabio also stated that in the past 15 years he had bought a property every year and had been conscious of checking whether there was a liability for GST on the purchase and whether he would be able to claim a credit and get a GST refund.[14] He said he had an accounting background. He also stated that one of the Partnership’s representatives was a qualified accountant.
[14] Transcript pp 27-28.
In the course of cross-examination, it emerged that Mr Fabio was no longer a director of the Trustee nor was he a director at the time of preparing his witness statement, notwithstanding he had incorrectly stated he was a director of the Trustee at that time. Apart from this mistake, which Mr Fabio explained on the basis of not necessarily recalling the date of his resignation notice as it was not an important matter to him, Mr Fabio was a reliable witness. I was satisfied of his recollection of the pertinent GST issues to do with the Trustee’s purchase of the Land from the Partnership, namely, that no GST was payable and there was no need to register the Trustee for GST to claim an input tax credit.
THE LEGISLATIVE FRAMEWORK
Broadly, the margin scheme is a concessional method for calculating the GST on taxable supplies of freehold interests in land, of stratum units and of long-term leases: s 75-1 of the GST Act. If a taxable supply of the real property is under the margin scheme, the amount of the GST on the supply is 1/11th of the margin for the supply instead of 1/11th of the price: s 75-10(1). Generally, the margin for the supply is the amount by which the consideration for the supply exceeds the consideration for the acquisition of the interest in question: s 75-10(2). Importantly, an acquisition of a freehold interest in land, a stratum unit or a long-term lease is not a creditable acquisition if the supply was a taxable supply under the margin scheme: s 75-20. That is, the acquirer is not entitled to claim an input tax credit for the GST (if any) on a taxable supply under the margin scheme.
The GST treatment of the Trustee’s sales of the two townhouses is governed by the current form of Division 75 of the GST Act which contains the margin scheme provisions, as each sale occurred pursuant to a sale contract made by the Trustee on or after 29 June 2005.
Section 75-5(1) of the GST Act (in its current form) provides:
(1)The *margin scheme applies in working out the amount of GST on a *taxable supply of *real property that you make by:
(a)selling a freehold interest in land; or
(b)selling a *stratum unit; or
(c)granting or selling a *long‑term lease;
if you and the *recipient of the supply have agreed in writing that the margin scheme is to apply.
Section 75-5(2) (in its current form) relevantly provides that “However, the margin scheme does not apply if you acquired the entire freehold interest … through a supply that was ineligible for the margin scheme”.
The reference in s 75-5(2) to “a supply that was ineligible for the margin scheme” is a reference to the property earlier acquired, in this case, the Land that the Trustee acquired from the Partnership in January 2005.
Section 75-5(1), extracted above, provides for when the margin scheme applies in working out the amount of GST on a taxable supply of real property. However, it relevantly only applies in relation to supplies that are made under contracts entered into on or after 29 June 2005. The supply of the Land by the Partnership to the Trustee was made under a contract entered into before that date, so the former s 75-5(1) of the GST Act must be referenced as well as the former definition of “margin scheme”.
Former s 75-5 of the GST Act stated, as follows:
(1)If you make a *taxable supply of *real property by:
(a)selling a freehold interest in land; or
(b)selling a *stratum unit; or
(c)granting or selling a *long-term lease;
you may choose to apply the *margin scheme in working out the amount of GST on the supply.
(2)However, you cannot choose to apply the *margin scheme if you acquired the freehold interest, *stratum unit or *long-term lease through a *taxable supply on which the GST was worked out without applying the margin scheme.
The definition of “margin scheme” in s 195-1 of the GST Act was amended to apply in relation to supplies made on or after 17 March 2005. Relevantly, the former definition of “margin scheme” provided that a taxable supply of real property is made under the margin scheme if:
you choose, under section 75-5, to use the margin scheme in working out the amount of GST on the supply.
Accordingly, where the supply of the Land by the Partnership to the Trustee was a taxable supply, that supply was made under the margin scheme if the Partnership as the supplier chose, under the former s 75-5 of the GST Act, to use the margin scheme in working out the amount of GST on the supply.
Importantly, there was no requirement in the former s 75-5(1) as to how the supplier’s choice to use the margin scheme was to be recorded and communicated to the purchaser. This is to be contrasted with the current s 75-5(1) where there is a requirement for the supplier and the recipient of the supply to have agreed in writing that the margin scheme is to apply. There are also further requirements as to when the agreement must be made in s 75-5(1A).
Consequently, the supply through which the Trustee acquired the Land from the Partnership would have been ineligible for the margin scheme if:
(a)it was a taxable supply; and
(b)the Partnership did not choose to use the margin scheme in working out the amount of GST on the supply under the former s 75-5(1) of the GST Act.
It is not in dispute that the supply of the Land by the Partnership to the Trustee was a taxable supply. This is on the basis that the Partnership was registered for GST and the Land was vacant land which was supplied by the Partnership (comprised of two companies), in the course of carrying on its enterprise. As vacant land cannot be residential premises, the supply of the Land by the Partnership must have been a taxable supply: see Vidler v Commissioner of Taxation [2010] FCAFC 59.
Mr Baxter submitted at the hearing that there was a possibility the supply by the Partnership was not a taxable supply. Mr Baxter stated the numerous nil BASs lodged by the Partnership, which had been provided to the Trustee, suggested the Partnership was potentially not carrying on an enterprise and, therefore, not required to be registered for GST. A difficulty with that argument was that regardless of whether it was required to be registered, the Partnership was registered for GST. It is unnecessary, in any event, because of the conclusion reached to further explore that submission.
DID THE PARTNERSHIP CHOOSE TO USE THE MARGIN SCHEME IN WORKING OUT THE GST ON THE TAXABLE SUPPLY OF THE LAND TO THE TRUSTEE?
The Trustee effectively contended in its Statement of Facts Issues and Contentions (Applicant’s SFIC) at [31] that, although the GST choice made by the Partnership could not be known with certainty, the Tribunal should infer that the margin scheme was used by the Partnership on the sale of the Land to the Trustee. The Trustee urged the Tribunal to apply a favoured maxim of human behaviour by former NSW premier Jack Lang which was to the effect “always back the horse named self-interest, son. It’ll be the only one trying” (Applicant’s SFIC at [35]). Mr Baxter argued the margin scheme must have been used, after canvassing various possible scenarios as to how the second page of the Land Sale Contract may have been prepared, because it was in the interests of the Partnership to use it. This was because no GST was payable under the margin scheme as there was no margin made on the relevant sale. Mr Baxter pointed out that the Partnership had a negative margin for GST purposes as the Partnership had earlier purchased the Property for $1,200,000 and sold it to the Trustee for $1,080,000. Accordingly, no GST was payable under s 75-10 of the GST Act. On the other hand, GST would have been payable at 1/11th of the selling price if the Partnership had not chosen to use the margin scheme.
Mr Baxter argued that the result that “no GST was payable” was entirely consistent with the evidence of Mr Fabio who had satisfied himself before signing the contract with the real estate agent (being the representative of the Partnership), that the Trustee was not liable to pay GST. It was also consistent with Mr Fabio’s recollection that it was unnecessary for the Trustee to register for GST at the time of purchase as it was unable to claim an input tax credit. On one view, if the margin scheme had not been used, the Partnership would have sought to recover the GST cost under the terms of the Land Sale Contract from the Trustee, in addition to the selling price.
Mr Baxter further relied on the fact that the Partnership did not report its sale of the Property in its relevant BAS, a copy of which was in evidence, to prove that it must have sold the Land to the Trustee under the GST margin scheme. Mr Baxter argued the Partnership’s GST treatment of the sale in its BAS where it did not report the sale (because there was no margin) was strictly in accordance with the Commissioner’s own BAS instructions. Mr Baxter referenced the following guidance set out by the Australian Taxation Office in the booklet Business Activity Statement Instructions, Commonwealth of Australia, 12 May 2000, at page 38. The booklet was, moreover, a public ruling for the purposes of the TAA, at that time. Relevantly, the Commissioner stated, as follows:
Supplies of interests in real property made under the margin scheme
If you have made a supply of a freehold interest, strata unit or long-term lease under the margin scheme, do not include the whole amount you received or are entitled to receive for the supply if you calculated GST on the supply under the margin scheme.
Include only the amount of the margin on your sale. The margin is your sale price (including GST) less your original purchase price. If your original purchase price is more than your sale price, there is no margin and no amount to be included. (bolding is for emphasis added)
The Trustee also advanced an alternative, secondary argument to the effect that if the Tribunal were to find that the Partnership did not choose to apply the margin scheme and in doing so, found that the Partnership did not have regard to the GST implications of the sale of the Land, then the Partnership did not actually “work out” the amount of GST on the supply for the purposes of s 75-5(3) so as to cause any subsequent supply by the Trustee to be ineligible for the margin scheme. The Trustee contended that the expression “on which the GST was worked out without applying the margin scheme” requires that the vendor (here, the Partnership) “has in fact determined that it has a GST liability and/or calculated the amount of that liability AND that it has communicated the fact of that liability to the purchaser” (the Applicant’s SFIC at [31]). Mr Baxter relied on the decision in Cyonara Snowfox Pty Ltd v Federal Commissioner of Taxation (2012) 208 FCR 471 (Cyonara) to support this secondary argument. In Cyonara, the Full Court of the Federal Court (Greenwood, Collier and Middleton JJ) considered whether the taxpayer was entitled to make a choice under the former s 75-5(1) to apply the margin scheme in working out the amount of GST on supplies made. The Full Court held that the Tribunal[15] had correctly construed the former s 75-5(1) of the GST Act in rejecting the taxpayer’s construction in that case about the timing of the taxpayer’s choice to use the margin scheme. The Full Court concluded that the taxpayer’s choice under the former s 75-5(1) must be made no later than the time of the supply: see [93] and [95].
[15] Re Cyonara Snowfox Pty Ltd and Commissioner of Taxation [2011] AATA 124.
The Full Court observed at [99] that, in respect of Lot 1, the taxpayer had received an amount from the buyer in respect of GST and it was required to account for this to the Commissioner in its BAS for that quarter, but it failed to do so, despite having calculated the GST on the supply and having received that GST. In respect of Lot 9, the taxpayer received an amount from the buyer in respect of GST and accounted for this to the Commissioner in its BAS for the quarter. The Court then concluded at [98] and [100]:
[98] Apart from these matters of construction of s 75-5 in the context of the GST Act and its purpose and objective, Cyonara had, on the facts, worked out the amount of GST payable on the supply of Lots 1 and 9 by the date of supply, in any event.
…
[100] Cyonara did not account for GST on the transaction even though it had chosen to work out GST on the supply on the basis of the supply price and had received the amount in respect of GST from the purchaser. Cyonara settled the supply of Lot 9 on 1 November 2004 and worked out the amount of GST on the supply as $150,000 calculated on the supply price. An amount in respect of that GST was paid by the purchaser. Cyonara accounted for GST of $150,000 on the supply in its November Business Activity Statement dated 6 January 2005 lodged with the Commissioner on 12 January 2005. It follows that by the time Cyonara lodged each Business Activity Statement, it had well and truly completed “working out” the GST on each supply. It was not until July 2007 that Cyonara purported to then exercise a choice to apply the margin scheme to each transaction. By then, it had already determined, calculated and worked out, the amount of GST payable on the supply.
The Trustee’s key proposition from Cyonara at [98] and [100] is that if the Partnership in the present case did not “work out” the amount of GST on the supply, the Trustee could not be ineligible to use the margin scheme. The Trustee relied on a literal reading of the expression “it is a taxable supply on which the GST was worked out without applying the margin scheme” in s 75-5(3) (in its current form). The Trustee emphasised that the part expression “GST was worked out” references the Partnership’s past actions with respect to its calculation of GST on the supply. On the basis that the Partnership’s BAS was nil, the Trustee argued it could not be said the Partnership had not “worked out” the GST without applying the margin scheme. The Trustee claimed it is the BAS where the GST calculations are recorded. According to the Trustee, if one were to look at the Partnership’s BAS, it simply didn’t follow that the Partnership had a taxable supply and did not apply the margin scheme in its calculations (even if the Partnership had not considered the GST implications and not made the requisite choice to use the margin scheme), as the Partnership’s BAS was nil.
On the other hand, the Commissioner submitted that the Full Court’s reasons in Cyonara should be read on the basis that even if the former s 75-5(1) was not to be construed as requiring the supplier’s (here, the Partnership’s) choice prior to the making of the supply, the supplier’s “working out” of the amount of GST was necessarily complete at the latest by the time it lodged its BAS. According to the Commissioner’s view, the supplier’s “working out” of the GST under the former s 75-5(1) could be made at the latest by the time it lodged its BAS for the tax period in which it made the supply, but the choice would also have to be made by that time. The Commissioner did not specifically counter the Trustee’s adventurous proposition that if the Partnership had not even turned its mind to the GST on the supply, the supply could still be eligible for the margin scheme as it could not be said “it is a taxable supply on which the GST was worked out without applying the margin scheme.”
It is unnecessary to deal with the Trustee’s secondary argument and reliance on Cyonara, in light of the conclusion reached. It suffices to say the Trustee’s interpretation depends on directing attention to the “worked out without applying the margin scheme” part of the expression in s 75-5(3). Without deciding the point, while the Trustee’s interpretation is straightforward, it cannot be the intended meaning as it leads to anomalous outcomes.
I turn now to deal with the substantive arguments of the Commissioner in relation to the Trustee’s primary position which was to the effect the Tribunal should infer the Partnership chose to use the margin scheme. The Commissioner’s submissions centred on the onus of proof borne by the Trustee as it was unable to adduce direct evidence of the Partnership’s choice to use the margin scheme. The Commissioner submitted it was up to the Trustee as the taxpayer to establish the facts on which it relies to displace the assessment issued by the Commissioner. In this regard, the Commissioner relied on Danmark Pty Ltd v Federal Commissioner of Taxation (1944) 7 ATD 333 at 337 and Trautwein v Federal Commissioner of Taxation (1936) 56 CLR 63 at 87. The Commissioner doubled-down on his position stating it is not for the Commissioner to prove any fact required to support the assessment but rather it is for the taxpayer to prove the non-existence of that fact: Macmine Pty Ltd v Federal Commissioner of Taxation (1979) 9 ATR 638 at 653-654. Further, the Commissioner said he is entitled to rely on any deficiency in proof of the excessiveness of the amount assessed to uphold the assessment: Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614 at 624 per Brennan J.
The Commissioner further argued that while a Court, or the Tribunal acting in a judicial manner, is permitted to draw inferences from objective facts as part of its fact-finding, mere assumptions, guesswork and speculation are not accommodated in the process of arriving at conclusions. The Commissioner stated there must be a body of evidence that might reasonably sustain a relevant finding of fact or permit the Tribunal to draw an inference: see Tisdall v Webber [2011] FCAFC 76 at [127] per Buchanan J, with whom Tracey J agreed.
Secondly, to the extent that the Trustee sought to rely upon evidence from a representative of the taxpayer, the Commissioner stated the Tribunal should have regard to the principle that the evidence of witnesses who have interests that turn on whether that evidence is accepted, needs to be approached critically, and will necessarily be the subject of careful scrutiny. In this regard the Commissioner pointed to the well-known passage from the judgment of Hill J in Imperial Bottleshops Pty Ltd & Egerton v Federal Commissioner of Taxation 91 ATC 4546 at 4552.
Thirdly, the Commissioner argued, to the extent that the Trustee seeks to rely on the fact that the Partnership did not report its sale to the Trustee in its BAS for the relevant tax period, it did not prove the margin scheme had been applied on the sale of the property to the Trustee. The Commissioner says that, without supporting documentation, or any other evidence, it is impossible to know the basis of its nil BAS.
As noted above, this was a difficult dispute for the parties because of the limited direct evidence. Nonetheless, I was persuaded that the Trustee acquired the Land from the Partnership under the GST margin scheme on the evidence before me supported by the strong inferences able to be drawn from the conduct of the Partnership and the Trustee. Accordingly, my finding is that the Partnership chose to use the margin scheme in working out the amount of the GST on the supply. It follows that the assessment issued to the Trustee based on it having made taxable supplies of new residential premises under the basic GST rules and not being eligible to use the margin scheme is excessive, as is the assessment of administrative penalty based on that same premise.
The unchallenged evidence was, as follows. The Partnership sold the Land to the Trustee for less than it had acquired it. In other words, it had a negative margin. The Partnership did not report the sale of the Land in its relevant BAS. The Trustee did not register for GST purposes at the time of purchase of the Land but registered approximately a year later.
I accept, as per the Commissioner’s submission, that the nil BAS lodged by the Partnership does not of itself support the margin scheme was used but it is, of course, entirely consistent with the margin scheme having been used. The BAS lodged by the Partnership accords with the way the Commissioner instructed taxpayers in the Business Activity Statement Instructions booklet to complete their BAS for margin scheme supplies, that is, not report the sale if there was a negative margin. Moreover, one of the Partnership’s privies was a qualified accountant.
I further consider the fact that the Trustee did not register for GST until about a year after it purchased the Land when it started incurring expenses regarding the development to be particularly persuasive and to fortify the foundations for my findings. The strong inference to be drawn from the Trustee’s conduct is that the Partnership had chosen to use the margin scheme as, under s 75-20 of the GST Act, an acquisition of a freehold interest in land is not a creditable acquisition if the taxable was under the margin scheme. It was pointless for the Trustee to register for GST at the time of sale if it was under the margin scheme. If it had been a taxable supply where the margin scheme had not been used, I infer the Trustee would have almost certainly registered so as to claim an input tax credit for the GST charged. Even the Commissioner acknowledged in the objection decision issued to the Trustee that despite failing to report its GST on the subsequent sales of the two townhouses, the Trustee “clearly showed an awareness of the GST laws in claiming ITCs”.[16]
[16] T2-6.
My findings are supported by the oral evidence of Mr Fabio who said that it was his understanding that it was not a taxable supply, that no GST was payable on the acquisition and, additionally, that the Trustee could not claim a credit for any GST. As noted above, I accept Mr Fabio was a reliable witness as to his memory of the GST aspects of the acquisition. Mr Fabio did not seek to fill in the gaps in the evidence and painted a plausible recollection of events, including about satisfying himself there was no GST payable before signing the contract with the real estate agent. Mr Fabio is, of course, wrong about the supply not being a taxable supply - it was a taxable supply of vacant land notwithstanding the use of the margin scheme. However, two points that mattered for Mr Fabio and that he understood as a property player were, firstly, no GST was going to be charged by the vendor and, secondly, it was pointless for the Trustee to register for GST purposes because no input tax credit could be claimed. Those outcomes (and the subsequent conduct of the Trustee in not immediately registering for GST) as well as the fact of the Partnership not reporting the GST are compatible with the Partnership having chosen to use the margin scheme.
I have also considered in arriving at the conclusion the fact that the margin scheme provisions did not prescribe the manner in which the supplier’s choice to use the margin scheme had to be recorded or communicated. As noted above, there was no written agreement requirement under the former s 75-5(1) of the GST Act. In that context, the expectation of what the Trustee (as the taxpayer) must show as regards the supplier’s (the Partnership’s) choice to use the margin scheme, has to be within reason.
For completeness, it is necessary to record that the Partnership’s choice to use the GST margin scheme on its supply of the Land to the Trustee depended on that supply not being ineligible for the margin scheme. I enquired at the hearing whether the Trustee had undertaken any due diligence in relation to how the Land had been earlier acquired by the Partnership. Ordinarily, that GST due diligence would have been undertaken by the Trustee at the time of the Trustee’s purchase of the Land from the Partnership. On the limited information before the Tribunal, there appeared to have been a sale after the start of the GST on 1 July 2000, and that sale was apparently of a block of holiday apartments when sold to the Partnership.
However, the Trustee was unable to say whether the supply to the Partnership was a taxable supply and, if so, whether the margin scheme had been used by the earlier vendor at the time of the sale of the holiday apartments. It appears the Commissioner had also not turned his mind in the objection decision to whether the Partnership was itself ineligible to use the margin scheme, with the Commissioner focusing on the Partnership’s sale of the Land to the Trustee. In circumstances where that issue was not ventilated in any meaningful way, and specifically not raised by the Commissioner at the objection stage or in the Commissioner’s Statement of Facts Issues and Contentions, it is unnecessary and inappropriate in the present proceedings to further explore that issue.
CONCLUSION
The Trustee was eligible to use the margin scheme on its taxable supplies of new residential premises as it acquired the freehold interest in the Land through a taxable supply that was not ineligible for the margin scheme. Accordingly, the assessments of net amount of GST for the Relevant Tax Periods are excessive and the assessment of penalty is also excessive, to the extent of the difference in the tax shortfall on the sale of the two townhouses under the margin scheme compared to the GST previously assessed under the basic GST rules.
The objection decision is set aside and, in substitution thereof, the objection is allowed so that the supplies made by the Applicant in the quarterly tax periods ending 30 September 2015 and 31 December 2015 are eligible for the margin scheme and the administrative penalty imposed is applied to the reduced tax shortfall.
I certify that the preceding 67 (sixty-seven) paragraphs are a true copy of the reasons for the decision herein of Ms G Lazanas, Senior Member
...............................[SGD].........................................
Associate
Dated: 21 June 2019
Date(s) of hearing: 21 March 2019 Advocate for the Applicant: Mr S Baxter Counsel for the Respondent: Ms M Ellicott Solicitors for the Respondent: Australian Government Solicitor
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