What happens when your evidence doesn’t match your tax position? A case which recently appeared before the Administrative Appeals Tribunal (AAT) highlights why ensuring you have adequate evidence for your tax is important, and what can happen when the evidence doesn’t line up.
The case in question was a heritage farmland, which was originally purchased for $1.6m. Selling 7 years later for $4.25m, the ATO is now pursuing the GST debt from the sale.
The taxpayer in the case purchased Sutton Farms in Western Australia, in 2013. This was a 1.47-hectare property, housing a large barn, quarters, and a homestead which was uninhabitable.
Over the next 7-year period, the taxpayer rezoned the property completely. This included receiving conditional subdivision approval to subdivide the property into four lots, with plans to further subdivide into 15 lots down the track. Additionally, further work was planned for the property’s electrical, water and sewerage systems, which included a $1m bank loan, with a further $1.5m from his brother-in-law.
Without any subdivision on the property, in 2020 it eventually sold as a single lot, with a profit of $4.25m.
When the transaction was audited by the ATO, an assessment notice was issued for GST on the sale transaction. However, the taxpayer in question objected. Their argument was that Sutton Farms was intended to be used as a family home, and that the application to subdivide the property had no commercial purpose. Given this intent, the GST should not apply as the sale was not made in the course of an enterprise. However, looking at the evidence related to the case, there were a number of factors which made it hard for the taxpayer’s argument to be substantiated:
· GST credits were claimed on the original costs to develop the property. The taxpayer’s accountant made representations to the ATO, reporting the GST credits were claimed due to the intention to subdivide and sell several lots within the property, which amounted to an enterprise.
· During the objection stage of the dispute, a number of statements were made by the taxpayer to the ATO, which indicated the intention to subdivide the property and then sell a portion of these lots to replay loans owed to his brother-in-law.
· There were a number of local media articles which were published which outlined plans by the taxpayer to commercialise the property, “with the plans to lease it out as a restaurant, wine bar or coffee house, turn the barn into an art studio and add 8-10 finger jetties in the canal adjacent.”
Whilst the taxpayer did not develop the property in the way which was originally intended and the property was sold as an entire lot, evidence throughout the ownership period showed his treatment towards the property was a commercial venture, with a stated commercial outcome.
The importance of objective evidence
When considering the tax treatment of a property, it’s important to think about the objective evidence available. A number of factors should be looked at, such as the taxpayer’s intention or purpose for acquiring a property. However, stating your intention alone isn’t enough. Objective evidence is needed to support the intention, which may include loan terms, the way expenses have been accounted for, correspondence between real estate agents or advisers, or publicised conversations you may have with a journalist.
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