TRUSTEE OF THE FAMILY TRUST and COMMISSIONER OF TAXATION

[2010] AATA 876

Administrative Appeals Tribunal

DECISION AND REASONS FOR DECISION [2010] AATA 876

ADMINISTRATIVE APPEALS TRIBUNAL      )

)          No 2009/5748

TAXATION APPEALS DIVISION		)
Re		TRUSTEE OF THE FAMILY TRUST

Applicant

And COMMISSIONER OF TAXATION

Respondent

DECISION

Tribunal Mr S E Frost, Senior Member

Date9 November 2010

PlaceSydney

Decision The decision under review, being the objection decision dated 6 November 2009, is affirmed.

................[sgd]..............................

S E Frost
  Senior Member

CATCHWORDS

TAXATION AND REVENUE – goods and services tax – whether applicant entitled to claim input tax credits – whether the applicant made creditable acquisitions – whether applicant was carrying on an enterprise – decision under review affirmed

A New Tax System (Goods and Services Tax) Act 1999 ss 9-20, 11-5, 11-15, 40-5

A New Tax System (Goods and Services Tax) Regulations 1999

REASONS FOR DECISION

9 November 2010 Mr S E Frost, Senior Member       

Introduction

1.      The applicant is the corporate trustee of a family trust.  It is registered for goods and services tax (GST).  It lodges Business Activity Statements (BASs) quarterly and accounts for GST on a cash basis.

2.      In each of the GST reporting quarters ended 30 June 2005 to 31 March 2009 inclusive, the applicant lodged a BAS declaring no taxable supplies, but claiming that it had made acquisitions, many of them creditable acquisitions.  Over the 16 reporting periods, the acquisitions that were reported amounted to over $230,000.  The input tax credits (ITCs) claimed, in relation to acquisitions that the applicant says are creditable acquisitions, totalled $19,424.

3.      The Commissioner commenced an audit of the applicant’s affairs in March 2009.  The applicant provided documents in support of its ITC claim for the December 2008 quarter.  Those documents revealed that the ITCs claimed related to expenditure such as accounting fees, motor vehicle expenses and telephone expenses, all of them said to be in relation to the applicant’s enterprise, as well as expenditure relating to the activities of one of the beneficiaries of the family trust, to whom I will refer as “Ms K”.  Ms K’s activities are said to constitute the carrying on of an enterprise, although activities of that same kind are not conducted by the applicant.

4.      The Commissioner formed the view that none of the ITCs claimed were allowable, and accordingly he made an assessment of GST net amount for the relevant periods.  The net amount assessed was $0.  The assessment has the practical effect of negating the entire amount of $19,424 previously claimed.  The applicant objected against the assessment.  The objection was disallowed, and the applicant has now applied to the Tribunal for review of the objection decision.

The issues

5.      The main question for determination by the Tribunal is whether the applicant made creditable acquisitions during the relevant periods. 

6. In the circumstances of this case, the answer to that question depends on whether the applicant acquired anything “solely or partly for a creditable purpose”: s 11-5, and in particular paragraph 11-5(a), of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). Section 11-15 of the GST Act explains:

(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

…

7. An “enterprise”, referred to in s 11-15(1), is, relevantly, an activity, or series of activities, done in the form of a business: s 9-20 of the GST Act.

8. Included within the kinds of supplies that are input taxed (s 11-15(2)(a)) are “financial supplies”: s 40-5 of the GST Act. The meaning of the expression “financial supply” is provided in Division 40 of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations).

Audit, assessment and objection

9.      It seems that during the audit of the applicant’s affairs, the Commissioner took the view that the applicant “only made financial supplies”[1].  That explains why all the ITCs were disallowed.

[1] T2-5

10.     On objection, the applicant argued as follows[2]:

The expenses on which the trust paid GST do not relate to making financial supplies.

…

The expenses claimed by the trust mainly relate to things such as fuel, telephone costs, vehicle maintenance, accounting costs and [expenses relating to Ms K’s activities].  These acquisitions do not relate in any way to acquiring or disposing of shares or units.  Instead, they relate to the other business activities of the trust, which include carrying out management activities for the related veterinary surgeries, for which the trust receives a management fee.

…

[2] T7-87/88

11.     The Commissioner’s reasons for his objection decision included the following[3]:

In your objection request dated 13 July 2009 you stated the acquisitions were made as a result of you carrying out management activities for the related veterinary surgeries, for which you received management fees.  However the BAS you lodged for the period do not record any management fees received as a result of you making taxable supplies.

In the conversation between Peter Laudenbach of this office and your tax agent on 10 August 2009, your tax agent stated that you were a member of a group registered for GST purposes as per Division 48 of the GST Act. As such the representative member of the group reported the taxable supplies you made. However in your letter dated 25 August 2009 your [sic] retracted that claim and stated you did not make any taxable supplies at all.

As you have not provided any evidence that you made taxable supplies on your own behalf you are not entitled to claim input tax credits (ITC) as per section 11-5 of the GST Act, as the acquisitions were not acquired solely or partly for a creditable purpose. The acquisitions you made applied to the only type of supply you made, that is, financial supplies which are input taxed.

As the only supplies you have made are input taxed, the acquisitions you made can only relate to you making input taxed supplies. Therefore you have not made any creditable acquisitions as per paragraph 11-15(2)(a) of the GST Act.

[3] T2-5

12. The suggestion in the third quoted paragraph that if you do not make taxable supplies then you cannot be entitled to input tax credits is, of course, not correct. The nexus required for input tax credits is not between acquisitions and taxable supplies, but between acquisitions and the carrying on of an enterprise: that is made plain by s 11-15(1). It is, however, and as correctly noted in the fourth paragraph, subject to any relationship between the acquisitions and the making of input taxed supplies.

The Tribunal proceedings

13.     Prior to the hearing on 26 August 2010, there were filed on behalf of the applicant one witness statement and a “statement of facts and submissions”.  I set out, in its entirety, the witness statement made by “Mr P”:

1.I am a principal of [ABC], a veterinary practice in [a regional area of New South Wales].

2.The applicant … is an integral part of the structure utilised to operate this practice.

3.This structure has been devised with consideration to commercial realities and family protection.

4.The practice is commercially viable and one of the most successful practices in regional N.S.W.

14.     The “facts and submissions”, filed by the applicant’s representative, include the following:

Carrying on an Enterprise

The trust is carrying on a business.  I refer to [the Commissioner’s public ruling] TR 97/11 and comment on the activities of the trust as follows.

(a)  Significant commercial activity

The trust derived significant assessable income for the last three financial years of:

30.06.2007

30.06.2008

30.06.2009

Copies of the Income tax returns are attached as Appendix ‘C’.

The commercial activities are significant.

(b)  Purpose and intention of the taxpayer in engaging in activity.

The purpose and intention is to secure the [family’s] interest in the [ABC] operating structure.  The structure is essential for asset protection and estate planning purposes.

(c)  Intention to make a profit from the activity.

The income tax returns prove the profitable nature of the activity.

(d)  Activity is or will be profitable see (a) above.

(e)  Repetition and regularity of the activity.

The business is operating on daily basis in three locations in the [region].

(f)   Activity is carried on in a similar manner to that of ordinary trade.

The trust is a typical structure utilised by professionals.

(g)  The activity is organised and carried on in a business like manner – records are kept.  Again see answer to (a).

(h)  Size and scale of activity.  See answer to (a).

(i)   Not a hobby, recreation or sporting activity.  See answer to (a).

(j)   Business plan exists.  There is no formal business plan.

(k)  There are no commercial sales of the product.  See answer to (a).

(l)   The taxpayer has knowledge or skill.

As with all entities it is not a natural person and cannot as such hold knowledge or skill.

15.     In the income tax returns for 2007, 2008 and 2009 the main business activity of the applicant was described as:

Renting or leasing of non-residential property as owner or leaseholder.

16.     Each income tax return declared, relevantly, gross business income of $23,556, plus significant distributions from trusts (for different amounts in each year).

17.     At the hearing on 26 August 2010 the applicant’s representative argued, in summary, that the applicant was carrying on an enterprise because the “economic group” to which it belongs carries on an enterprise.  The argument, as I understand it, is this: the fact (if it is a fact) that the applicant does not itself carry on an enterprise is not fatal to its claim that the applicant made creditable acquisitions, provided the economic group overall carries on an enterprise.  In my opinion, that argument is plainly wrong.

18. The GST Act contains repeated references to rights that are granted to, and obligations that are imposed on, “you”. As s 195-1 of the Act explains:

[I]f a provision of this Act uses the expression you, it applies to entities generally, unless its application is expressly limited.

19. The GST Act explains the circumstances in which “you” make a creditable acquisition (s 11-5), and how to determine whether “you” acquire a thing in carrying on “your” enterprise. Those enquiries must be carried out at the “entity” level, and not at the “economic group” level. If “you”, as an entity, do not carry on an enterprise, then “you”, as an entity, cannot acquire a thing for a creditable purpose, and “you” are not entitled to input tax credits.

20.     The applicant’s representative was content to respond, orally, to the written submissions that the Commissioner’s representative handed to the Tribunal at the commencement of the hearing, but accepted the Tribunal’s offer of further time to respond in writing.  The applicant’s written submissions, filed on 10 September 2010, included:

…

3.The income tax return for the business of the trust describes its business as “Renting or leasing of non-residential property as owner or leaseholder”.  It may be more appropriate to describe the activities of the trust as “Investment operation – own account”.

4.The business activities of the taxpayer include the long term investment in the [DEF] Unit Trust. In [2008] Administrative Appeals Tribunal Appeals Division 461, Re the Taxpayer and FCT it was accepted by the Administrative Appeals Tribunal that in this case the taxpayer acquiring antiques and artwork for long term investment was carrying on an enterprise. The Tribunal’s decision was affirmed in FCT v Swansea Services Pty Ltd [2009] FCA 402.

5.… The taxpayer’s activities include the provision of the services of [Mr P] in the administration of the business.  The trust derived income of $23,556.00 per annum for the provision of [Mr P’s] services.  The support of [Ms K] is in the activities [that she conducts.  Those activities form] an integral part of the business of [ABC].  The prime activities of the taxpayer are in the investment of the [ABC] business.  …

21.     At page 3 it was stated:

Management Service

The applicant has provided management services and derived consideration for those services.  It is the intention of the Applicant to determine whether it is required to amend its BAS return to reflect that consideration.  It is also envisaged that [ABC] may amend its BAS returns to claim the ITCs.  The effect of these amendments will be revenue neutral to the Commissioner.

…

Consideration

22.     The acceptance by the Tribunal in an entirely different case, and on the basis of the evidence before it, that an entity that acquired antiques and works of art for long term investment was carrying on an enterprise does not persuade me, on virtually no evidence, that the applicant in this case was similarly engaged in long term investment activities and that those activities, if there were any, were done “in the form of a business”.

23.     In summary, I am not satisfied that the applicant carried on an enterprise during the relevant periods, and it follows that I am not satisfied that it made any creditable acquisitions.  The shifting nature of the applicant’s claims – it carried out “management activities” for a management fee; it was part of the business structure; its commercial activities were “significant”, albeit not identified with any precision; it satisfied all the requirements in TR 97/11 for carrying on a business, again without identifying how it did so; its main business activity was described as “renting or leasing of non-residential property as owner or leaseholder”, but later as “investment operation – own account”; it derived income from the provision of Mr P’s services – does not make it any easier for me to determine what activities, if any, it conducts, or conducted. 

24.     None of the claimed activities were reflected in the applicant’s BASs for the relevant periods, and none of them (with the possible exception of the amount of $23,556 per annum – but this is not adequately explained) were reflected in the applicant’s income tax returns. 

25. The applicant has failed to discharge its burden, under s 14ZZK of the Taxation Administration Act 1953, of proving that the assessments of net amount are excessive.

Decision

26.     The objection decision is affirmed.

I certify that the 26 preceding paragraphs are a true copy of the reasons for the decision herein of Mr S E Frost, Senior Member

Signed:         ..............[sgd].................................................................
  Associate

Date of Hearing  26 August 2010
Final submissions received               10 September 2010
Date of Decision  9 November 2010
Appearance for the Applicant            Mr K Butler, Butlers Taxation and Business      Lawyers
Appearance for the Respondent       Ms E Webster, ATO Legal Services