The problem when the evidence doesn’t match what the taxpayer tells the ATO – A recent case before the Administrative Appeals Tribunal (AAT) highlights the importance of ensuring that the evidence supports the tax position you are taking.
In this case, a piece of heritage farmland was initially bought for $1.6 million and later sold for $4.25 million after seven years. The Australian Taxation Office is now focusing on the Goods and Services Tax (GST) obligations arising from this significant sale.
A Story of Property Development and Tax Implications
In 2013, the taxpayer purchased Sutton Farms in Western Australia – 1.47 hectares consisting of an uninhabitable homestead, a large barn and quarters.
Over the course of 7 years, the taxpayer rezoned the property, obtaining conditional subdivision approval to subdivide the property into four lots with plans for a further subdivision into approximately 15 lots, as well as undertaking sewerage, water and electrical works. The work was supported by a $1m loan from a bank and a further $1.5m from his brother-in-law.
While the property was never used for this purpose, the taxpayer’s stated intention was to use the property as their home, gift the subdivided lots to his daughter and son for use as their own respective residences, and use the last subdivided lot as a memorial dedicated to another child who had passed away.
Without being subdivided, the property was eventually sold at a profit as a single lot in 2020 for $4.25m.
When the ATO audited the transaction and issued an assessment notice for GST on the sale transaction, the taxpayer objected. The taxpayer argued that Sutton Farms was intended to be used as a family home and the subdivision application had no commercial purpose. Therefore, GST should not apply as the sale was not made in the course of an enterprise.
“In the complex case of Sutton Farms, the line between personal intention and commercial enterprise blurred, underscoring the vital need for objective evidence in property transactions. This story is a stark reminder of the importance of aligning declarations with actions, especially when it comes to taxation and the ATO’s scrutiny.”
However, there were several factors and inconsistencies working against the taxpayer’s argument:
- Local media articles outlined the taxpayer’s plan 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.”
- Statements made to the ATO during the objection stage of the dispute indicating that the taxpayer intended to subdivide the property to sell some of these lots to repay loans owed to the taxpayer’s brother-in-law; and
- GST credits were claimed on the original development costs. The taxpayer’s accountant also made representations to the ATO stating that the GST credits were claimed because the intended subdivision and sale of the several lots within the property amounted to an enterprise.
The challenge faced by the taxpayer in this case was a disconnect between their initial intentions and their actions over the ownership period. Although the plan was not to commercially develop the property, the taxpayer’s activities during this time suggested a commercial venture, leading to a different interpretation by the ATO regarding the property’s sale.
The Role of Evidence and Intent
In assessing the tax implications of property transactions, it’s not enough to simply declare your intentions. The real challenge lies in substantiating these claims with concrete evidence. This includes details like loan agreements, communications with advisors and real estate agents, and how expenses are recorded. Every piece of evidence counts in painting a clear picture of your true purpose in acquiring the property.
