Property transactions and record keeping

29 July 2011

If you are developing property and undertaking construction activity, take note. The Australian Administrative Appeals Tribunal upheld the ATO’s objection decision against a taxpayer who was carrying on various property development and construction activities, including land subdivision, rezoning and selling various lots of land as well as the provision of construction services as a contract builder.

Upon audit of the client’s affairs for the period January 2004 to June 2007, the Commissioner found a number of errors in the reporting of the taxpayer’s obligations and the ultimate tax payable for that period.

The decision meant that the taxpayer was liable for further GST and income tax as well as 50% penalties and interest on the shortfall in taxes.

Among the many GST and income tax issues raised in the case, the Tribunal held that:

• GST on the supply of property lots occurred at the time of title transfer, rather than at the time certain loans were set-off;
• Input tax credits were attributable to periods determined by the Commissioner (later than that attributed by the taxpayer) because the taxpayer was unable to provide sufficient documentation to the contrary
• The margin scheme in respect of a property sale was disallowed on the basis that there was no evidence of an agreement in writing between the taxpayer and the purchaser at the time of sale;
• Certain property transactions occurred outside the ordinary course of business and for less than market value and hence the Commissioner substituted market value proceeds for the sale of those lots; and
• The taxpayer recognised income incorrectly as they were legally entitled to income on completion of construction works, not at a later time as reflected in the financial statements.

This case demonstrates the importance of record-keeping and the onus placed on the taxpayer to accurately record and declare the transaction that have occurred.

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