Paul Anderson | February 2013 | Corporate & Commercial
The recent Federal Court decision of Cyonara Snowfox Pty Limited v Commissioner of Taxation raised several interesting questions relating to GST on real estate transactions.
Who does this impact? Property developers and their advisers.
What action should be taken? Property developers and their advisers should be aware of the decision and the need to be precise in their methodology and calculation of GST liabilities in relation to real estate transactions.
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GST and Real Estate Transactions
The recent federal court decision of Cyonara Snowfox Pty Limited v Commissioner of Taxation (“Cyonara�) raised several interesting questions relating to GST on real estate transactions.
Facts Cyonara acquired a parcel of land at Springwood in 1998 and proceeded to subdivide it into a number of parcels, including relevantly lots 1, 8, 9, and 10. Lot 1 was sold on 16 September 2004 for $1.5 million. The sum of $1,655,918.42 was paid by the purchaser which included GST of $150,543.76. However, Cyonara did not account to the Commissioner for the GST in its next Business Activity Statement. Lot 9 was sold on 1 November 2004 for $1.5 million plus GST of $150,000. Cyonara accounted to the Commissioner for the GST in its next Business Activity Statement. Lot 8 was sold by contract dated 18 October 2005 for $3.7 million which settled on 7 December 2005. The Contract recited that the sale was the supply of a going concern and that Cyonara would have a two year lease over lot 8 commencing from 6 December 2005. Further facts in relation to this sale are set out below. Lot 10 was sold for $1,075,000 on 31 October 2006. GST of $107,966.86 was paid by the purchaser on settlement but Cyonara did not account to the Commissioner for the GST in its next Business Activity Statement.
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Lot 202 concerned an acquisition by Cyonara rather than a supply. Cyonara acquired lot 202 for $3.4 million on 23 December 2005 and claimed input tax credits of $313,892. The claim was initially disallowed by the Commissioner but subsequently conceded after issue of the Amended Notice of Assessment referred to in the next paragraph. The Commissioner issued an Amended Assessment dated 24 May 2007 and the Administrative Appeals Tribunal (‘AAT’) subsequently upheld the Amended Assessment, subject to the Commissioner’s concession that Cyonara was entitled to the input tax credits claimed in respect of lot 202.
Questions
the purchaser without using the margin scheme (as in the case of Lot 1) and the margin scheme was subsequently adopted, then the taxpayer would presumably retain the difference between the two calculations, i.e. an unjustifiable windfall. Not surprisingly, the Court found that any claim had to be made by the taxpayer by the time of the supply, i.e. by the date of settlement, and dismissed the appeal on this point. The GST Act was subsequently amended in respect of transactions occurring after 17 March 2005 to provide that use of the margin scheme had to be agreed in writing between the supplier and the recipient of the supply. Effectively, this meant that the parties have to agree in the contract for sale which would then take effect on completion. The result is therefore the same in respect of transactions occurring before or after 17 March 2005.
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GST and Real Estate Transactions Paul Anderson | February 2013
Three questions required determination, namely: •
•
•
Could Cyonara subsequently ‘choose’ to adopt the margin scheme in respect to the sales of lots 1 and 9, although initially GST on both sales had been calculated without using the margin scheme? Had Cyonara discharged the onus of demonstrating that the sale of lot 8 was the supply of a going concern and therefore GST free? Could the Commissioner recover the GST payable in respect of lots 1, 8, 9 and 10 because more than four years had elapsed since the GST became payable?
Lots 1 and 9 (first question) Under Section 75-5 of the GST Act (as it read prior to 17 March 2005), if you make a taxable supply of real property ‘you may choose to apply the margin scheme in working out the amount of GST from the supply’. However, the section does not say when you need to make the choice. Cyonara argued that it could make the choice at any time until the amount payable was ultimately worked out, e.g. on objection to an assessment, or a review by a tribunal or court. The Court pointed out one anomaly if this was correct. If GST had been calculated and paid by
Lot 8 (second question) Cyonara contended that it was engaged in the ‘enterprise’ of leasing commercial property. However, the evidence of such commercial leasing was at best confused. A retail and/or wholesale showroom had been constructed on Lot 8 in 2003. Initially, it was said that the premises were leased to a ‘Swiss Group of Entities’ for seven years from 1 January 2004. However, no copy of the lease was produced and AAT found that any supporting evidence was unsatisfactory. Cyonara then relied upon a lease to Solartech Solutions Pty Limited for seven years commencing on 1 July 2004. Again, no copy of the lease was produced and no rent was ever paid. Again the AAT found that any supporting evidence of a lease was unsatisfactory. The AAT was not persuaded on the balance of probabilities that Cyonara had leased Lot 8 to Solartech Solutions Pty Limited from 1 July 2004 to 6 December 2005 or at all. The contract for sale of lot 8 required Cyonara to enter into a leaseback of the premises for two years from 7 December 2005. This lease, if it ever existed (and there was considerable doubt about this), could not satisfy the requirements of Section 38-325 dealing with the supply of a going concern because the lease
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had to be in existence at the date of the contract for there to be an enterprise of commercial leasing. The Court found that the taxpayer had not discharged the onus of proof on this issue and the AAT’s decision was upheld.
Limitation period (third question) Section 105-50(1) of the Tax Administration Act 1953 provides that any GST ‘ceases to be payable four years after it becomes payable by you’. However, Section 105-50(3) provides that: ‘Subsection (1) does not apply to an amount … if: a.
within those four years the Commissioner has required payment of the amount by giving a Notice to you; or
b.
the Commissioner is satisfied that payment of the amount was avoided by fraud or evaded.’
The AAT found that the Amended Notice of Assessment dated 24 May 2007 was a Notice satisfying the requirements of Section 105-50(3) and the Commissioner was not prevented by Section 105-50(1) from claiming the outstanding GST. However, the Amended Notice of Assessment had originally disallowed Cyonara’s claim for input tax credits in respect of the acquisition of Lot 202 but before the AAT the Commissioner conceded that Cyonara was entitled to the input tax credits. The result was to reduce the assessment by the sum of $313,892.
respect of that amount under Section 10550(3)(a) as that amount of unpaid GST is not payable. However, the Notice of Assessment, giving a taxpayer notice for the purposes of Section 105-50(3)(a) in respect of other amounts the subject of the notice for the relevant tax periods, not the subject of a variation of the objection decision, remains a valid notice as to those amounts for those periods.’
Conclusion It is difficult to argue with the decision which appears both correct and reasonable. Any other decision could not be supported by the evidence and would have resulted in an unfair windfall for Cyonara. However, the decision is important insofar as it clarifies the operation of several sections of the GST Act.
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GST and Real Estate Transactions Paul Anderson | February 2013
For more information, please contact: Paul Anderson Special Counsel T: 02 8257 5742 M: 0418 491 395 paul.anderson@turkslegal.com.au
Cyonara argued that the Amended Notice of Assessment could not constitute a Notice for the purposes of Section 105-50(3) because it was not a valid Notice as it failed to require payment of the correct amount. The Court found as follows: ‘Plainly enough, a taxpayer who demonstrates that an assessment is excessive in respect of an amount which is shown not to be payable to the Commissioner, is entitled to a variation of the objection decision concerning that amount and equally, of course, the Notice of Assessment cannot operate as a notice in
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