The impact of this case on ATO policy is discussed in Decision Impact Statement: Toyama Pty Ltd v Landmark Building Developments Pty Ltd (4541/02).

TOYAMA PTY LTD v LANDMARK BUILDING DEVELOPMENTS PTY LTD

Judges:
White J

Court:
New South Wales Supreme Court

MEDIA NEUTRAL CITATION: [2006] NSWSC 83

Judgment date: 28 February 2006

White J

1. This is an application for equitable compensation for breach of trust.

2. The respondents to the application, Messrs Carroll and MacDonald, were appointed pursuant to s 66G of the Conveyancing Act 1919 (NSW) as trustees for sale of land at 5 Laman Street, Nelson Bay. The applicant, Landmark Building Development Pty Limited ("Landmark"), and the plaintiff in the proceedings, Toyama Pty Limited ("Toyama"), were the co-owners of the property. Landmark owned two-thirds of the land as tenant in common with Toyama, which owned one-third.

3. The property was sold by auction on 7 August 2003 for $2,760,000. The contract for sale provided that the sale was a taxable supply under the GST Act (A New Tax System (Goods & Services Tax) Act 1999 (Cth)). Development approval had been given by the Port Stephens Council for the erection of a 14-unit development upon the land. A house was built upon part of the land containing two residences. The land was marketed as a development site. The trustees expected, as was the case, that the land would be purchased by a developer, the house demolished, and new units built on the site.

4. Landmark contends that the sale was not a taxable supply. It says that the supply was not made in the course or furtherance of an enterprise carried on by the trustees. It also says that the supply was input taxed, because it was a sale of residential premises to be used predominantly for residential accommodation. It says that as a result of the trustees' mistake in describing the sale as a taxable supply, the trustees must now remit one-eleventh of the purchase price to the purchaser. Landmark claims that the trustees acted in breach of trust and are liable to compensate Landmark for two-thirds of the loss occasioned by the breach. Landmark says that the loss occasioned by the breach is the loss of one-eleventh of the sale price.

5. The following issues arise:

1. whether, as Landmark contends, the trustees were mistaken in describing the sale in the contract for sale as a taxable supply;
2. if so, whether, by making the mistake, the trustees acted in breach of trust;
3. whether the trustees acted in breach of trust by failing to act diligently and prudently;
4. if otherwise liable, whether the trustees should be excused pursuant to s 85 of the Trustee Act 1925 (NSW); and

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5. if not, to what equitable compensation Landmark is entitled.

Events up to the Auction

6. The land at 5 Laman Street, Nelson Bay was purchased by Landmark and Toyama on 2 October 1998 from Dakka Developments Pty Ltd for $560,000. The contract for sale describes the land as containing improvements consisting of a house. Included in the sale were a clothesline, curtains, fixed floor coverings, insect screens, light fittings, stove and external television antenna.

7. The house was divided into two self-contained residences. After November 1998, a director of Landmark, Mr Barrak, stayed at the property from time to time during holiday periods and weekends. Between 3 February 1999 and 3 August 1999, the property known as 1/5 Laman Street was occupied by tenants. This property was again leased for thirteen weeks between 2 November 2001 and 1 February 2002. The tenant remained in occupation of the premises up to 20 August 2002.

8. On 10 May 2000, development consent was obtained from the Port Stephens Council for the demolition of the existing structures and the construction of a 14-unit development and associated infrastructure. There was also an earlier development consent to the construction of eight units.

9. On 10 September 2002, Toyama applied for an order for the appointment of trustees for sale of the property. On 12 December 2002, Messrs Carroll and MacDonald were appointed as trustees for sale pursuant to s 66G of the Conveyancing Act .

10. Raine & Horne, real estate agents, were appointed to act on the sale. On 28 January 2003, they advised Mr Carroll that the improvements on the site consisted of a disused building, which was formerly a veterinary clinic. They said the building had no value and would be demolished to make way for future developments. They opined that the value of the site with development consent for the construction of 14 units was $1,800,000, but without development consent was $1,400,000.

11. The applicant for the development consent for the construction of 14 units was Parramatta Design & Development Pty Ltd, a company having common directors and shareholders with Landmark. Parramatta Design & Development asserted that a purchaser of the property would not be entitled to use its development consent. It denied that any person was entitled to obtain copies of the building plans on the basis of which the development consent had been obtained.

12. The trustees retained Mr Halliday of Cornwall Stodart, solicitors, to act on the sale of the property. On 17 January 2003, Cornwall Stodart sought information from Toyama's solicitors (Cameron Gillingham Boyd), and from Landmark's solicitor (Mr Benjamin Barrak) in relation to the property. Cornwall Stodart asked whether the owners were registered for the purposes of GST. They said that:

"We imagine that, as a development site, its sale will be a taxable supply on which GST will be payable."

13. On 6 February 2003, Cornwall Stodart were advised by Cameron Gillingham Boyd that the property was registered for the purposes of GST. Cameron Gillingham Boyd, acting for Toyama, said that "our client is aware that as a development site, its sale will be a taxable supply upon which GST will be payable." They enclosed a letter from Landmark's accountants advising that the joint venture of Landmark and "KJR Family Trust" had been registered by the Australian Taxation Office and issued with an Australian Business Number, and registered for GST purposes.

14. On 13 February 2003, Cornwall Stodart advised Cameron Gillingham Boyd and Mr Barrak that:

"The trustees propose to register for the purposes of GST and sell the property on the basis that the price is GST inclusive so that the GST will come out of the gross sale price.

The trustees will be prepared to consider using the Margin Scheme and obtaining a valuation of the property as at 1 July 2000 if both owners forward a written request for the trustees to use the Margin Scheme and obtain the valuation."

15. They also advised that the trustees were endeavouring to obtain copies of the development consent, designs and plans from the Council file.

16.

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At about this time, Mr Carroll received advice from two quarters as to whether the sale would be a taxable supply upon which GST was payable. Mr Carroll was and is a partner of the firm Carroll and O'Dea. He consulted an employed solicitor of that firm, Mr Vianello. Mr Vianello had been admitted as a solicitor for about three and a half years at the time. He was predominantly a property lawyer. He had acquainted himself with the GST Act. He had attended a week-long course on the legislation conducted by Sydney University in late 1999 or early 2000 and had otherwise familiarised himself with the Act from reading it, and from reading information about it published on the Australian Taxation Office website. Mr Carroll told Mr Vianello that the property was a residential development site and had a development approval for its redevelopment. After carrying out some research and discussing the issue with another solicitor employed by Carroll & O'Dea, Mr Vianello advised Mr Carroll that the safest course was to treat the sale as a taxable supply. He advised Mr Carroll that this was because the owners had obtained approval for a residential development, and it seemed that it was a commercial undertaking which was being sold.

17. Mr Vianello's advice was consistent with Mr Carroll's own opinion. Mr Carroll had also discussed his opinion with Mr Halliday of Cornwall Stodart. Mr Halliday was also of the view that the sale of the property would be liable for GST, and communicated that view to Mr Carroll and Mr MacDonald.

18. On 17 February 2003, Mr Carroll also sought advice on this issue from an accountant, Mr Robertson. Mr Carroll believed that Mr Robertson had extensive experience with, and knowledge of the GST Act. Mr Carroll told Mr Robertson that there was a residence on the property at Port Stephens, but that it had been used as a veterinary clinic. Mr Carroll told Mr Robertson that the property had development approval to erect residential apartments. Mr Robertson later telephoned Raine & Horne at Nelson Bay and received confirmation that the property had been used as a veterinary clinic. He was also told that it had been used as a beauty therapist's business. Mr Robertson formed the opinion that the sale of the property was a taxable supply. He said to Mr Carroll words to the effect:

"In my view, because of the unusual nature of your appointment as a trustee for sale and the apparent non-residential use of the property from it being a development site, the sale should be considered to be a taxable supply. You should register for GST purposes."

19. Mr Robertson was retained to act for the trustees in obtaining their registration for GST purposes.

20. None of Mr Halliday, Mr Vianello, or Mr Robertson, advised the trustees to obtain a private ruling from the Australian Taxation Office.

21. On 21 February 2003, Mr Barrak wrote to Cornwall Stodart in relation to their letter of 13 February. He objected to the retention of Raine & Horne as agents to act on the sale. He also objected to the trustees endeavouring to obtain copies of the development consent and plans from the Council. No issue was taken at that time with the advice that the trustees proposed to register for GST purposes and to sell the property on the basis that the price was GST inclusive.

22. On 28 March 2003, the Australian Taxation Office registered the "trustee for 5 Laman Street, Nelson Bay" for GST purposes and in the Australian Business Register, with an effective date of 12 December 2002.

23. The dispute between Toyama on the one hand, and Landmark and Parramatta Design & Developments on the other hand, in relation to the copyright in the plans, created difficulties for the trustees in the marketing and sale of the property. On 28 April 2003, Cornwall Stodart advised Cameron Gillingham Boyd and Mr Barrak that the trustees intended to approach the Court for directions as to how the sale of the property should be conducted. Mr Barrak objected to this course and demanded that the trustees commence marketing the property without further delay. However, the trustees took that course and filed a notice of motion on 13 May 2003 seeking such directions. No judicial advice was sought as to whether the sale should be described in the contract as a taxable supply. Even to this point, Landmark had not taken issue with the trustees' statement

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of 13 February, 2003 that the sale would be described as a taxable supply, and sold on the basis that the price was inclusive of GST.

24. Landmark insisted upon a prompt sale. On 15 May 2003, Mr Barrak demanded that the trustees immediately commence marketing the property such that contracts could be exchanged by no later than 30 June 2003 and foreshadowed asking for orders to compel the trustees to exercise their powers of sale.

25. On 22 May 2003, Young CJ in Eq gave the following judicial advice to the trustees:

"On the motion by the trustee, I advise the trustee by order under s 63 of the Trustee Act, that they would be justified in selling the property, 5 Laman Street Nelson Bay, as expeditiously as circumstances allow, on the basis that the contract of sale would disclose the existence of the development approval issued by the local council but specifically giving no warranty as to the availability of or ability to use the plans in relation to that development approval."

Landmark's notice of motion for orders to compel the trustees to exchange contracts by 30 June 2003, was not proceeded with, and was dismissed.

26. On 23 May 2003, Cornwall Stodart provided drafts of the contracts for sale under which the trustees proposed to market the property with a view to its sale at public auction to Cameron Gillingham Boyd and to Mr Barrak. On 10 June, 2003, Mr Barrak objected to the special conditions. He also stated that:

"In light of the contract not passing the benefit of the plans and designs to any purchaser, then we submit that the sale is no longer a taxable supply. It is simply a sale of an existing residential house, which is not subject to GST. Accordingly, we suggest that the table on page 2 should be amended."

27. On 10 June 2003, Mr Halliday responded to Mr Barrak. In relation to the GST issue he said that the trustees were registered for GST and proposed to sell on a GST inclusive basis as the sale was a taxable supply. He said that "clearly, it is not a simple residential sale and the project is an enterprise."

28. Mr Barrak thereafter made no further comment to the trustees about the GST issue prior to the auction. He did not provide any elaboration of his view that the sale was not a taxable supply. He did not suggest that the trustees seek a private ruling from the Australian Taxation Office. The obtaining of any such ruling would have delayed the marketing and sale of the property. Landmark was pressing for an early sale.

29. On 20 June 2003, Cornwall Stodart provided Mr Barrak with a draft property inspection report. On 24 July 2003, they provided him with the property information report. These documents were prepared by Raine & Horne. The property information report described the improvements of the property as follows:

"There is a disused building on the site formerly a veterinary clinic. This has little value and is likely to be demolished to make way for future development."

30. The property information report, like the draft contract for sale, disclosed that the Port Stephens Shire Council had approved an application for development for a complex of 14 units on 10 May 2000. A copy of the development consent was enclosed. The report disclosed that a dispute existed in relation to the right to use the plans and designs which accompanied the development applications, including as to the existence of any licence to make use of the copyright of those plans and designs, and that legal action had been foreshadowed in respect of any future use of those plans and designs.

31. In evidence before me, Mr Barrak disputed that the property had been used as a veterinary clinic. He said he did not notice that the property had been so described in the property information report. He received a draft of that report which included the statement that the building was disused and was formerly a veterinary clinic, well before the auction. I do not accept his evidence that he did not notice this statement.

32. Mr Barrak was not only Landmark's solicitor. He was also a director and shareholder of Landmark. Landmark made no objection to the description of the improvements in the property information report. The trustees were entitled to act on the assumption that the advice which they had received from the real estate agents in relation to the improvements on the

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property was correct. That is particularly so given that the statement was not contradicted by Landmark.

33. On 7 August 2003, the property was sold at auction to Concrete Pty Ltd for $2,760,000. This was well in excess of the reserve and the agent's opinion as to the likely price which would be fetched. As foreshadowed by the trustees, the contract for sale stated that "subject to clause 13, the price INCLUDES goods and services tax (if any) payable by the vendor."

34. The second page of the contract stated that the sale was a taxable supply. It did not say that the Margin Scheme applied to the property. Pursuant to clause 13.9, if the sale was not a taxable supply, the vendor was required to pay to the purchaser on completion an amount of one-eleventh of the price. Pursuant to clause 20.8, that obligation survived completion.

The GST Issue Emerges

35. Completion was due on 18 September 2003. On 9 September 2003, Mr Barrak wrote to Mr Halliday, now a partner of Bartier Perry, referring to his letter of 30 May 2003, and Mr Halliday's response of 10 June 2003 concerning liability to GST on the sale proceeds for the property. In the course of a seven-page letter, Mr Barrak set out reasons for the view that the sale of the property was not a taxable supply. In summary he contended that:

a. the only taxable supply made by the trustees was the supply of legal services to the beneficiaries;
b. the sale of the property was a supply made by Landmark and Toyama;
c. the sale of the property was a sale of a residential property which was not a new residential property and was an input taxed supply and not a taxable supply;
d. although the sale of a residential property is input taxed only to the extent that the residential property is to be used predominantly for residential accommodation, by s 9-30(4) of the GST Act the supply was to be taken to be input taxed irrespective of the use to which the purchaser proposed to put the property.

36. Mr Barrak demanded that the trustees notify the purchaser that the contract had misdescribed the sale as a taxable supply and allow the purchaser the opportunity to serve notice of a claim with respect to the misdescription.

37. On 11 September 2003, Mr Carroll and Mr Halliday received advice on this issue from Mr Ganz, a solicitor with Parry Carroll. Mr Ganz provided a file note of his advice on 12 September 2003. Mr Ganz advised that in his view, the trustees were correct in considering the sale of the property to be a taxable supply. He gave detailed reasons for that view.

38. On 15 September 2003, Mr Halliday wrote to Mr Barrak and advised that the trustees had obtained detailed taxation advice which confirmed that they were correct in considering the sale of the property to be a taxable supply in terms of the GST Act. In substance he said that the trustees were effecting the supply, not the beneficiaries, and that the sale was not input taxed because the property was not to be used for residential purposes. It was marketed as a development site and not for residential accommodation. The purchaser proposed to use the property for development purposes. Subsection 9-30(4) was not relevant because the property had not been used by the trustees solely in connection with their making supplies which were input taxed.

39. Settlement of the sale was delayed. The reason for the delay appears to have been the lodgement by Landmark of a caveat, which, by consent, the Court ordered to be withdrawn on 24 September 2003. Settlement was effected in early October, 2003, and arrangements were made for part of the purchase price to be held by the trustees pending resolution of the issues between the parties.

40. Concrete Pty Ltd was a developer. After the purchase was completed, the house was not occupied as a residence. There were delays in carrying out demolition and construction, attributable partly to the dispute about the right of the purchaser to use the plans and designs on the basis of which development consent had been given, and partly to delays in organising finance and other reasons. The directors of Concrete did not consider the possibility of letting the house on a short-term residential lease, because their intention was to develop the site as soon as possible.

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Australian Taxation Office Rulings

41. On 27 October 2003, Messrs Proctor & Associates, who then acted for Landmark, advised Mr Halliday that Landmark had obtained a private ruling from the Australian Taxation Office and provided a copy of that ruling. The ruling was addressed to the trustees, although it had not been sought by them. The ATO's letter set out certain facts of which it had been advised. One of those "facts", namely that the trustees were not registered for GST, was wrong. Other facts were contrary to the information in the property information report prepared by Raine & Horne. In particular the ATO assumed that the premises had not been fitted out for uses other than residential accommodation, and the house had always been used as a residence. That is not consistent with the description in the property information report of the improvements as consisting of a disused building which was formerly a veterinary clinic.

42. After setting out the terms of s 40-65 of the GST Act and paragraphs 19, 22 and 23 of the Goods and Services Tax Ruling GSTR2000-20, the ATO said that it was the physical characteristics of the premises that determined when their use, or proposed use, was for residential accommodation. As the physical characteristics of the premises were those of a residential accommodation, the ATO expressed the opinion that the trustees had supplied residential premises to be used predominantly for residential accommodation and that the sale was input taxed. The ATO also opined that the sale was an isolated transaction that did not have a commercial flavour and was not made in the course or furtherance of an enterprise carried on by the trustees. The ATO also said that the sale of the premises failed paragraph (d) of s 9-5 of the GST Act as the trustees were not registered or required to be registered.

43. In short, the ATO concluded that the sale of the premises was not a taxable supply because it was input taxed; the trustees did not make the supply in the course or furtherance of an enterprise they carried on; and they were not registered or required to be registered for GST. The ATO therefore concluded that the sale was not subject to GST.

44. On 3 December 2003, Mr Robertson wrote to the ATO in relation to the private ruling of 22 October 2003. He said that the application for that ruling had been made without the trustees' knowledge or consent and that it was apparent from the ruling that some matters assumed by the ATO were incorrect. Mr Robertson advised the ATO that the premises had been widely marketed as a residential development site. He attached a copy of the property information report prepared by the selling agents, Raine & Horne of Bondi Junction. He also expressed the view that although copyright of the plans was claimed by the architect, the benefit of both of the development approvals ran with the land with the intent that they remain valid and enforceable by subsequent owners and that they added significantly to the value of the land as distinct from its value for use as a single residence. He said that the trustees could not comment upon whether the property had been used by the directors of Toyama and Landmark as their residence, or leased out to tenants as residential accommodation. He said that the property was never used as a residential premises by the trustees and was vacant up to the date of settlement of the sale. Mr Robertson also described the circumstances of the trustees' appointment, their employment of accountants, real estate agents, solicitors and barristers to assist in selling what was described as being, in reality, a development site. He expressed the view that the transaction, although one-off, had a commercial flavour.

45. The ATO gave a second private ruling addressed to the trustees on 23 December 2003. Again, the ATO concluded that the sale was an input taxed supply of residential premises. The letter has some curious features. It is addressed to the trustees and states under the heading "You advised us of the following facts" certain facts of which it contended it had been advised by the trustees. Many of these facts had not been advised to it by the trustees. In particular, one of the "facts" said to have been advised to it by the trustees was that the house had always been used as a residence and had not been fitted out to accommodate uses other than residential accommodation. Mr Robertson provided no such advice. The statement is inconsistent with the property information report which Mr Robertson provided.

46.

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The ATO asserted that the trustees had advised that during Landmark's and Toyama's ownership, the property was used by the directors of those companies as their residence and leased out to tenants as residential accommodation. Whilst it is true that there were some periods for which part of the premises were so used, it was not correct to say that these were facts advised to the ATO by the trustees. In fact, the trustees expressly stated that they could not comment on whether the property had been so used.

47. The ground upon which the ATO concluded that the sale was an input taxed supply was that:

"Your property has been used for residential purposes and at the time of sale it is fit to be used predominantly for residential accommodation."

There was no elaboration as to how this satisfied the requirement of s 40-65(1) of the GST Act by which sales of residential premises to be used predominantly for residential accommodation, are input taxed.

48. The ATO advised the trustees that they had incorrectly issued a tax invoice to the purchaser, and they should cancel the tax invoice and return the GST incorrectly collected to the purchaser.

Was the Sale a Taxable Supply?

49. Landmark submitted:

(a) that it was not open to the trustees to seek to contradict the private rulings of the Australian Taxation Office in proceedings to which the Commissioner was not a party;
(b) the sale was not a taxable supply because it was not made in furtherance of an enterprise carried on by the trustees; and
(c) the sale was not a taxable supply because it was an input taxed supply, being the sale of residential premises to be used predominantly for residential accommodation (s 40-65(1)).

Tax Issue not Concluded by ATO Private Ruling

50. The trustees submitted that the question of whether the sale was a taxable supply did not arise directly for consideration. They submitted that the issue was whether the trustees acted reasonably in directing that the contract of sale should treat the property as being sold on a GST inclusive basis, that is, whether they exercised the degree of care which a reasonably prudent man of business would exercise in selling his own property, (
Fouche v Superannuation Fund Board (1952) 88 CLR 609 at 641). They submitted that whatever the true taxation position might be, they exercised the degree of care required of them in taking and acting on advice from competent advisers.

51. I accept the trustees' submission that the ultimate question is not whether the sale was a taxable supply, but whether they exercised the required degree of diligence and prudence. Nonetheless, the taxation issue is important. It does not follow necessarily that the trustees would be liable if the advice upon which they acted was wrong. However, if the advice was right, there can be no question of the trustees being liable.

52. Landmark submitted that the trustees are liable because they were in error in describing the sale as a taxable supply. Thus, Landmark raised the issue whether the trustees were right or wrong in so describing the sale. Nonetheless, Landmark submitted that it would not be open to the Court to entertain a submission that the private rulings of the ATO were wrong, in the absence of the Commissioner being joined as a party to the proceedings. (
CSR Ltd v Hornsby Shire Council, [2004] NSWSC 946, Gzell J at [26]-[28]).

53. In
CSR Ltd v Hornsby Shire Council , the Council had compulsorily acquired CSR's land and was liable to pay compensation under the Land Acquisition (Just Terms Compensation) Act 1991 (NSW). The Valuer General determined the amount of compensation in the sum of $25,099,500 being $25,000,000 for the market value of the land and $99,500 for disturbance. In stating that the market value of the land was $25,000,000, the Valuer General said that any liability for GST was a factor in the market for property and embedded in the land's market value. Gzell J held that the Council was not entitled to deduct one-eleventh of that sum from the compensation payable to CSR. The Council also contended that it was entitled to be issued with a tax invoice by CSR. CSR obtained a private ruling that the compulsory acquisition of its land by the Council was not a taxable supply by it of the

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land to the Council. Gzell J declined to declare whether CSR was obliged to provide a tax invoice. His Honour said that such a declaration would not resolve an issue between the parties as the question of whether CSR was obliged to provide a tax invoice to the Council raised an issue between the Council and the Commissioner of Taxation. In the absence of the Commissioner, it was inappropriate to make the declaration sought.

54. In the present case, a decision that the sale was a taxable supply would resolve the issue between the present parties. Such a decision would not bind the Commissioner, but that is not relevant. The issue to be decided is not whether the private ruling was right or wrong, but whether the trustees acted in breach of trust. That issue cannot be decided adversely to the trustees, without its being found that the trustees were mistaken in describing the sale as a taxable supply, and hence exposed themselves to a liability to refund one-eleventh of the purchase price to the purchaser. It is not to the point that the trustees might not have acted in breach of trust even if they were mistaken. The first question is whether they were mistaken, or whether they were right. That issue is raised by Landmark's application and its determination cannot be precluded by the opinion of an officer of the ATO.

Relevant Statutory Provisions

55. Section 7-1(1) of the GST Act provides that GST is payable on taxable supplies and taxable importations. The trustees contend that the sale of the land was a taxable supply.

56. Section 9-5 provides:

"9-5 Taxable supplies

You make a taxable supply if:

(a) you make the supply for *consideration; and

(b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and

(c) the supply is *connected with Australia; and

(d) you are *registered, or *required to be registered.

However, the supply is not a *taxable supply to the extent that it is * GST-free or *input taxed.

* To find definitions of asterisked terms, see the Dictionary, starting at section 195-1."

57. The expression "you" applies to entities generally, unless its application is expressly limited, (s 195-1), and "entity" has the meaning given by s 184-1. That section provides:

"(1) Entity means any of the following:

(a) an *individual;

(b) a body corporate;

(c) a corporation sole;

(d) a body politic;

(e) a *partnership;

(f) any other unincorporated association or body of persons;

(g) a trust;

(h) a *superannuation fund.

Note: The term entity is used in a number of different but related senses. It covers all kinds of legal persons. It also covers groups of legal persons, and other things, that in practice are treated as having a separate identity in the same way as a legal person does.

…

(2) The trustee of a trust or of a *superannuation fund is taken to be an entity consisting of the person who is the trustee, or the persons who are the trustees, at any given time.

Note: This is because a right or obligation cannot be conferred or imposed on an entity that is not a legal person.

(3) A legal person can have a number of different capacities in which the person does things. In each of those capacities, the person is taken to be a different entity.

Example: In addition to his or her personal capacity, an individual may be:

* sole trustee of one or more trusts; and

* one of a number of trustees of a further trust.
In his or her personal capacity, he or she is one entity. As trustee of each trust, he or she is a different entity. The trustees of the further trust are a different entity again, of which the individual is a member.

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…"

58. There was no issue that the sale of the land was a "supply" made for consideration. Landmark contended that the supply was not made in the course or furtherance of an enterprise that the trustees carried on, so that paragraph 9-5(b) was not satisfied. Section 9-20 defines an enterprise as follows:

"9-20 Enterprises

(1) An enterprise is an activity, or series of activities, or series of activities, done:

(a) in the form of a *business; or

(b) in the form of an adventure or concern in the nature of trade or

…

(2) However, enterprise does not include an activity, or series of activities, done

…

(b) as a private recreational pursuit or hobby; or

(c) by an individual (other than a trustee of a charitable fund), or a *partnership (all or most of the members of which are individuals), without a reasonable expectation of profit or gain; or

…

* To find definitions of asterisked terms, see the Dictionary, starting at section 195-1."

59. "Business" is defined in s 195-1 as including any profession, trade, employment, vocation or calling but as not including occupation as an employee.

60. Landmark submitted that the trustees were not required to be registered and should not have been registered for GST purposes such that paragraph 9-5(d) should not have been satisfied. Section 23-5 requires a person to be registered under the Act if the person carries on an enterprise and its annual turnover meets the registration turnover threshold. The threshold is $50,000 or such higher amount as the regulation specifies. Landmark submitted that the trustees were not required to be registered because they did not carry on an enterprise as defined in s 9-20(1).

61. Landmark also submitted that the sale was not a taxable supply because it was input taxed. Section 40-65 provides:

"40-65 Sales of residential premises

(1) A sale of *real property is input taxed , but only to the extent that the property is *residential premises to be used predominantly for residential accommodation.

(2) However, the sale is not input taxed to the extent that the *residential premises are:

(a) *commercial residential premises; or

(b) *new residential premises other than those used for residential accommodation before 2 December 1998.

* To find definitions of asterisked terms, see the Dictionary, starting at section 195-1."

62. There is no issue that the sale was of real property. The expression "residential premises" is defined in s 195-1 as follows:

" residential premises means land or a building that:

(a) is occupied as a residence; or

(b) is intended to be occupied, and is capable of being occupied, as a residence; and includes a *floating home."

63. Also relevant is s 40-35 which deals with the leasing of residential premises. It provides:

"40-35 Residential rent

(1) A supply of premises that is by way of lease, hire or licence (including a renewal or extension of a lease, hire or licence) is input taxed if:

(a) the supply is of *residential premises (other than *commercial residential premises); or

(b) the supply is of *commercial accommodation and Division 87 (which is about long-term accommodation in commercial premises) would apply to the supply but for a choice made by the supplier under section 87-25.

(2) However:

(a) the supply is input taxed only to the extent that the premises are to be used predominantly for residential accommodation; and

(b) the supply is not input taxed under this section if the lease, hire or licence, or the renewal or extension of a lease, hire or licence, is a *long-term lease."

64. Subsection 9-30(4) provides:

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"9-30 Supplies that are GST-free or input taxed

(4) A supply is taken to be a supply that is *input taxed if it is a supply of anything (other than *new residential premises) that you have used solely in connection with your supplies that are input taxed but are not *financial supplies."

Landmark did not rely on s 9-30(4) in its final submissions, although Mr Barrak referred to it in his letter of 9 September, 2003.

Did the Trustees Supply the Land in Furtherance of an Enterprise?

65. Landmark submitted that the entity which made the supply of the real property was the trust, which is itself taken to be an entity for GST purposes pursuant to s 184-1(g). It submitted that the only activity of the trust was the sale of the property, and that the conduct of the trust, or perhaps more accurately the sale of the property by "the trust", was not the carrying on of an enterprise. In particular, it was not an activity in the form of a business, or in the form of an adventure or concern in the nature of trade.

66. I do not accept these submissions. First, the supply of the real property was made by the trustees. The property was vested in them by the order made pursuant to s 66G of the Conveyancing Act . They entered into the contract for the sale of the property and conveyed the title to it. The trustees are the entities who made the supply. Indeed, notwithstanding that the GST Act treats the trust as an entity, it is difficult to conceive how a trust, which has no legal personality, as distinct from a trustee, or a trustee's agent, can make a supply.

67. The trustees carried on an enterprise within the meaning of the Act, being a series of activities done in the form of a business. They were appointed as trustees by the Court because of their professional qualifications as solicitors. Although the orders appointing them do not currently provide for their remuneration, Landmark accepts that they will be entitled to proper remuneration for the work they have done. That work includes retaining real estate agents, solicitors, counsel and accountants; giving instructions for the marketing of the property; liaising with Toyama and Landmark; preparing the contract of sale; arranging for the marketing and public auction of the development site; and selling the site. These activities have a commercial character.

68. It was submitted for Landmark, as I understood it, that the only enterprise carried on by the trustees was the provision of services to the beneficiaries, and that the sale of the property was not a supply made in furtherance of that enterprise. I do not accept that submission. The enterprise which the trustees carried on was the series of activities required to be undertaken pursuant to their appointment as trustees for sale. The sale of the property, being the very thing they were appointed to do, was in furtherance of that enterprise. Without deciding, I am prepared to accept that they provided services to the beneficiaries. But that does not preclude them from also making a supply to the purchaser in furtherance of their activities as trustees for sale.

69. Further, the activity, or series of activities, which they carried on was done in the form of business. The words "in the form of" have the effect of extending the meaning of enterprise beyond entities carrying on a business, to encompass activities that have the appearance or characteristics of business activities. (Goods & Services Tax Determination GST 2000/8 para 7 ). However, even without this extension, what was done by the trustees were business activities, whether considered from the point of view of their providing services to the beneficiaries, or from the point of view of their effecting a sale of the land. In
Rolls v Miller (1884) 27 Ch D 71, Lindley LJ said (at 88) that the word "business":

"... means almost anything which is an occupation, as distinguished from a pleasure - anything which is an occupational duty which requires attention is a business - ..."

70. It is often a feature of a carrying on of a business that a person conducts an enterprise systematically and regularly with a view to profit. (
Hyde v Sullivan (1955) 56 SR (NSW) 113 at 119;
Hope v Bathurst City Council (1980) 144 CLR 1 at 8-9). However, as Mason J said in Hope v Bathurst City Council (at 8):

"It is the words 'carrying on' which implied the repetition of acts (Smith v Anderson (1880) 15 Ch D 247 at 277-278) and

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activities which possess something of a permanent character."

71. Section 9-20(1)(a) does not require for there to be an enterprise that there be repeated or continuous activities. One activity done in the form of a business can be an enterprise. However, it is necessary, in order for an entity to make a taxable supply, that the supply be made in the course or furtherance of an enterprise which the entity carries on. The words "carrying on" would ordinarily imply a repetition of acts. The expression is defined in s 195-1 as including doing "anything in the course of the commencement or termination of the enterprise".

72. When the enterprise carried on by the trustees is regarded as a whole, it can be seen that it involves a series of acts done by the trustees. These included the engaging of consultants, the marketing of the property, the obtaining of judicial advice and the sale of the property.

73. Moreover, the property sold was not owned by an individual and used as a residence, but a disused house on a development site having a development consent. In
Fasold v Roberts (1997) 70 FCR 489, Sackville J (at 524) agreed with Rolfe J in
Durant v Greiner (1990) 21 NSWLR 119 that the word "business", where used in the Fair Trading Acts, bore the meaning of "trade, commercial transactions or engagement", although ordinarily also including a notion of system, repetition and continuity. The sale of the development site was a commercial transaction.

74. Landmark relied upon the judgment of Brennan J in
Northern Engineering Pty Limited v Federal Commissioner of Taxation (1979) 42 FLR 301; 29 ALR 563, where his Honour said (at 304, 565):

"When a company's business is closing down there comes a time when the activity of a trading or profit-making nature comes to an end. The business of the company is not carried on merely by managing or disposing of the company's assets otherwise than in a business. There was, as it seems to me, no element of business in the circumstances of the case here appearing in the movement of funds between the appellant and the other companies in the group. It was not shown that the movement of those funds was for the purpose of deriving any commercial benefit for the appellant and the mere existence of a debt owing by the holding company during the income year had no element of a business about it, nor was it in any relevant sense an incident of the trading business in which the appellant had been engaged."

75. The question in that case was whether a taxpayer in 1967 was carrying on the same business as it had carried on in the years 1960 and 1962. In the earlier years it had carried on the business of buying and selling earthmoving and material handling equipment. During the 1967 income year, the business was wound down and all the stock was sold, the last payment for it being received in May 1967. Its trading activities had ceased. The High Court held that no business was carried on after the taxpayer's trading credits were paid and its trading liabilities discharged.

76. The issue in that case has no parallel with the facts or issues in the present case. Whilst I accept that the trustees were engaged in a separate activity from the joint venturers, Landmark and Toyama, it was nonetheless a related activity. The trustees were appointed to wind up the venture on which Toyama and Landmark had engaged when they fell out. In my view, the mere appointment of a trustee to take the place of someone involved in activities which amounted to the carrying on of an enterprise, would not alter the characterisation of those activities. Clearly the activities conducted by the joint venturers, Toyama and Landmark, were activities in the nature of a business done for profit. The activities of the trustees, although a different enterprise, because carried on by different entities, had a business or commercial character because they brought the activities of the joint venturers to fruition. Moreover, the trustees were themselves acting in business, as professional persons who would charge fees for the work done in selling the site for the profit of the joint venturers.

77. For these reasons, I am of the view that the trustees did make a supply in the course of and furtherance of an enterprise they carried on. For the same reasons, they not only were registered, but were required to be registered under the Act.

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Was the Supply Input Taxed?

78. Section 40-65(1) provides that a sale of real property is input taxed only to the extent that the property is residential premises to be used predominantly for residential accommodation.

79. Landmark submitted that it was the physical characteristics of the premises which both determined whether they were residential premises and whether they were to be used predominantly for residential accommodation. As there was a house constructed on the land which included all the facilities necessary for residential accommodation, such as bedrooms, a lounge room, a kitchen, bathrooms, laundry and so on, the trustees supplied residential premises to be used predominantly for residential accommodation. Landmark submitted that it was irrelevant that the land was marketed as a development site in the expectation that the existing building would be demolished, and it was irrelevant that the purchaser, as was expected, bought the land with the intention of demolishing the house and constructing new apartments. It was said to be irrelevant that the purchaser did not intend to use the existing premises for residential accommodation, but to construct new residential premises.

80. In support of these submissions, Landmark relied upon paragraph 19 of the Goods and Services Taxation Ruling GSTR2000/20, the decision of the Full Court of the Federal Court in
Marana Holdings Pty Ltd v Commissioner of Taxation (2004) 214 ALR 190 and the reasons in the private rulings of the Australian Taxation Office.

81. In its original form, paragraph 19 of GSTR2000/20 stated:

"19. Further, the requirement in paragraph 40-35(2)(a) and subsection 40-65(1) that input taxing only applies to the extent that the premises are 'to be used predominantly for residential accommodation' indicates that premises that are residential premises are capable of use for purposes other than residential accommodation. It is their physical characteristics that mark them out as a residence, their use or proposed use intended by the supplier in relation to the occupier (whether the supplier or someone else) that mark them out as residential premises and the use or intended use by the occupier for residential purposes that mark them out as residential accommodation."

82. It will be noted that as originally issued, the Commissioner was not of the view that the physical characteristics of the premises both marked out whether the premises were residential premises, and also determined whether the premises were to be predominantly used for residential accommodation. As originally formulated, the Ruling expressed the view that whether residential premises were "to be used predominantly for residential accommodation" would depend upon the use of the premises by the occupier, or the occupier's intention as to such use.

83. This paragraph was amended on 19 December 2001, by deleting the second sentence and substituting:

"It is their physical characteristics that mark them out as a residence. In turn, these characteristics determine when the use or proposed use is for residential accommodation." (GSTR2000/20A).

84. Paragraph 22 of GSTR 2000/20 expresses the opinion that the function of paragraph 40-35(2)(a) and subsection 40-65(1) is to differentiate the GST treatment of any portions of residential premises that are commercial, by excluding commercial parts from the input taxed treatment of the rest of the property. It states:

"The function of paragraph 40-35(2)(a) and subsection 40-65(2) is to differentiate the GST treatment of any portions of residential premises that are commercial. This would apply, for example, to a house that has been partly converted for use as a doctor's surgery. Several parts of the house may still be used predominantly for residential accommodation, such as bedrooms, bathroom, kitchen, living rooms and gardens, while other areas are not, being turned over to office and consulting room space, and storage for the surgery. In this case paragraph 40-35(2)(a) and subsection 40-65(2) operate to exclude these commercial parts from the input tax treatment of the rest of the property."

85. In the example given, a house which was constructed entirely for residential use and

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which was used entirely as a residence could be partly converted for use as a doctor's surgery without making any physical changes to the building. One room could be used as an office, another as a consulting room, and another for storage. It is difficult to reconcile paragraph 22 with the statement in the amended paragraph 19 that it is the physical characteristics of the premises which determine whether their use or proposed use is for residential accommodation, unless the "physical characteristics" of the premises encompass not merely its structure but also the fittings and furnishings.

86. Whilst it is a function of s 40-65(1) and s 40-35(2)(a) to differentiate those parts of residential premises which are to be used predominantly for residential accommodation from those which are not, that is not their only function. If no part of residential premises sold or let is to be used predominantly for residential accommodation, then the sale or lease of such premises is not input taxed at all.

87. In
Marana Holdings Pty Ltd v Commissioner of Taxation (2004) 214 ALR 190, the Full Court of the Federal Court had to consider whether the sale of a lot in a new strata plan of subdivision of a building which had formerly been a motel was input taxed pursuant to s 40-65 of the GST Act. The Commissioner contended that the sale was not input taxed because the lot was new residential premises other than those used for residential accommodation before 2 December 1998. If that contention were correct, s 40-65(2) had the effect that the sale was not input taxed. The new lot in the strata plan of subdivision had previously been a motel room having the usual features of such a room. The motel was divided into 134 strata title lots and physical modifications were made to the unit. It was not in dispute that the sale of the unit was a sale of residential premises to be used predominantly for residential accommodation within the meaning of s 40-65(1) of the Act. One of the arguments advanced on the appeal was that the sale of the unit was not the sale of "new residential premises" within the meaning of the definition of that term, because the motel of which the unit had been a part had previously been sold as "residential premises". The Commissioner conceded that the sale of the motel involved a sale of the unit, but submitted that when the motel was sold the premises were not sold as "residential premises". (At 202 [58]). Section 40-75(1) of the GST Act provides that:

"40-75 Meaning of new residential premises

(1) *Residential premises are new residential premises if they:

(a) have not previously been sold as residential premises and have not previously been the subject of a *long-term lease; or

(b) have been created through *substantial renovations of a building; or

(c) have been built, or contain a building that has been built, to replace demolished premises on the same land.

…"

88. The question then was whether the motel had been sold as "residential premises". That depended on the definition of "residential premises". It would be "residential premises" if it had been occupied as a residence, or if it was intended to be occupied, and capable of being occupied, as a residence. The Full Court of the Federal Court rejected the argument that the prior use of the premises as a motel meant that it had been occupied as a "residence" within the meaning of the definition of "residential premises". This was because the word "residence" involved a degree of permanent or long-term commitment to the occupation of the premises which was not shown to have been present. (At [60] (203)). The appellants also relied upon paragraph (b) of the definition of "residential premises" in relation to the sale of the motel including the room which became the unit. They argued that when the motel was bought, they intended that the building be occupied as a residence. In dealing with this argument, the Full Court said (at [61]-[63], (203-204):

" [61] As to whether the motel (or unit 46) had been previously sold while it was intended to be, and capable of being occupied as a residence, we consider that it was not. The appellants' argument assumes that the relevant intention is that of the appellants at the time of acquisition. We disagree. If parliament intended that a subjective intention be the relevant

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consideration for the purposes of s 40-75(1)(a), one might reasonably have expected it to have indicated whose intention was relevant for that purpose - the vendor's or the purchaser's. In any event, it is difficult to see why such intention would be of any significance in this context.

[62] In our view the word 'intended' in the definition is used in a different sense. The relevant meaning of the verb 'intend' is, according to Shorter Oxford, '[h]ave as one's purpose (an action etc)'. The verb may also be used in the passive form to describe the object of an intention. In the present case, the passive verbal form 'is intended' has as its grammatical subject the connective 'that', standing in place of the words 'land or a building'. The person having the relevant intention is not identified. This sentence structure is commonly used to describe characteristics of the subject of the sentence, which subject is the object of the relevant intention. To say that a building is 'intended' to be occupied as a residence implicitly describes the intention with which it was designed, built or modified, which intention will be reflected, to greater or lesser extent, in its suitability for that purpose. It is true that this meaning may overlap with the further requirement that the building be capable of occupation as a residence. However, as we have pointed out, the 1999 amendment appears to have been concerned primarily with land. It may not be surprising that it is a little awkward in its application to buildings. In any event para 1.167 of the explanatory memorandum which accompanied the amending legislation suggests that the draftsman may have thought that 'intended' meant 'permissible' and 'capable' meant 'having necessary qualities'."

89. The Full Court concluded that the evidence did not establish that the premises were physically suitable for use as a residence at the time the motel was sold. Irrespective of the purchaser's intention, they were not "intended to be occupied and capable of being occupied as a residence".

90. The Full Court's decision establishes how the definition of "residential premises" is to be construed. Although, in the present case, the property was not occupied as a residence at the time of sale, it was nonetheless "residential premises", because it was built for the purpose of being occupied as a residence and was capable of being so used.

91. However, that does not resolve the question whether the sale was of residential premises to be used predominantly for residential accommodation. The Court in Marana did not consider how the words "to be used predominantly for residential accommodation" in subs 40-65(1), or how the words "are to be used predominantly for residential accommodation" in paragraph 40-35(2)(a), are to be construed.

92. The construction of both provisions should be approached in the same way. They require a prediction as to the future use of the premises. The most important factor in such a prediction is the intention of the future owner or lessee of the property. In the case of a lease, the question of how the property is to be used in the future will usually be determined by the terms of the lease. In the case of a sale, the likely future use of the property will probably depend on the purchaser's intentions, to be assessed having regard to objective circumstances such as the physical condition of the premises, the zoning or any restrictive covenants.

93. In my view, it does not accord with the natural meaning of paragraph 40-35(2)(a) and subs 40-65(1), to determine the question whether the residential premises are to be used predominantly for residential accommodation, solely by reference to the physical construction of the premises, and what that construction connotes about the intention with which the premises were designed, built or modified. If that construction were correct, it would have been much simpler for Parliament to have provided that a sale of real property was input taxed to the extent that the property was constructed as a residence. It is necessarily implicit in the expression "residential premises to be used predominantly for residential accommodation" that premises constructed as a residence may not be used for that purpose. Sections 40-65 and 40-35 recognise the possibility of dual or multiple uses of a building constructed as a residence. Hence the

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construction of the premises cannot be determinative of their intended or expected use.

94. Nor should the fitting-out or furnishing of premises be determinative, except in so far as it throws light on the intentions of a purchaser, or parties to a lease. The Act does not say that a sale of real property is input taxed to the extent it is constructed or fitted out for, or fit for, use as residential accommodation. If the fitting-out of premises were determinative, one could not assess whether the sale of an empty house, capable of multiple uses, was input taxed.

95. The construction which Landmark advances is not consistent with the evident purpose of the provisions. As explained in Marana v Federal Commissioner of Taxation (at [35], [36] and [38], 197-198), the purpose of sub-divisions 40-B and 40-C of the Act was to benefit homeowners who are selling their homes, and to treat persons who are renting a house on the same footing as a person who owns a house. The provisions were intended to operate for the benefit of homeowners and those who rented their homes.

96. It would be inconsistent with that purpose if a lease of a house to a real estate agent, which provided that the premises could only be used as a real estate agency, was input taxed because no changes had been made to the physical structure of the house, which could equally be used as a residence. This would equally be so if the house was sold empty, or was furnished as a residence. In the same way, in the circumstances of this case, the rulings of the Australian Taxation Office and the argument of Landmark, if correct, would give s 40-65 an operation which is inconsistent with its intended purpose. Neither Landmark, nor the trustees, nor Concrete Pty Ltd was a homeowner or home occupier whom Parliament intended to benefit.

97. I accept that there is a practical difficulty in determining the vendor's liability to pay GST on a sale of a house or home unit by reference to the purchaser's intention as to how the premises will be used. If the premises are sold at auction, the identity of the purchaser will not be known in advance. However, it is open to a vendor by the terms of the contract to protect himself or herself from liability. The 2000 edition of the Standard Form Contract for Sale which was used on the sale to Concrete Pty Ltd made such a provision. Clause 13.7 provided that if the contract said that the sale was not a taxable supply, the purchaser promised that the property would not be used and represented that the purchaser did not intend the property to be used in a way that could make the sale a taxable supply.

98. The authors of the CCH GST Guide Commentary on Real Property suggest (at 35-200) that whether residential premises are to be used predominantly for residential accommodation should be determined by objective criteria rather than a party's subjective intentions. Neither s 40-65(1) nor s 40-35(2) expressly uses the language of intention. The provisions rather require a prediction at the time of supply as to how the premises will be used. However, the most important factor in making such a prediction is the intention of the purchaser of the premises or the parties to a lease. The fact that it may be difficult to assess how premises will be used in the future does not mean that the range of available materials for making that assessment should be limited, by excluding, in the interests of expediency, the most important consideration.

99. In any event, even if the matter is to be determined solely by objective criteria, there is no warrant for limiting those criteria to the physical characteristics of the premises at the time of supply. The physical characteristics of the premises will be relevant to, but not determinative of, the question of to what use the premises will be put. There can be many other objective criteria, such as the terms of the lease. In this case, the objective criteria for determining whether the premises would be used predominantly for residential accommodation include its location, the configuration of the site, the fact that two development consents had been granted for the construction of residential apartments, and the fact that at the time of sale the building was disused. These were all factors that led to the site being marketed as a development site. They show that notwithstanding that the land had on it a building which was constructed as a residence, considered objectively, it was not likely that the premises would be used for residential accommodation.

100. For these reasons, I do not accept the reasoning in the ATO's private rulings. Those

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rulings followed the revised terms of paragraph 19 of the ATO's GST Ruling 2000/20. However, neither that paragraph, nor the private rulings, explain how the terms of s 40-65(1) are satisfied merely by a consideration of the physical characteristics of the premises.

101. In my view, the subjective intentions of the purchaser, and the objective criteria considered as a whole, show that the proper conclusion to have been drawn at the time of the supply was that the premises were not to be used predominantly for residential accommodation. The trustees' conclusion that this was the case was correct. Indeed, it has been shown to be correct, as neither the purchaser nor anyone else used the premises as residential accommodation after the sale.

102. In his correspondence of 9 September 2003 referred to in paragraph [35] above, Mr Barrak appeared to concede that it was not likely that the purchaser would use the property predominantly for residential accommodation. He contended that by virtue of s 9-30(4) of the GST Act, the sale was input taxed irrespective of the use to which the purchaser proposed to put the property. Landmark did not rely upon this provision in its final submissions. On any view, it could have no application. If, as I have found, the supply to Concrete Pty Ltd was made by the trustees, it was not made in connection with other supplies by the trustees that were input taxed. It is true that the beneficiaries, (Landmark and Toyama) had made previous supplies of the property by way of lease which were input taxed. However, the supply by sale to Concrete Pty Ltd was not made by the beneficiaries, but by the trustee. Even if it could be treated as a supply by the beneficiaries, the sale to Concrete Pty Ltd was not made in connection with the earlier supplies. Section 9-30(4) is not relevant.

103. Landmark did not submit that the purchaser's intention that the new units to be constructed on the land be used as residential accommodation satisfied s 40-65(1). They are not the residential premises sold.

104. There is another difficulty with s 40-65(1), but its resolution would not resolve the present issue. The difficulty is that it is clear from the words "to the extent that" in s 40-65(1), and from s 9-80, that a sale or lease of real property may have to be apportioned between that part which is input taxed because it is to be used predominantly for residential accommodation, and that which is a taxable supply. However, no apportionment arises unless a use is not to be "predominantly" for residential accommodation. If residential premises were to be used partly as a residence and partly for commercial purposes, no question of apportionment would arise if the predominant use of the premises was to be for residential accommodation. In other words, it would not simply be a matter of saying that part of the premises was to be used for commercial purposes and part as a residence and apportioning the supply accordingly, as that would give no work to the word "predominantly". However, this difficulty exists irrespective of which approach to the construction of s 40-65(1) and para 40-35(2)(a) is adopted.

105. For these reasons, I consider that the trustees were correct in describing the sale as a taxable supply. Concrete Pty Ltd did not intend to use the land and existing buildings for residential accommodation. It intended to demolish the existing buildings. The objective circumstances at the time of sale indicated that this was probable. That is why the property was marketed as a development site. The fact that the existing buildings were constructed as a residence made them "residential premises", even though they were not, at the time of sale, occupied as a residence. However, they were not residential premises which were, to any extent, to be used predominantly for residential accommodation. They were therefore not input taxed pursuant to s 40-65(1).

106. It follows that as the trustees acted correctly, they cannot be liable for breach of trust.

Trustees' Liability if the Sale was Input Taxed

107. If I am wrong in my interpretation of subs 40-65(1), it does not follow that the trustees committed a breach of trust. As I have said in para [51], I accept that the trustees' duty was to act on the sale of the property with the degree of care a reasonable, prudent man of business would exercise in selling his own property.

108. On the other hand, Landmark submitted that it is not a defence that the trustees acted on

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advice, if the advice was wrong. It relied on
National Trustees Executors & Agency Company of Australasia Ltd v General Finance Co of Australasia Ltd [1905] AC 373 at 379.

109. National Trustees Executors & Agency Company of Australasia Ltd v General Finance Co of Australasia Ltd is not germane to this case. There, the trustees breached their trust by paying trust moneys to persons not entitled. They could not rely upon their having acted on the advice of competent legal advisers to establish that there was no breach of trust, when the terms of the trust required them to hold the trust property for others. The obligation to hold the trust property for, or pay it to, the persons entitled, is not an obligation whose touchstone is reasonableness or prudence. The trustees' duty is to adhere to the terms of the trust. On the other hand, in the management of the trust business, a trustee should exercise the same diligence and prudence as an ordinary prudent man of business would exercise in conducting that business as if it were his own. (Fouche v Superannuation Fund Board at 641; Jacobs, Law of Trusts in Australia , 6 ed, para [1718]). In asking whether a trustee has exercised the care and diligence expected of an ordinary prudent man of business, it is clearly relevant, although it may not be decisive, that he acted on the advice of competent advisers.

110. The trustees were not under an absolute duty to state correctly whether the sale was a taxable supply.

111. Without conceding that the trustees' duty was merely one of exercising reasonable care and diligence, Landmark nonetheless submitted that the trustees did not act with reasonable care and diligence. Landmark submitted that:

(a) the trustees failed to obtain relevant information about the property to be sold;
(b) they failed to "properly characterise the sale in relation to the various definitions in the GST legislation";
(c) they failed to choose independent advisers with requisite specialist expertise;
(d) they failed to give proper instructions to their advisers;
(e) they failed to keep an appropriate record of the advice;
(f) they failed to obtain a private ruling from the Australian Taxation Office before entering into the contract; and
(g) they failed to obtain judicial advice, notwithstanding the advice they received did not put the issue beyond doubt.

112. I do not accept these submissions. As to first, in my view the trustees did take proper steps to obtain relevant information about the sale. On 17 January 2003, Mr Halliday, on their behalf, wrote to Mr Barrak on behalf of Landmark and to Toyama's solicitors. Amongst other things, he asked them what was the current description of the property; whether it was vacant land or had improvements. Toyama's solicitors replied that a four-bedroom house was located on the property together with a one-bedroom flat and garage. Mr Barrak did not respond to the enquiry. The trustees appointed Raine & Horne of Bondi Junction as agents to sell the property. There was no criticism in the hearing before me of the appointment of that firm of real estate agents. The trustees had proposed to appoint the Nelson Bay franchise of Raine & Horne as co-agents with Raine & Horne of Bondi Junction, but Landmark objected to their appointment. On 28 January 2003, Raine & Horne provided advice to Mr Carroll that the improvements on the site consisted of a disused building which was formerly a veterinary clinic. There was no reason for Mr Carroll to doubt that advice, although Mr Barrak, in his evidence before me, disputed its correctness. Nonetheless, the property was described in the same way in the property information report prepared by Raine & Horne and made available to prospective purchases. As previously noted in these reasons, a draft of that report was provided to Mr Barrak and no objection was taken to that description.

113. Mr Carroll also inspected the property himself and observed that it was a disused residence overlooked by surrounding units in a favourable location for development. He said that he couldn't see anyone buying it as a residence as distinct from a development site. In my view, the trustees did obtain all relevant information about the sale.

114. The second submission was that the trustees failed properly to characterise the sale in relation to the various definitions in the GST legislation. What I think the submission means

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was that, according to Landmark, the trustees were wrong in their view that the sale was a taxable supply and not an input tax supply. In fact, their advisers addressed the right questions as to whether the trustees carried on an enterprise and whether the sale would be input taxed under s 40-65(1) of the GST Act. Even if, contrary to my view, the trustees' conclusions, based on the advice they received, were wrong, that does not establish that they failed to act with the required degree of care and diligence.

115. Next, it was said, that the trustees did not choose independent advisers with the requisite specialist expertise. Neither of the trustees regarded themselves as having specialist knowledge of the GST legislation, although they had some general familiarity with it from their practice as property lawyers. Mr Halliday, who acted on the conveyance, was in the same position and was understood by them to be in the same position. Mr Carroll consulted both Mr Vianello, a solicitor, and Mr Robertson, an accountant. He placed more reliance on Mr Robertson, perhaps because Mr Vianello was a comparatively junior solicitor, having been admitted to practice in 1999. Both Mr Vianello and Mr Robertson had studied the GST Act and given advice to clients in relation to it. I do not accept that they lacked sufficient expertise to proffer advice on the Act, let alone that the trustees ought to have appreciated that they did not have requisite expertise.

116. Landmark submitted that Mr Vianello may not have properly addressed all the issues that were required to be considered in the legislation. In my view, it was not shown that Mr Vianello failed to consider any matter that the Act required to be considered, although even if that had been the case, the question is not whether the adviser exercised reasonable care and skill, but whether the trustees exercised reasonable care and diligence in their briefing of an adviser and obtaining his opinion.

117. Mr Vianello considered that the sale was made by the trustees pursuant to an enterprise. He considered that the safest course of action was to treat the sale as a taxable supply because the trustees could not be certain what a purchaser's intentions would be as to how the property would be used. Landmark criticised this approach and said that his advice was "somewhat paradoxical" because it would be difficult to know in the case of a sale by an auction whether the sale was or was not a taxable supply prior to the conclusion of the auction. Mr Vianello considered that because the trustees could not know who the purchaser would be and therefore would not know for certain what the purchaser's intentions would be, the prudent course for them to take was to classify the sale as a taxable supply. I do not think there was anything unreasonable in Mr Vianello's view that the test of whether the sale was an input taxed supply would be governed by the intentions of the purchaser of the property.

118. I do not know that it follows that describing the sale as a taxable supply was a course of prudence. If the land had not been a development site and it had not been expected that the purchaser would be a developer, the prudent course would probably have been not to have so described the sale, but to have relied upon purchaser's warranty. However, given the nature of the land being sold and the expectation that it would be sold to a developer, Mr Vianello cannot be criticised for describing his advice as being the prudent course to take.

119. Mr Vianello was employed by a firm of which Mr Carroll was a partner, but that does not mean that his advice lacked independence. There was no question of Mr Carroll being in a position of conflict with anyone.

120. There was no evidence to challenge Mr Carroll's view that Mr Robertson had extensive experience with knowledge of the GST Act. There was nothing in his advice to Mr Carroll to which I have referred in paragraph [18] which, even if incorrect, would indicate to a person in Mr Carroll's position that Mr Robertson had not applied appropriate care and skill in reaching the opinion which he expressed. In other words, there is nothing obviously faulty in the advice which he gave.

121. In my view, the trustees did not fail to exercise the required standards of care and diligence in selecting advisers on the GST issue.

122. The next grounds of criticism were that the advisers were not briefed in writing and did not give their opinions in writing. Nor did the trustees keep a file note or other record of the advice which they were given. Mr Carroll accepted that the manner in which he sought

ATC 4179

advice from Mr Robertson was not in accordance with his usual standard when he seeking specialist advice on a legal or important accounting question for a client. This consideration would carry weight if the advisers had not been given necessary information, or there was doubt about what advice they had given, or their reasons for their advice should have indicated to the trustees that the advice was flawed. That is not the case. There is no doubt about the advice which was given. The failure of the advisers to be briefed in writing, or to advise in writing, or for a record of their advice to be kept in writing, is not significant. It is to be borne in mind that until Mr Barrak's letter of 10 June 2003, no-one had taken issue with the view expressed by the trustees' solicitors on 17 January 2003 and 13 February 2003 that the sale would be a taxable supply.

123. Next, it was submitted that the trustees ought to have obtained a private ruling before entering into the contract for sale from the Australian Taxation Office. There was uncontradicted evidence that a private ruling can be obtained from the Australian Taxation Office prior to a party entering into a conveyancing transaction, and that that is a matter widely known amongst the legal profession in New South Wales. The trustees were not advised that this was a course they should take.

124. It is important to bear in mind that Landmark was pressing the trustees to proceed with the sale urgently. Landmark filed its own Notice of Motion with a view to obtaining an order to compel the trustees to submit the property for sale by 30 June 2003. On 15 May 2003, Mr Barrak complained that:

"The trustees have had power of sale since December last year and the marketing on the property has not even begun. Your client's failure to comply with the Supreme Court orders are causing our client financial hardship. . We again demand that you comply with the orders of the Supreme Court by immediately commencing the marketing of the property such that the exchange of contracts takes place no later than 30 June 2003."

125. In his letter of 30 May 2003, in which he contended that the sale was not subject to GST, Mr Barrak repeated that Landmark was keen for the trustees to commence marketing the property expeditiously. He raised a number of matters. He suggested that they be finalised prior to commencement of marketing. Whether the sale was described as a taxable supply needed to be determined before marketing commenced, as that was a matter which was likely to be relevant to a developer's financial assessment. Mr Barrak asserted that the reason the sale was "no longer" a taxable supply was because the contract would not pass the benefit of the plans and designs to any purchaser.

126. It is not obvious why that fact would mean that the sale was not a taxable supply whereas, apparently in Mr Barrak's view, it would have been a taxable supply if the benefit of the plans and designs had passed. The fact that the contract gave no warranty about the right of a purchaser to use the plans and designs, and warned a purchaser of the dispute, was no reason to think that a likely purchaser would not be a developer but a person wanting to use the existing buildings predominantly for residential accommodation. In his oral evidence, Mr Barrak said that he regarded the point as relevant because it meant it was likely there would be a delay before a developer could proceed, and in the meantime it was likely that the premises would be occupied as a residence. He did not explain that position in his correspondence with the trustees' solicitor. Mr Halliday understandably and correctly rejected Mr Barrak's assertion that the sale was "simply a sale of an existing residential house".

127. After Mr Halliday's letter of 10 June 2003, Mr Barrak did not mention the point again until shortly before completion was due of the contract for sale. He did not suggest that the trustees delay the marketing of the property whilst they sought a private ruling from the Australian Taxation Office or judicial advice.

128. It is not clear from the evidence what would have been the delay had the trustees sought a private ruling from the Australian Taxation Office following Mr Barrak's letter of 30 May 2003. It appears however, that such rulings can be obtained relatively promptly. The Australian Taxation Office's ruling of 22 October 2003 was given in response, it would seem, to an application made on 13 October 2003, although that application is not in evidence and it is not clear whether it was

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preceded by earlier correspondence. Nonetheless, I infer that there would have been a delay of at least some weeks in obtaining from Mr Barrak, if he were willing to give it, adequate reasons for his view that the supply was input taxed, preparing an application for a private ruling, and obtaining it. Given the unanimous advice which the trustees had received, the fact that they had not been advised to seek a private ruling, and given the paucity of the reasons given by Mr Barrak for his contention that the sale was a taxable supply, I do not consider that in the circumstances in which the trustees found themselves, they failed to exercise the required standards of care and diligence in not seeking a private ruling.

129. Landmark's last contention was that the trustees should have obtained judicial advice on the GST issue. The trustees did seek judicial advice on the terms to be included in the contract of sale. When they did so, there was no issue about GST. The trustees had been given advice from two sources. They had communicated their intentions to the joint venturers and no issue had been taken about it. They cannot be criticised for not seeking judicial advice in relation to this issue when they applied to the Court in May 2003.

130. The trustees could have sought judicial advice after the point was raised in Mr Barrak's letter of 10 June, 2003. However, that course would have led to delays in selling the property which, it would seem, would have caused the beneficiaries financial harm. It would have been necessary for the trustees to prepare the application and obtain written advice, probably from counsel, on the issue. There would have been delays in the matter coming before a judge for advice. In any event, having regard to my conclusions on the trustees' liability to pay GST, it is likely that the advice would have been that the trustees were justified in taking the course they proposed. In my view, the trustees did not fail to exercise the standard of care and diligence required of them by not seeking judicial advice. Had they done so, Landmark would probably have complained that they were subjecting it to continued financial loss in order to obtain protection for themselves at the expense of the beneficiaries.

131. Trustees will be protected if they act in accordance with judicial advice, having made appropriate disclosures. It does not follow that they have a duty to seek it, such that failing to obtain judicial advice can be relied upon as showing they did not exercise due care or diligence. Landmark submitted that if the trustees wished to "avoid liability for error" they ought to have obtained judicial advice pursuant to s 63 of the Trustee Act . As I have said, the trustees are not liable merely for "error".

132. For these reasons, even if my conclusion as to the proper construction of s 40-65(1) of the GST Act is wrong, I do not consider that the trustees breached their duty.

Remaining Issues Need Not be Decided

133. Had I reached a different conclusion on the liability of the trustees to pay GST and the nature of their duty, I would nonetheless have concluded that they were entitled to relief under s 85(1) of the Trustee Act 1925. This would have been for the reasons I have given in finding that they did not fail to act with the required prudence and diligence. Having regard to my primary findings, it is unnecessary to say anything further about s 85.

134. Nor is it necessary to decide what would have been the appropriate measure of equitable compensation, if any, to which Landmark would have been entitled had it succeeded in establishing the trustees' liability.

135. Landmark contended that the trustees were obliged to remit one-eleventh of the purchase price to Concrete Pty Ltd. It contended that the trustees should be surcharged with that amount. That is, Landmark contended that because the trustees had breached their duties of care and diligence they should account for more moneys from the sale of the property than they received as moneys available for distribution to the beneficiaries. Where the trustees' liability is of that kind, the equitable compensation payable is that amount which would restore the trust estate to what it would have been had the trustees complied with their duties of care and diligence.

136. The question then would be what price the property would have reached had the trustees, exercising care and diligence, described the sale as an input taxed supply. That is a difficult question which remained unclear on the evidence. Although a purchaser, who was a developer, would not be entitled to

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an input tax credit if the sale was not described as a taxable supply, Landmark developed an argument that by using the margin scheme, such a developer could obtain a substantially similar financial position as if the property were sold inclusive of GST. On the view to which I have come in relation to the trustees' liability, it is unnecessary to decide this question. It would not be desirable to do so.

Trustees' Applications

137. The trustees seek judicial advice as to whether they should issue an amended invoice in respect of the sale of the property in accordance with the private ruling of the Australian Taxation Office of 23 December 2003, and repay one-eleventh of the purchase price to the purchaser. The parties were agreed that that question should be considered in the light of my reasons.

138. The trustees also sought orders that they be entitled to be paid remuneration in respect of their administration of the statutory trust for sale. The orders appointing the trustees made no provision for their remuneration. They could not be expected to undertake the onerous duties they assumed without remuneration. Landmark did not oppose their being paid proper remuneration, whilst reserving its right to object on an assessment to the remuneration sought. Toyama was a party to the trustees' notice of motion and did not appear in opposition to it.

139. Trustees are entitled to be indemnified from the trust estate in respect of the expenses properly incurred by them. The Court has inherent jurisdiction to allow them remuneration. The trustees' duties were more than usually complicated. Not only did they have to act on the sale, but there were disputes between the beneficiaries in relation to the sale. As I have noted, they sought judicial advice in relation to the provision to be made in the contract for sale in relation to a prospective purchaser's right to use the plans and drawings over which Parramatta Design & Development Pty Ltd had copyright. They also commenced proceedings for the removal of a caveat which Landmark lodged shortly before completion of the sale was due.

140. The trustees sought an order that their application for remuneration be referred to the Registrar for assessment.

141. I have no doubt that this is a proper case to exercise the Court's inherent jurisdiction to allow the trustees' remuneration. Had the matter been adverted to when they were appointed, I am sure that orders would have been made for their remuneration.

142. Not only was the trustees' work difficult, but the outcome of their efforts for the beneficiaries was outstandingly successful. The property was sold at auction for $2,760,000, which was almost double the agent's estimate.

143. The parties did not make submissions as to whether the trustees should be remunerated at an hourly rate appropriate to solicitors of their standing, or as a percentage of the price realised on sale. I will hear argument on this question if any party contends that the trustees should be remunerated by receiving a percentage of the sale proceeds. Otherwise, I think it appropriate to adopt the procedure adopted by Campbell J in
Application of Sutherland (2004) 50 ACSR 297; 22 ACLC 1326 where his Honour, in the exercise of the Court's inherent equitable jurisdiction, directed that a claim of a liquidator of a trustee for remuneration be examined by a Registrar, with the beneficiaries allowed the opportunity to object.

144. It is not clear to me what funds are presently under the control of the trustees. An amount of $250,909.09 was deposited at interest following completion of the sale on 3 October 2003, pending resolution of the GST issue. That sum will not be available to pay the trustees' remuneration, as it will be payable either to the Commissioner of Taxation or the purchaser. The trustees seek orders that they be permitted to retain amounts received by them from the sale of the trust property on account of their remuneration, and that the beneficiaries pay to them such additional amount by way of remuneration as the Court should approve as their proper remuneration. No submissions were made about this latter aspect of the claim. Landmark's only opposition to the relief claimed by the trustees was that it have liberty to contest the reasonableness of the trustees' claim for remuneration. Toyama did not appear. In my view, unless it is agreed or held that the trustees should be remunerated by commission calculated on the sale proceeds, the appropriate course is to refer the trustees' claim for

ATC 4182

reasonable remuneration to a Registrar or Deputy Registrar for assessment and certification of the trustees' proper remuneration. I will reserve the matter for further consideration on the Registrar's or Deputy Registrar's certificate.

145. Landmark's notice of motion sought orders that the trustees provide copies of memoranda of account in taxable form for their professional fees. I will not make that order, as it will be subsumed by the reference to the Registrar or Deputy Registrar.

146. For these reasons, I order that the defendant's notice of motion filed on 13 August 2004 be dismissed and that the defendant pay the costs of the respondents to that notice of motion.

147. I will not make orders immediately upon the trustees' notice of motion in case any party wishes to make further submissions as to whether the trustees' remuneration should be by way of commission based on a percentage of the proceeds of the trust property realised by them. If no such submissions are made, or if made, are not successful, I will refer the claim of the trustees for remuneration, to the Registrar for assessment and certification.

148. The trustees are entitled to indemnify themselves out of any trust estate in their hands in respect of expenses they have properly incurred. At the moment, I see no need to refer any question of their right to indemnity for expenses incurred in the execution of the trust to a Registrar for assessment. Neither beneficiary has sought an order to compel the trustees to deliver accounts.

149. I will stand the proceedings over to a date convenient to counsel to deal with the trustees' application for judicial advice as to whether they should issue an amended invoice in respect of the sale of the property and pay the purchaser the one-eleventh of the purchase price held on trust, and to deal with any further issues with respect to the trustees' remuneration.

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