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Navigating Tax Challenges: The Crucial Role of Objective Evidence in Property Transactions

Navigating Tax Challenges: The Crucial Role of Objective Evidence in Property Transactions

Learn about the crucial role of objective evidence in property transactions for navigating tax challenges. Get expert advice from Bates Cosgrave.

The challenge arises when the evidence presented does not align with the information provided by the taxpayer to the Australian Taxation Office (ATO).

A recent case before the Administrative Appeals Tribunal (AAT) underscores the crucial aspect of ensuring that the evidence corroborates the tax stance taken.

The case revolves around a heritage farmland initially bought for $1.6 million, which was sold seven years later for $4.25 million. The ATO is currently pursuing the GST debt associated with the sale.

In 2013, the taxpayer acquired Sutton Farms in Western Australia, spanning 1.47 hectares with an uninhabitable homestead, a large barn, and quarters. Over the ensuing seven years, the taxpayer undertook activities such as rezoning the property, obtaining conditional subdivision approval for four lots (with plans for further subdivision), and executing sewerage, water, and electrical works. This endeavor was backed by a $1 million loan from a bank and an additional $1.5 million from the taxpayer’s brother-in-law.

Although the property was never utilized for its intended purpose, the taxpayer asserted the intention to use it as a family home, gift subdivided lots to children for residences, and dedicate the last subdivided lot as a memorial. 

When the ATO audited the transaction, issuing a GST assessment notice, the taxpayer objected, arguing that Sutton Farms was intended for personal use, and the subdivision had no commercial purpose. Therefore, GST should not apply, as the sale was not within the scope of a business enterprise.

However, several factors and inconsistencies countered the taxpayer’s claim:

    1. Local media articles detailing plans to commercialize the property.
    2. Statements to the ATO during the objection stage indicating an intention to subdivide and sell lots to repay loans.
    3. GST credits claimed on the original development costs, with the accountant asserting that these were valid due to the planned subdivision and sale constituting a business venture.

The challenge for the taxpayer lies in the fact that, despite deviating from the original development plan and selling the property as a single lot, the actions during ownership suggested a commercial venture with a stated commercial outcome.

Emphasizing the significance of objective evidence, determining the tax treatment of a property transaction requires a comprehensive analysis. Factors include the taxpayer’s intention or purpose when acquiring the property. 

However, merely stating intent is insufficient; it must be substantiated by objective evidence such as loan terms, correspondence with advisers and real estate agents, expense accounting methods, or conversations documented with third parties like journalists.