A recent case before the Administrative Appeals Tribunal (AAT) outlines the significance of ensuring that the evidence supports the tax position you are taking.

The issue involves heritage farmland purchased for $1.6 million and sold 7 years later for $4.25 million. The ATO is now chasing the GST debt from the sale.

In 2013, the taxpayer bought Sutton Farms in Western Australia – 1.47 hectares consisting of an uninhabitable homestead, quarters, and a large barn. Over 7 years, the taxpayer rezoned the property, getting conditional subdivision approval

for the subdivision of the property into four lots with plans for a further subdivision into approximately 15 lots, as well as undertaking water, sewerage, and electrical

works. A loan of $1m from a bank supported the work and a further $1.5m from his brother-in-law.

While the property was never used for this purpose, a taxpayer intended to use the property as their home, gift the subdivided areas to his daughter and son for use as their own respective residences, and use the last subdivided area as a memorial dedicated to another child who died.

In 2020, the property was eventually sold at a profit as a single area for $4.25m, without being subdivided. The taxpayer objected when the ATO checked the transaction and released an assessment notice for GST on the sale transaction. The taxpayer argued that Sutton Farms was likely to be used as a family home and the subdivision application had no commercial use. As a result, GST should not apply because the sale was not done in the course of an enterprise.

However, various factors and inconsistencies were working against the taxpayer’s argument:

  • Local media articles highlighted the taxpayer’s plan to commercialise the property, “with the plans to rent it out as a restaurant, wine bar or coffee house, convert 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 showing that the taxpayer subdivided the property to sell some of these portions to repay loans owed to the taxpayer’s brother-in-law; and
  • The taxpayer’s accountant claimed GST credits on the initial development expenses and made representations to the ATO stating that the credits were claimed because the planned subdivision and sale of various portions of the property constituted an enterprise.

For instance, if a taxpayer initially planned to develop a property but ended up selling it as one portion, they would have to prove that they acted as if the project was a commercial venture with a stated commercial outcome during the ownership period. The problem for the taxpayer arises when they fail to provide sufficient objective evidence to support their intention.

Significance of Objective Evidence

Determining the tax treatment of a property transaction can be a complex task. Several factors need to be considered, including the taxpayer’s intention or purpose when acquiring the property. However, just stating the intention isn’t sufficient. It needs to be supported by objective evidence, such as loan terms, correspondence with advisers and real estate agents, the way expenses have been accounted for, or any relevant conversation with a journalist.