Inconsistencies Between Taxpayer Claims and ATO Evidence

Inconsistencies Between Taxpayer Claims and ATO Evidence

A striking case brought before the Administrative Appeals Tribunal (AAT) recently underscored the critical nature of aligning one’s tax claims with the supporting evidence provided.

This case revolved around heritage agricultural land that was originally acquired at a price of $1.6 million and then sold after seven years for $4.25 million. The Australian Taxation Office (ATO) is currently seeking the GST owed from this transaction.

In 2013, the land in question, Sutton Farms, located in Western Australia and spanning 1.47 hectares, was bought. The property included a dilapidated main house, a sizable barn, and additional living quarters.

Over seven years, the landowner managed to rezone the estate and received conditional approval for subdividing it into four segments, with an ambitious vision to further split it into around 15 parcels. Additionally, the owner invested in substantial improvements, including updates to the sewerage system, the water supply, and the electrical infrastructure, backed by financial support—a $1 million loan from a bank and another $1.5 million from the owner’s brother-in-law.

Despite the clear improvements and subdivision plans, the owner maintained that the sole purpose of these actions was personal use. The intention was to occupy the main property as their residence, bestow the new parcels upon their daughter and son for their individual homes, and dedicate one of the lots as a memorial for another child who had passed.

However, in 2020, before any subdivision took place, the entire property was sold as a single parcel for $4.25 million, realising a substantial gain.

During an audit of the sale, the ATO issued a notice for the GST due on the transaction, to which the owner objected. The grounds for objection were that Sutton Farms was merely a personal family estate, and the division plans were without any commercial objective, implying that GST was not applicable since the sale didn’t occur as a part of a business. Yet, several conflicting elements and inconsistencies arose, casting doubt on the owner’s defense:

  • Local media articles that 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 problem for the taxpayer is that although he did not develop the property in the way he originally intended and ended up selling the property as one lot, through the ownership period he acted as if the project was a commercial venture with a stated commercial outcome.

The importance of objective evidence

Navigating the tax implications of property dealings is often a complex process, with myriad elements to be taken into account. A significant aspect of this process is establishing the taxpayer’s motive or intent at the point of acquiring the property. Yet, simply declaring one’s intentions falls short of the mark; there must be concrete, objective evidence to back up these claims. This evidence can take various forms, such as the specifics of loan agreements, documented interactions with financial advisors and realtors, the method of recording financial transactions, or even discussions held with journalists.

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