A taxpayer has been unsuccessful in contesting GST assessments, relating to the sale of 4 properties. They imposed $265,296 of GST plus substantial further amounts of shortfall penalties, before considering, also, interest based penalties.

The facts were these:

  1. The taxpayer bought 2 existing terrace properties (Lots 1 & 2) in 2001 – one used commercially (and leased as such) the other used as residential premises.
  2. The taxpayer subdivided these properties, in 2012, creating Lots 3 & 4 on the rear. They built residential premises, on these lots, and sold them in the June 2014 quarter, without paying GST, claiming that the ‘margin scheme’ applied and had a $nil margin (so there was no GST to pay). This was held to be wrong (see below).
  3. The taxpayer did some renovation work on the (existing) buildings, on Lots 1 & 2, selling them in June 2015 quarter – both on the basis that they were ‘going concerns’ and thus GST-free (and, thus, no GST to pay on the sale). This was conceivably right, in that leasing a building constitutes carrying on an ‘enterprise’ (under s9-20(1)(c)) that could be sold as a ‘going concern’ under s38-325 of the GST Act. But the Taxpayer ran into trouble on this too.
  4. Lot 1 was tenanted, when sold, but only the bottom floor and not the first floor.
  5. And Lot 2 was not tenanted at all, when sold (though the new purchaser let it to a commercial tenant).
  6. The Taxpayer made it difficult, for itself, on these sales, as it didn’t lodge a GST return for the June 2015 quarter, in which it sold Lots 1 & 3, ultimately leading to the Commissioner issuing a default assessment, with the standard 75% of shortfall penalty.

Lots 3 & 4 (new residential premises at the rear) – Margin Scheme does NOT include building costs

The AAT held that Taxpayer was wrong, and that the cost of improvements can’t be included when calculating the ‘margin’ (on which the GST is based). [see paras 19-23 of the AAT’s reasons]

  1. Section 75-10(2) of the GST Act, says that the ‘margin’ (on which ‘margin scheme’ GST is paid)is the amount “by which the *consideration for the supply exceeds the consideration for your acquisition of the [relevant land] “.
  2. The Taxpayer had relied on the ‘alternative view’ expressed by the Commissioner, in his ruling: GSTR 2006/8 in paras 50 & 51, but the same ruling went on to explain why that was wrong (in paras 52 & 53), which included the Sterling Guardian decision.
  3. In Sterling Guardian v CofT the Federal Court and Full Federal Court ([2005] FCA 1166; [2006] FCAFC 12) held that further development costs were not part of the ‘acquisition cost’ – explaining that ‘input tax credits’ will be allowed on those costs, if the sale is taxable (such as a sale of ‘new residential premises’) and, if the sale is input taxed, then the GST embedded in those costs should not be shielded from being taxed in the hands of the eventual purchaser.
  4. This Ruling goes on to say that the GST Act had been amended to put this issue beyond doubt, from 17 March 2005, by inserting the then new s75-14.

Lot 1 – 404 Queens Parade, Clifton Hill (existing building – partly let commercially) – 50% GST-free only

  1. The Commissioner had accepted that the sale of a single building, that was only partly let, could be partially GST-free and had allowed a 50/50 split between being taxable and GST-free. [para 24]
  2. The Taxpayer attempted to rely on parts of GSTR 2002/5 to say that ‘going concern’ treatment need not be prejudiced by temporarily unlet parts of a building or some parts of it being set aside for storage or cleaning equipment (for instance). The AAT said that having a whole floor unused and unlet was not of the same kind.
  3. The AAT held that the Taxpayer had not discharged its onus to establish a more favourable split than the 50/50 one applied by the Commissioner. [para 32]

Lot 2 – 406 Queens Parade (existing building – completely unlet) – fully taxable

  1. The Taxpayer failed in it’s first contention, that it was GST-free as a going concern. This was because there was no lease, no ‘enterprise’ that could be sold as a ‘going concern’. [para 35]
  2. It then failed, in it’s second contention, that it should be taxed under the ‘margin scheme’ – having tried to get the purchaser to change the contract of sale, to elect the ‘margin scheme’. It had not succeeded, though, so if failed.
  3. It failed in its third and last contention, too. It argued that there was no GST, on the sale, because it was ‘input taxed’, under s40-65, as the sale of ‘residential premises’. The premises avoided the first exception, that would have made them taxable – they were not ‘commercial residential premises’ a hotel, hostel, or the like). The Taxpayer struggled, however, to show they were ‘residential premises’ in that they were not occupied as such. Under the definition, they could also be ‘residential’ if they were ‘intended to be occupied and be capable of being occupied as a residence’ (s195-1). The Taxpayer struggled with this, to some degree as  the building was described ‘office’ (to give it ‘going concern’ credibility). Also the new owner let the property to a commercial tenant. [para 38] However, the Tribunal said [para 39] that this building began its life as ‘residential premises’. [para 39] However, there would still be a GST liability, if the renovations were sufficiently extensive to make the premises relevantly ‘new’ (under s40-65(2)(b)). The Tribunal held that it had insufficient evidence to determine that the premises were not ‘new’ and the Taxpayer had failed to discharge its onus, to show that the assessment was excessive. [para 42]

However, the AAT reduced the default penalty by 50% to avoid what it termed an “unjust outcome”.

(SM Ho & Ors v CofT [2018] AATA 3911, AAT, O’Loughlin DP, 16 October 2018.)

FJM 5.11.18

[LTN 201, 18/10/18; Tax Month- October 2018]

CPD questions (answers available)

  1. Did the Taxpayer fail to overturn the assessments of GST?
  2. On what basis did the Taxpayer claim there was no GST on the sale of the new residential premises (on Lots 3 & 4)?
  3. What was wrong with that?
  4. Why did the Taxpayer only get 50% of the sale of Lot 1 as GST-free?
  5. Was Lot 2 leased at all, when sold by the Taxpayer?
  6. Did the Taxpayer argue that there ought be no GST on the sale of Lot 2, on the basis that it was an input taxed sale of ‘residential premises’?
  7. Would there be GST, though, on ‘new residential premises’?
  8. Can residential premises be renovated to an extent where they become ‘new’ under s40-75?
  9. Had the Taxpayer renovated Lot 2?
  10. Could the Taxpayer prove that the premises were not ‘new residential premises’?

[Answers:1.yes;2.’marginScheme’withNilMargin;3.Can’tIncludeBuilding/DevelopmentCostsWhenCalculating’Margin’)

4.onlyTheGroundFloorLeased;5.no;6.yes;7.yes(s40-65(2)(b));8.yes(‘substantialRenovations’s40-75(1)(b));10.no(failedOnOnus)]

 

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