The argument of whether or not an enterprise is carrying on a business was touched upon recently in regard to passive income and eligibility to JobKeeper payments. But the conclusion of an entity being in business or not has outcomes for many tax situations — especially for GST and important CGT concessions, as well as basic income tax matters including the availability of deductions and more.
The ATO has issued various documents treating this matter, or related issues of a similar nature, over a number of years — TR 97/11 (Income tax: am I carrying on a business of primary production?), TR 2017/D7 (Income tax: when does a company carry on a business within the meaning of section 23AA of the Income Tax Rates Act 1986?), TR 2019/1 (Income tax: when does a company carry on a business? — said by many to be the “final word”), and in other guidance on its website. In the latter guidance, the ATO clearly provides links to apply for private rulings and/or an objection to a decision, indicating that the concept is an ongoing issue.
Another recent AAT case involved a similar conundrum over whether or not an enterprise was being conducted. In that instance, Wanda Street Pty Ltd and Commissioner of Taxation, at issue was whether a company was carrying on an enterprise at the time of a property acquisition and therefore entitled to input tax credits arising on the purchase.
The following case was included in Tax & Super Australia’s Tax Notes for June 2020.
You can preview the full June Tax Notes document (66 pages) here for free.
The decision that was being appealed in the AAT was the ATO refusing a claim for input tax credits for a taxable supply by another entity. (The AAT affirmed the reviewable decision.) The case involved a group of individuals, companies and trusts that were all associated, whether those associations be legal, employment, or romantic.
The applicant company (Wanda) was incorporated on 12 April 2016. On 30 May 2016, Wanda purchased a property from another company (PindiHold), which gave rise to a $70,000 input tax credit. Not long after, at the instigation of the ATO, PindiHold was placed into liquidation on 8 July 2016.
Although it was contended that both PindiHold and Wanda had, at various stages, development plans for the property, those plans were vague, inconsistent and there were doubts as to when the plans were formulated.
Activities to be evaluated
- Were development plans and associated activities sufficient to conclude that Wanda was carrying on an enterprise at the time of a property acquisition and therefore entitled to input tax credits arising on the purchase?
- Was the supply by PindiHold a “taxable supply”?
The taxpayer argued that there was an intention, in the nature of a business plan, to develop the property as a self-sufficient eco lodge most commonly referred to as “Off the Grid” and various plans, drawings and council submissions evidencing this intention.
The concept of “carrying on an enterprise” was defined in the GST Act to include “anything done in the course of the commencement” of the enterprise. It followed that while mere intention could not be determinative, it could operate to characterise as the “carrying on of an enterprise” any activity, even of a preliminary kind, undertaken for the purpose of implementing that intention.
A single activity could constitute both the commencement and the conduct of an enterprise. The acquisition of the property was a step taken in carrying on Wanda’s enterprise.
The Commissioner’s arguments
- A distinction can be drawn between activities that marked the commencement of an enterprise and those that were preparatory to its commencement.
- Wanda’s activities were merely preparatory to the carrying on of an enterprise.
- Wanda bore the onus of establishing that the denial of the input credit was incorrect.
- It was incumbent on Wanda to establish, on the balance of probabilities, that it made the acquisition of the property for the purpose of, and in the course of carrying on, an enterprise.
- Wanda had failed to show that it had acquired the property “in carrying on an enterprise” and thus for a “creditable purpose” within the meaning of s 11-15(1) of the GST Act.
- Wanda had failed to show that PindiHold “supplied” the property “in the course or furtherance of an enterprise” it carried on, and that the transaction therefore involved a “taxable supply” and a “creditable acquisition” (for the purposes of GST Act ss 9-5(b) & 11-5(b)).
- Neither Wanda nor PindiHold had been conducting an enterprise at the time of the property acquisition.
- Wanda’s acquisition of the property was not a “creditable acquisition”.
The ultimate question whether an activity had occurred in the course and for the purpose of carrying on an enterprise involved an answer that was a matter of “fact and degree”. It is ultimately a matter of impressionistic assessment, made after regard to all the relevant considerations in the circumstances of the particular taxpayer.
Those considerations included the taxpayer’s intention, the apparent purpose of the contentious activities, their essential character, and whether they have been undertaken in a systematic, organised or business-like manner.
Where the acquisition is merely of property that provides the venue for the contentious enterprise, a more nuanced factual enquiry is required in determining the point at which it is properly to be regarded as having commenced.
There were many unusual, and apparently uncommercial, circumstances surrounding the transaction. There were significant inconsistencies and deficiencies in the documents presented. Witnesses contradicted themselves as well as other witnesses and documents presented.
There was little evidence to show that Wanda had brought any rational financial analysis to bear on its acquisition of the property and its subsequent activities relating to it. Wanda’s apparently total indifference to its financial circumstances (apart from its pursuit of the input tax credit claim) tends away from any reliable conclusion that Wanda could be regarded as having any particular enterprise intention when it acquired the property, and as having then commenced an enterprise at the time of its acquisition of the property.
The purchase of the property did not mark the commencement of an enterprise by Wanda.
PindiHold appears never to have got to the stage of putting forward any particular proposal for the development of the property. Furthermore, such investigative activities and designs as it may have undertaken appear to involve a mere intention to create a private dwelling house.
There is no evidence to substantiate the proposition that PindiHold had ever intended to, or had commenced, to carry on an enterprise. And in the absence of any significant evidence it would be inappropriate to conclude that PindiHold’s sale of the property to Wanda was an enterprise related activity.
The sale of the property to Wanda could not be a taxable supply as PindiHold was not carrying on an enterprise at the time of the sale.