The Problem When Evidence Doesn’t Match What The Taxpayer Tells The ATO

A recent case highlights the importance of ensuring that the evidence taxpayers are providing to the ATO supports their tax position.

The case involves heritage farmland originally purchased for $1.6m. It sold 7 years later for $4.25 million, and the GST debt that the Australian Taxation Office (ATO) is now pursuing on the sale.

In 2013, the taxpayer purchased Sutton Farms in Western Australia. It is 1.47 hectares consisting of an uninhabitable homestead, large barn and quarters.

Over seven years, the taxpayer rezoned the property, secured conditional approval to subdivide it into four lots (with plans for 15), and completed utility works. He funded the project with a $1 million bank loan and $1.5 million from his brother-in-law.

The taxpayer intended to use the property as their home and gift two subdivided lots to their children as residences. They also planned to dedicate the final lot as a memorial for a deceased child. However, the property was never actually used for these purposes.

Without being subdivided, the property was eventually sold at a profit as a single lot in 2020 for $4.25 million.

When the ATO audited the transaction and issued an assessment notice for GST on the sale transaction, the taxpayer objected. The taxpayer’s argument was 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.

However, there were a number of factors and inconsistencies working against the taxpayer’s argument:

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 taxpayer didn’t develop the property as planned and sold it as one lot. However, his actions throughout ownership reflected a commercial venture with a clear profit motive.

The importance of objective evidence:

Determining the tax treatment of a property transaction can sometimes be a difficult exercise. There are a number of factors that need to be considered. This will often include the intention or purpose of the taxpayer when acquiring a property. However, merely stating your intention isn’t enough, it needs to be supported by objective evidence.

This might include:

Loan terms,
Correspondence with advisers and real estate agents,
The way expenses have been accounted for, or
The conversation you have with a journalist.

If you like to discuss this further, please get in touch with our Aintree Group Chartered Accountants team.

Read about another recent AA T case involving a taxpayer who claimed a loss on their home.

This is general advice only and has not been prepared with your situation and needs in mind. For individual and personalised advice, we highly recommend that you seek out proper professional advice from your accountant.