CASE 4/2008

Members:
A Sweidan SM

Tribunal:
Administrative Appeals Tribunal, Perth

MEDIA NEUTRAL CITATION: [2008] AATA 461

Decision date: 28 May 2008

A Sweidan (Senior Member)

Background

1. This is an application for review of the Commissioner's decision of 8 August 2006 to disallow a Part IVC objection against the Commissioner's decision dated 18 November 2005 to cancel the applicant's registration under A New Tax System (Goods and Services Tax) Act 1999 ("the GST Act") with effect from 1 October 2001. The importance of this to the applicant is that unless it is registered none of the acquisitions that it has made will be "creditable acquisitions" for the purposes of section 11-5 of the GST Act and will thus not attract "input credits" pursuant to section 11-20.

Facts

2. Since 1 July 2000 (the advent of GST) the applicant has spent at least $4 million on acquiring various artworks and antiques. It has treated this expenditure as being for creditable acquisitions in relation to which it has claimed input credits in the various business activity statements (BASs) that it has lodged since then. These claims were made on the basis that the acquisitions of artworks and antiques were made in the course of an "enterprise" consisting of the dealing in such items.

3. All of the shares in the applicant are and have at all relevant times, been beneficially owned by Mr A, either directly or through interposed companies.

4. Mr A is said to be a wealthy individual who controls a group of companies ("the group") which has a successful and substantial real estate development business in Western Australia. The applicant company is a member of the group.

5. In early 1997 the applicant's sole activity became the acquisition of valuable artworks and antiques. In it's income tax returns for the years ended 30 June 1999 and subsequent years, the applicant's activities have been described consistently as "investment in artwork and antiques".

6. In the 8 years to November 2005 approximately $4.8 million was spent by the applicant on acquisitions comprising 225 antique items and 87 paintings.

7. During that time the applicant had no employees but was provided with services by employees of the group and contractors/consultants who provided expert advice on art to the applicant. As at 30 June 2004 the applicant appears to have had no other assets apart from unsecured loans back to the group.

8. The acquisitions have been financed by unsecured loans advanced by Mr A personally and the group and in addition, since 11 September 2003, a $1 million ANZ bank facility, secured from personal guarantees by Mr A and the group. The applicant's Balance Sheet at 30 June 2004 showed that the applicant owed $2.7 million in unsecured loans to the group and Mr A and $492,255 in respect of commercial bills arranged by ANZ.

9. No sales of any items occurred until November 2002 when an antique item purchased in 1998 was sold for a profit of $315. In the following financial year (i.e. ended 30 June 2004) another antique item and a painting were sold for losses of $1,090 and $34,090 respectively. These losses correspond to sales of approximately $42,000. These three items were the only sales in the period up to and including 28 September 2005. In his witness statement dated 8 March 2007 Mr A says that "art sales to date have amounted to approximately $46,000. Antique sales have amounted to approximately $60,000" (see para 5.1 of his witness statement). However the income tax returns indicate that apart from the three items mentioned above the applicant's only other relevant sales were $2,063 in the 2006 financial year representing a cost of sales of $28,000. It appears that a $71,797 item described in the 2005 income tax return as "non-deductible expenses" (see Supplementary T docs folio 487) is in fact a reference to "Other Assessable Income". It is unclear whether this amount refers to sales of artwork or antiques.

10. Mr A acknowledges in his witness statement that very little attempt has been made to date to actively market the artworks/antiques. It is not in dispute that items are generally not advertised or displayed in galleries where they can be viewed by the public at large. All of the antiques and most of the paintings are kept (on display) at Mr A's two private residences which are owned by the group companies. A few items are kept at the head office of the group or loaned out for short periods of time. At paragraph 4 of Mr A's witness statement he says:

"The art which is purchased is displayed in the offices of the Group in South Perth. It is also on display in my home in Peppermint Grove and the property owned by Rebkin Pty Ltd at Quindalup. Two of these properties are company owned, and are occupied under commercial arrangements.

Mrs A, my wife, is closely involved in a number of charities. She regularly gives cocktail parties and similar functions in our home in Peppermint Grove, which are to enable people to view the artworks on display.

My wife recently hosted a substantial function at our home in Peppermint Grove on behalf of Toy Bank - Variety Club for Charity. The artistic works are on display at that function for visitors to consider, and if a collector or dealer wished to purchase a work or works, [applicant] would sell if the price is right.

I have acquired a property at View Street, Peppermint Grove as a place of future residence. The current designs include an art gallery sufficient to accommodate up to 200 visitors at a time. Mr Purves and Mrs Minchin (two art dealers that Mr A has had regular dealings with) have both advised in relation to the design and construction of the proposed art gallery. The gallery will have UV protected glass and lighting, refrigeration and security."

11. There is no evidence that any charge is made by the applicant to the borrowers of these items.

12. The few sales that have been made to date are the result of conscious decisions to actively market the items by engaging art dealers to sell them. These sales have thus far been restricted to unwanted items. As Mr A says at paragraph 5.1 of his statement:

"Thus far, there have been limited sales, because the philosophy has been to try to build up the Swansea Collection as a collection of note. We have been careful to ensure that we have only bought good investment paintings which fall within our business philosophy, and so it has not been necessary, thus far, to dispose of paintings which have turned out to be unsatisfactory, other than in one or two cases."

13. This is further explained in relation to his "investment strategy" or "underlying philosophy" in his statement as follows:

13.1 para 3.5 of his witness statement:

"The purpose and intention of acquiring artworks has always been based on the view that the artworks must have an inherent appreciating value, that the investment may be turned to account when it is appropriate to do so at a profit. Swansea does not purchase artwork as a hobby or recreational pursuit, nor do I. The Swansea Collection has been built up as a sound financial investment, all the works in which are for sale at the right price. I am striving to improve the quality of the collection to museum quality. In that process, as better quality paintings come on the market, I will sell the B grade paintings in order continually to raise the quality of the collection as a whole."

13.2 para 5.2:

"The overwhelming rationale is to acquire museum quality pieces for inclusion in the Swansea collection. All of the existing artwork and antiques are for sale at the right price. As we find better quality works, then we consider selling existing artworks so as to upgrade to the better quality works. This may be done by way of off-market transactions or by way of purchase at auctions."

13.3 para 6.3:

"The annual budget for [applicant] is an expenditure limit of between $1 million to $1.5 million. Acquisitions must be "blue chip" museum quality. The strategy in the purchase of artworks is that the value of the item must double every seven years, and if it fails to meet the target, the artwork is to be sold."

14. It appears that in May 2005 five paintings which had been acquired at various times for a total cost of $74,000 were intended to be sold by auction in November 2005 through Gregson Flanagan Fine Art Ltd (see T docs folio 114). A perusal of the applicant's income tax return for the year ended 30 June 2006 however shows sales of only $2,003 and the "cost of sales" of $28,000, so that it appears that the paintings in question were not in fact sold at that time.

15. The applicant does not have its own bank account.

16. Detailed accounts and financial records are maintained. Apparently a fully integrated computerised accounting package is used by applicant. Creditor's invoices are said to be recorded on a monthly basis through the accounts payable system and the system allows all other appropriate accounting and business entries to be made in the applicant's general ledger. Financial statements are said to be produced annually and are in accordance with AASB standards. Tax returns are lodged which are said to be audited by external accountants.

17. As the applicant has as already mentioned no employees of its own this work is apparently done on the applicant's behalf by employees of the group.

18. A perusal of the accounts shows that prior to 2003 the applicant was engaged in very little activity apart from the purchase of artworks and antiques. The only other expenses it incurred were in relation to accounting and ASIC fees and other minor expenses. Undisclosed "other" expenses as well as repairs and maintenance have increased in the years since then. These would appear to relate to maintenance of and repairs to the works.

19. Perusal of the accounts also shows that the purchased artwork has not been treated as "trading stock" but rather as capital or "fixed assets" - i.e. "property plant and equipment". In fact, artwork and antiques appear to have been depreciated.

20. The applicant has no written business plan although, according to Mr A's statement, he (i.e. Mr A) had an "investment strategy" or "underlying philosophy" which included:

20.1 developing a museum quality collection; and
20.2 investing to achieve a 10 - 15% per annum increase, yielding a doubling in value over 7 years.

Issues for Tribunal

21. Whether the applicant has been carrying on an "enterprise" for the purposes of section 9-20 of the GST Act since 1 October or at all?

22. Whether the applicant is entitled to be registered for GST under section 23-10(1) of the GST Act?

23. Whether the activities of the applicant are merely the expression of Mr A's hobby or interest in collecting and appreciating antiques and artwork or whether those activities have sufficient commercial character to amount to the carrying on of an enterprise for the purposes of section 9-20 of the GST Act?

24. Whether the applicant's activities represent the making of long term capital investments rather than the carrying of an enterprise for the purposes of the GST Act?

Summary of Statutory Scheme, Case Law and Rulings cited by Respondent

25. ss 23-10(1) of the GST Act states:

You may be registered under this Act if you are carrying on an enterprise (whether or not your turnover is at, above or below the registration turnover threshold).

26. ss 25-55(2) provides that the Commissioner must cancel an entity's registration if:

26.1 the Commissioner is satisfied that you were not carrying on an enterprise; and
26.2 the Commissioner believes on reasonable grounds that you are not likely to carry on an enterprise for at least 12 months

27. Pursuant to ss 25-60 the Commissioner must decide the date of cancellation of registration under ss 25-55(1) or (2) or section 25-57

28. The term "enterprise" is defined in ss 9-20(1) of the GST Act. The relevant paragraphs state:

"An enterprise is an activity, 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

(c) on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property"

29. Paragraph 9-20(2)(b) of the GST Act states that an enterprise does not include an activity, or series of activities done as a private recreational pursuit or hobby. The respondent contends that the purchase of antiques and artworks by the applicant is merely the expression of Mr A's hobby or private interest in collecting and appreciating such items.

30. Paragraph 9-20(2)(c) of the GST Act states that an enterprise does not include an activity, or series of activities done by an individual or partnership without a reasonable expectation of profit. This paragraph makes clear that in the case of an individual or a partnership, where most of the members are individuals, it is not enough to satisfy the statutory definition of "an enterprise" that the taxpayer merely has a subjective intention to make a profit, or that he satisfies the other indicia relating to what constitutes the carrying on of a business. In addition, the taxpayer's activities must be such as to give rise to the conclusion that, when viewed objectively, the activities are carried on with a reasonable expectation of profit. In the case of a body corporate it is not a necessary requirement that the corporation's activities, viewed objectively, be such as to give rise to a reasonable expectation of profit. However, it is necessary in the case of a body corporate that it be engaged in an activity or a series of activities constituting an enterprise as defined, and also that the activities not be done as a private recreational pursuit or hobby.

31. The term "carry on" - in relation to an enterprise is described in section 195-1 of the GST Act as follows:

"carrying on an enterprise includes doing anything in the course of the commencement or termination of the enterprise."

Enterprise

32. Miscellaneous Taxation Ruling MT 2006/1 states the respondent's views on the meaning of enterprise in the A New Tax System (Australian Business Number) Act 1999 (ABN Act). The definition of "enterprise" in s.41 of that Act is expressly linked to the definition of "enterprise" given by section 9-20 of the A New Tax System (Goods and Services Tax) Act 1999. Paragraphs 120-124, 149-154, 170-181, 233-259, 365-369, and 378-386 of that ruling appear to be relevant to the issues in this matter.

Business

33. The definition of business for both the GST and ABN Act (see definition of business in section 195-1 of the GST Act) comes from subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936). It states:

" business includes any profession, trade, employment, vocation or calling but does not include occupation as an employee."

34. The ITAA 1936 meaning of business is discussed in Taxation Ruling TR 97/11. Although TR 97/11 deals with the carrying on of a primary production business, the principles discussed in that ruling apply to any business. Paragraph 12 of TR 97/11 explains that whilst each case might turn on its own particular facts, the determination of the question as to whether a business is being carried on is generally the result of a process of weighing all the relevant indicators.

35. Paragraph 18 of TR 97/11 lists the main indicators of a business. These are:

a. a significant commercial activity;
b. purpose and intention of the taxpayer in engaging in the activity;
c. an intention to make a profit from the activity;
d. the activity is or will be profitable;
e. repetition and regularity of activity;
f. the activity is carried on in a similar manner to that of the ordinary trade;
g. the activity is organised and carried on in a businesslike manner and systematically - records are kept;
h. size and scale of the activity;
i. not a hobby, recreation or sporting activity;
j. a business plan exists;
k. commercial sales of product; and
l. taxpayer has knowledge or skill.

36. It is clear from the authorities that whether an activity or series of activities are properly characterised as carrying on a business turns upon an assessment of a number of different indicia, no one of which is necessarily decisive and depends, ultimately, "on the large or general impression gained": see
Martin v Federal Commissioner (1953) 90 CLR 470 at 474 (although the decision of Webb J was successfully appealed to the Full Court, this does not affect his Honour's statement of principle): see also
Ferguson v Federal Commissioner of Taxation 79 ATC 4261; (1979) 37 FLR 310 at 321 (Ferguson).

37. The relevant indicia which have been considered significant in previous cases include:

a. first, whether the activities are undertaken as a commercial enterprise in the nature of a going concern: see
Hope v Council of the City of Bathurst (1980) 144 CLR 1 at 8 (Hope) or on a commercial basis:
FCT v Walker 85 ATC 4179; (1985) 79 FLR 161 (Walker) at 165. In Taxation Ruling TR 97/11, "Income Tax: Am I carrying on a business of primary production?" (TR 97/11) it is said (at [28[) that "[i]n showing that a business is being carried on it is important that the taxpayer is able to provide evidence that shows there is a significant commercial purpose or character to the primary production activity, ie., that the activity is carried on for commercial reasons and in a commercially viable manner". The factors relevant to the assessment of whether a taxpayer's activities have a significant commercial purpose or character are identified in TR 97/11 at [30] to include:
- i. whether the taxpayer has drawn up a business plan;
- ii. whether the taxpayer has sought expert advice or done research in the relevant area;
- iii. whether the size and scale of the activity is sufficient to be commercial; and
- iv. whether the taxpayer has complied with applicable legal requirements;
b. second, whether the taxpayer intends to and has a reasonable prospect of making a profit from the activities: Hope at 8 - 9, Ferguson at 314, Walker at 162,
Babka v Federal Commissioner of Taxation (1989) 89 ALR 373 (Babka) at 380,
Ell v Federal Commissioner of Taxation (2006) 61 ATR 661 (Ell) at 689, [111] - [114]. Short term losses would not necessarily exclude activities from constituting a business: see Ferguson at 314. However, in Taxation Ruling "Income Tax: am I carrying on a business of primary production? TR 97/11 at [17] it is said that "where an overall profit motive appears absent and the activity does not look like it will ever produce a profit, it is unlikely that the activity will amount to a business". Where the taxpayer's activities are endemically unprofitable, the taxpayer will have a heavy onus to show that he or she nonetheless intends to carry on a business: see TR 97/11, at [50]. In Ell at 689, [112] Emmett J said:

"If there were no real expectation of a profit from engaging in a particular activity, there will be real doubt as to whether engaging in that activity can be said to be the carrying on of a business. Where the expenses and outgoings of an activity are disproportionate to any income that might reasonably have been expected from engaging in the activity that involved incurring those expenses and outgoings, it may be legitimate to draw an inference that the expenses and outgoings were not incurred in gaining or producing the relevant assessable income but were incurred for some other purpose."

Section 9-20(2)(c) of the GST Act expressly excludes an activity or series of activities done by an individual or partnership, but not a company, without a reasonable expectation of profit. The respondent says that this provision imposes an additional requirement [i.e. in addition to anything required by subsection 9-20(1)] in the case of individuals and partnerships of an objectively determined reasonable expectation of profit. The respondent says, however, that this does not detract from the relevance of the subjective intention of the taxpayer (or in the case of a company, those who constitute its controlling mind) to make a profit, especially in a case like this where the expenses and outgoings are disproportionate to income produced.
c. third, whether the activities are repeated on a regular basis or conducted systematically: see Hope at 8, Ferguson at 314. In TR 97/11 it is said (at [56]) that "[t]he taxpayer should undertake at least the minimum activities necessary to maintain a commercial quality and quantity of product for sale".
d. fourth, whether the taxpayer's activity is carried on in a way characteristic of the industry: see TR 97/11 at [63]. The factors identified as relevant indicia in TR 97/11 are as follows (at [64]):
- i. whether the scale of the activities is sufficient to produce a profit at some time, taking account of misfortunes and the fact that in its early stages the scale of the activity may be low;
- ii. how the taxpayer makes his or her sales (eg., in the general market or to friends) and whether the taxpayer engages in marketing;
- iii. whether the taxpayer has made significant capital investments; and
- iv. whether the taxpayer has previous experience in the industry, has sought advice from experts or conducted research;
e. fifth, whether the activity is carried on in a business like way in terms of record keeping, keeping books of account, maintenance of a business plan and otherwise operating in conformity with ordinary commercial principles: Ferguson at 314, Walker at 165;
f. sixth, the size of scale of the activities. While the larger the scale of the activities the more likely they are to constitute a business, a business may be carried on in a small way, and activities which are nonetheless in the nature of a recreation or hobby may be substantial in scale: see Ferguson at 314.

Adventure or concern in the nature of trade

38. The reference in paragraph 9-20(1)(b) of the GST Act to activities "in the form of an adventure of concern in the nature of trade" is intended to include isolated or one-off transactions that do not amount to a business but which have the characteristics of a business deal. In that regard see the comments of Foster J in
AB v FC of T (1997) 37 ATR 225 at 242; 97 ATC 4945 at 4961 where he said:

"See also the discussion in R W Parsons, Income Taxation in Australia, The Law Book Company Limited, Sydney, 1985, p 159-63 in which the learned author expresses the view that "an adventure in the nature of trade "is equivalent to an "isolated business venture" as opposed to a continuing business venture. I respectfully agree. I also accept that such a transaction must "exhibit features which give it the character of a business deal" (
McCelland v FC of T (1970) 120 CLR 487 at 495; (1970) 2 ATR 21 at 26; 70 ATC 4115 at 4120).

39. The word trade is commonly used to denote operations of a commercial character by which the trader provides to customers, for reward, some kind of goods or services. Generally, a business includes a trade that is engaged in on a regular or continuous basis, while an adventure or concern in the nature of trade may be an occasional or one-off transaction that does not amount to a business.

40. United Kingdom cases categorise assets as either trading assets or investment assets. Assets purchased with the intention of holding them for a reasonable period of time, to be held as income producing assets or to be held for the pleasure or enjoyment of the person, are more likely to be purchased for personal or investment purposes rather than trading purposes.

41. The mere realisation of private or investment assets has been held in income tax cases not to be an adventure in the nature of trade.

In the form of

42. The use of the phrase "in the form of" in paragraphs 9-20(1)(a) and (b) of the GST Act indicates that, as well as activities that constitute a business or an adventure or concern in the nature of trade, an enterprise also includes an activity or activities that is or are "in the form of" of a business or "in the form of" an adventure or concern in the nature of trade.

43. According to paragraph 170 of MT 2006/1 an enterprise includes an activity, or series of activities, done in the form of a business. The phrase "in the form of a business" is broad and has as its foundation the longstanding concept of a business. The meaning of this phrase has not been considered in detail by Australian courts. The definition clearly includes a business and the use of the phrase "in the form of" indicates a wider meaning than the word 'business' on its own. This occurs in the case of non-profit entities. In such instances the Commissioner considers that not all of the main features of a business such as a capacity to earn and distribute profits need to be present before an activity has the form of a business.

Private Recreational Pursuit or Hobby

44. The carrying on of a business and the pursuit of a hobby are mutually exclusive ideas. In that regard see paragraphs 366 and 367 of MT 2006/1 and paragraph 86 of TR97/11. As was said by Bowen CJ and Franki J in
Ferguson v FC of T (1979) 26 ALR 307 at 314:

"…if what he is doing is more properly described as the pursuit of a hobby or recreation or an addiction to a sport, he will not be held to be carrying on a business, even though his operations are fairly substantial."

Application of Principles to the Facts - Respondent's Contentions

Private Recreational Pursuit or Hobby

45. The respondent's primary contention is that what the applicant is doing is not an enterprise but rather a private recreational pursuit or hobby in terms of s.9-20(2)(b) of the GST Act.

46. The respondent contends that it is particularly significant that Mr A says the philosophy behind his acquisition of artworks and antiques is to build up a substantial collection "as a collection of note". He has told one of his art expert advisers, Mr Purves of his desire to "build up one of the great collections of this country".

47. The respondent contends that the philosophy and intent of a person who is desirous of building up a collection of repute, is fundamentally different to the intent of the trader who engages in activities of buying and selling for profit or reward. The trader in art and antiques will sell any and all of his stock at the right price.

48. Mr A however will only consider selling a limited number of paintings and antiques that are inferior in quality "in order to raise the standard of the collection" (paragraph 5.3 of Mr A's statement). He will consider replacing works when superior pieces can be acquired at which time he "will dispose of a number of works which are not suitable for the Swansea Collection" (para 5.4).

49. According to the respondent his statement that " Swansea would sell if the price is right" ( para 4.3) has to be taken to mean that selected works judged to be of an inferior quality may be sold to be replaced by better quality pieces to enhance the value and reputation of the collection.

50. Further it was contended that he would not be prepared to sell off the whole collection at one time and still maintain his fundamental interest in building the collection up. To do so would, it was argued, be incompatible with Mr A's stated intention of building up his collection of art and antiques to museum quality.

51. This was contended to be conduct indicative of a serious collector (or perhaps investor) in art and antiques, and not at all indicative of a person carrying on the business of buying and selling works of art and antiques. It was asserted that even a person who is a long term investor in serious art and antiques cannot be said to be carrying on a business, either in substance or form.

52. The keeping of the artworks and antiques in Mr A's private residences, where they are readily available for him to enjoy and share with his friends, was said to be consistent with this.

53. The respondent contends that this all shows that the resale of the artwork and thus the turning of a profit (at least in the foreseeable future) is not the primary concern. This demonstrates a lack of the commercial purpose necessary for a business and thus an enterprise.

54. Although the applicant has made many purchases, the evidence suggests, according to the respondent, that the artworks and antiques are intended to be retained indefinitely. The lack of sales and attempts to sell are said to be consistent with this as is Mr A's witness statement.

55. He says that only those items which do not appreciate in value at the required rate (i.e. double in value after 7 years) will be sold. Presumably, therefore, according to the respondent everything else is to be retained indefinitely. He also states that his purpose is to improve and maintain the quality of the "Swansea Collection" so that it consists only of "museum quality" pieces and becomes a "collection of note". Items that don't measure up to this standard are to be sold as better quality items come on the market. Presumably, however, items that do meet this standard are to be retained indefinitely. This, the respondent contends, is more consistent with the activities of a "collector" pursuing a hobby or interest or alternatively a long term investor than the carrying of an enterprise.

56. Although it is claimed that everything is for sale "at the right price" it was asserted by the respondent that is not inconsistent with private collection or long term investment. This it was said is especially so in circumstances when no attempt is made to actively market the items.

57. The respondent also asserted that it is significant that the artworks are treated in the applicant's own accounts as "fixed assets" rather than "current assets" or "stock in trade". The applicant's response to this is that in doing so it was only complying with relevant accounting standards. However, this is a recognition of the fact that the artworks and antiques are properly regarded as "long term investments" rather than as "trading stock". If the applicant is truly carrying on an enterprise, that enterprise must, so it was contended, be "trading in artworks and antiques" with the consequence that the artworks and antiques are trading stock.

Enterprise, Business - Trade

58. The applicant contends that it is carrying on an enterprise. The respondent claimed that if that is so, it must be a trading enterprise. According to the Macquarie Dictionary "trade" is defined interalia as:

1. the buying and selling, or exchanging, of commodities, either by wholesale or by retail, within a country or between countries: domestic trade; foreign trade.
2. a purchase, sale, or exchange.

59. The respondent contends that what the applicant is doing is clearly not trading. Although it is buying respondent says, this is not done with the intention of selling at a profit. Rather it is collecting. However the respondent claims that the above definition shows buying and selling for profit is central to the concept of trading.

60. The respondent contends that the applicant does not satisfy the first four of the indicia referred to in above. As there is no intention to sell artworks for profit on a regular basis, the respondent contends that the first factor does not assist the applicant. The second factor was also said not to apply because profit making is not the applicant's primary purpose. Rather, it is the establishment of a collection or long term investment. The third factor it was said is also not applicable. Sales are very infrequent and made only for the purpose of disposing of unwanted pieces that don't complement the collection. Similarly it was asserted that the fourth factor does not assist the applicant as no business could operate the way the applicant does. A trading business requires regular sales in order to maintain cash flow, so it was claimed.

61. Putting to one side the question whether the activities of the applicant and others like it amount to an enterprise, the respondent pointed out that the applicant has not identified any indisputably commercial art dealing enterprises run in this way. The respondent contends that a commercial art dealer could not afford to hold trading stock of this value for the length of time the applicant holds or intends to hold its alleged trading stock. Unless supported by some independent source of finance, a business needs regular cash flow to survive. That requires a fairly regular turnover of trading stock. The respondent also contends that it is significant that much high quality art is sold on consignment or through auction houses rather than being traded by retail businesses.

62. The applicant asserts that the repetitive nature of its activities and their frequency point to an enterprise. Although there have been frequent purchases made over a number of years, there has been very little activity on the sales side. That is not inconsistent with "collection" or "long term investment" by a wealthy individual.

63. The applicant points to the fact that very large sums have been expended by it as being consistent only with commercial activity. The respondent contends that given the high private wealth of Mr A the expenditure of these amounts is not inconsistent with "collection" or "long term investment".

64. According to the respondent the fact that the applicant has borrowed extensively to fund these purchases is also not decisive given the above factors, including:

a. the applicant's close association with Mr A;
b. Mr A's high personal wealth;
c. the fact that the applicant has very little capital of its own and that finance is either provided directly by the Group or that the Group provides additional security to third party lenders; and
d. the fact that the applicant neither paid nor incurred interest on these loans until the 2004 financial year - and then only on the arm's length commercial bills. The bulk of the artwork and antiques are financed by interest free loans from The Group companies.

65. The fact that significant amounts may have been spent on insurance, maintenance and valuation of the artworks is only prudent in the circumstances and, so says respondent, not inconsistent with private collection of art or long term investment given the high cost of the objects and Mr A's personal wealth.

66. Maintaining of detailed accounts was also said to be not inconsistent with private collection or long term investment. What is recorded is mainly acquisition costs of artworks as there are so few sales or other transactions. Again this is only prudent in the circumstances given the high cost of the items involved. In that regard it was claimed to be significant that the applicant has no employees. Any bookkeeping work that is required from to time is presumably performed by bookkeeping staff employed by the Group. Again it appears that the applicant incurs no charge for these services. The respondent contends that that is "non-commercial".

67. Respondent contended that the fact that income tax returns and business activity statements ("BASs") are prepared and lodged is also not decisive and arguably merely self serving. On respondent's view of the present circumstances, the applicant's registration for GST purposes and lodgement of BASs has the advantage of gaining extensive input tax credits. Given the applicant's apparent intentions as regards sales it was argued that, these input credits will far outweigh any GST liability it may incur in the foreseeable future. So far as the lodgement of income tax returns is concerned, again that poses no immediate threat of the incurring of any liability because the applicant continues to accumulate large losses.

68. Respondent submitted that the regular subscription to art journals, receipt of catalogues from auction houses and liaison with art experts is not inconsistent with the actions of a wealthy collector or alternatively a long term investor.

Significance of the Fact that the Applicant is a Company - Mere Passive Holding of Assets.

69. The respondent contends that it is clear that the legislative intent is that a company is not automatically entitled to registration under the GST Act by virtue merely of being a company. GST registration requires that the relevant entity, whether it be a company, individual or other structure, actually carry on an enterprise. This should be contrasted with the provision dealing with entitlement to an Australian Business Number ("ABN"). Pursuant to section 8(2) of the ABN Act a "Corporations Act company" is entitled to an ABN automatically regardless of whether it carries on an enterprise.

70. This it was contended clearly implies that the legislation contemplates a company that does not carry on an enterprise is thus not entitled to registration.

71. The respondent said that the fact that the activities in question were/are conducted through a company structure is not decisive. The applicant was said to be merely the alter ego of Mr A. Activities that in essence are not the carrying of an enterprise when carried out by an individual do not become an enterprise by the mere fact that they are undertaken by a private company.

72. The notion that not every company carries on an enterprise has been recognised in other contexts. In
IR Commrs v Butterley Co Ltd (1957) AC 32; (1956) 2 All ER 197; 36 TC 411, Lord Radcliffe said:

"I do not think it possible to contend that a company cannot own beneficially assets which do not belong to any trade or business which it conducts or that it cannot receive income beneficially which nevertheless is not income of such a trade or business. In other words, a company's business does not embrace the whole activity of being a company."

73. This was said to be in accordance with the views expressed by the Commissioner in Goods & Services Tax Ruling GSTR 2006/4. Not every acquisition made by an entity is for a creditable purpose. In that regard see paragraphs 27 and 74 to 86. It also accords with the Commissioner's public ruling in relation to the GST consequences of property transfers of enterprise assets as a result of property distributions under the Family Law Act (GSTR 2003/6). At paragraph 53 the view is expressed that an asset can be acquired by a company for "private" use; i.e.

"It is our view that entities can hold assets for a private use and purpose. Assets may be owned by a registered entity but not have been acquired for a creditable purpose. These assets are not used or intended to be used in the entity's enterprise and are 'private assets' of the entity for the purposes of this Ruling. For example, a company can acquire a yacht for the private purposes of the company or its directors and shareholders. Similarly, an entity can apply enterprise assets to a private use."

74. The respondent contends that the use of the applicant merely as a repository for artworks acquired for use in connection with the owner's hobby is not a gainful use of the applicant's assets and thus not an enterprise. The respondent also contends that the applicant is just a vehicle for Mr A's hobby.

75. This was claimed to be consistent with the decision of the High Court in
FC of T v Whitfords Beach Pty Ltd 82 ATC 4031; (1981-1982) 150 CLR 355. In that case, prior to the acquisition of all of the taxpayer company's shares by three other companies on 20 December 1967, the taxpayer company's only asset (the land in question) was held merely for the private purpose of providing uninterrupted access to the shareholders' beach shacks and was not part of any business or enterprise carried on by the taxpayer. In that regard Gibbs CJ said (at 150 CLR page 369 to 370):

"In the present case I gravely doubt whether the profits resulting from the development, subdivision and sale of the land would have been taxable if it had not been for the events that occurred on 20th December 1967. Had those events not occurred, the situation of the taxpayer would have been analogous to that of the company in
Scottish Australian Mining Co. Ltd. v. F.C. of T. However, on 20th December 1967, the taxpayer was transformed from a company which held land for the domestic purposes of its shareholders to a company whose purpose was to engage in a commercial venture with a view to profit. Counsel for the taxpayer submitted that it was not permissible to blur the distinction between the company and its shareholders. That of course is true, but in deciding whether what was done was an operation of business, it is relevant to consider the purpose with which the taxpayer acted, and, since the taxpayer is a company, the purposes of those who control it are its purposes. In
Ruhamah Property Co. Ltd. v. F.C. of T. the majority of the Court regarded as important, if not decisive, the purposes with which the shareholders and directors of the company acted, although Isaacs J., who dissented, thought it erroneous to consider a company merely as machinery for carrying out individual purposes: see at pp. 160, 162 and 166. However, in my opinion Isaacs J. took too rigid a view of the effect of
Salomon v. Salomon & Co. (1897) A.C. 22 if he thought that in determining the purpose with which a company acted it was not permissible to have regard to the intentions of the directors who controlled it. In the present case, the three companies which became the shareholders, or the two which became the managers (it matters not which), represented the directing mind and will of the taxpayer and controlled what it did, and their state of mind was the state of mind of the taxpayer:
H.L. Bolton (Engineering) Co. Ltd. v. T.J. Graham & Sons Ltd. (1957) 1 Q.B. 159, 172; cited in
Tesco Supermarkets Ltd. v. Nattrass (1972) A.C. 153, at pp. 171 and 187; and see
B. Elsey Pty. Ltd. v. F.C. of T. 69 ATC 4115 at p. 4117; (1969) 121 C.L.R. 119, at p. 121. The purpose of those controlling the taxpayer was to engage in a business venture with a view to profit. Moreover, although the taxpayer was not formed for the purpose of selling land, after December 1967 it became a company which existed solely for the purpose of carrying out the business operation on which the new shareholders had decided to embark when they acquired their shares. It is in the light of these circumstances that the extensive work of development and subdivision is seen to be more than the mere realization of an existing asset and to be work done in the course of what was truly a business venture. For these reasons, although the case is not without its difficulties, I have concluded that the profits were income within ordinary concepts and taxable accordingly."

76. As can be seen from the comments of Hill and Lander JJ (Gyles J agreeing) in relation to holding companies in
Spassked Pty Ltd v Commissioner of Taxation at paragraph 84 in [2003] FCAFC 282; (2003) 203 ALR 515; 2003 ATC 5099 and 54 ATR 546 (see also paragraph 197 of miscellaneous tax ruling MT 2006/1) the cases sometimes distinguish between a holding company which is a passive investor and a company the activities of which are properly characterised as a business.

77. As discussed at paragraphs 198 and 199 of MT 2006/1 in other VAT jurisdictions mere holding companies have been held not to be "carrying out" any relevant "economic activity" - the equivalent concept of "enterprise" for Australian GST purposes. Two European Court of Justice VAT decisions are indicative of that approach.
Polysar Investments Netherlands BV v. Inspecteur der Invoerrechten en Accijnzen, Arnhem (Case C-60/90) [1993] BVC 88 considered the activities of a Dutch holding company and whether they constituted carrying out any 'economic activity'. It was found that Polysar's activities did not constitute 'economic activities' and there was discussion of other sorts of activities that may satisfy that test.

78. The second VAT case is
Floridienne SA & Berginvest SA v. Belgian State (Case C-142/99) [2001] BVC 76. Both companies were holding companies (within a larger group) supplying administrative, accounting and information technology services to their subsidiaries. The main question was the form of their 'economic activity' and the connection between that activity and the dividends and interest they received from subsidiaries. The judgment analysed the passive nature of dividend income from shares. Broadly, it was found that the passive holding of shares did not amount to 'economic activity'. According to respondent Australian courts may be guided by this approach for ABN and GST purposes in determining whether an entity carries on an enterprise.

Long Term Investment

79. Even if the Tribunal is satisfied that Mr A's primary purpose in acquiring the artworks and antiques in question is to ultimately cause the applicant to resell them for more than what they cost in order to derive the resulting profits or gains, the respondent still contends that no relevant business or enterprise is being carried on. The respondent contends that in these circumstances the applicant's activities are no more than long term investment which is not the carrying on of a business.

80. The acquisition of property for the purpose of resale at a profit is an essential element of a business of the type that the applicant claims to be carrying on. Generally profits or gains made in the course of carrying on a business (or of a one-off "adventure in the nature of trade") are income according to ordinary concepts and thus assessable income under the Income Tax Assessment Act 1997 ("ITAA 97"). The notions of "business" and assessable profits go hand in hand. If the activity of the taxpayer does not amount to the carrying on of a business, or if individual transactions do not amount to "adventures in the nature of trade", then profits made on the sale of relevant items are not generally assessable (except under the CGT provisions). Similarly, if gains made on the disposal of the artworks are not assessable income according to ordinary concepts then, according to the respondent, it is likely that no business or adventure in the nature of a trade is being carried on.

81. Profits derived on the disposal of "long term investments" have been held, in the related income tax context, not to amount to income according to ordinary concepts - essentially because such profits are capital in nature and not the result of trading in such investments or of a "one off" "adventure in the nature of trade".

82. These decisions generally relate to former paragraph 26(a) of the Income Tax Assessment Act 1936 ("ITAA 36") and its replacement, section 25A. Those provisions consisted of two limbs. The first limb specifically included as assessable income profits made "from the sale by the taxpayer of any property acquired by him for the purpose of profit making by sale". The second limb included profits "from the carrying on or carrying out of any profit making undertaking or scheme". Generally speaking the first limb of paragraph 26(a) did not include any profits in assessable income that would not have been assessable income under ordinary concepts pursuant to subsection 25(1) of ITAA 36. In that regard see the judgment of Mason J in Whitfords Beach at 370, 381-385.

83. However, the respondent acknowledged that in many paragraph 26(a) cases in which taxpayers have succeeded in arguing that profits on resale were not assessable the property acquired by the taxpayer was "income producing" (e.g. it produced rent or dividends) or had some other use for the taxpayer, which enabled the taxpayer to show that profit making by resale was not his dominant purpose in acquiring the property. In that regard see the comments of Fullagar J in
Pascoe v FC of T (1956) 30 ALJR 402 at 411.

84. The respondent argued that despite this there remains authority for saying that even non-income producing assets which have no immediate use other than as objects of exchange (for example, vacant land) can be acquired for long term investment as "a hedge against inflation" with the result that the gains made on resale are not necessarily assessable income according to ordinary concepts. This it was said is so despite the fact that in such cases the only way, ultimately, in which the effects of inflation can be avoided is by selling the relevant property for more than what it cost.

85. Unlike vacant residential land, artworks and antiques do have an inherent use - i.e. the satisfaction gained from ownership, personal kudos, decorative value etc. But the respondent said that even if Mr A is able to satisfy the Tribunal that he was not primarily motivated by any of these things that is not necessarily fatal to the respondent's case.

86. In
McClelland v FC of T 70 ATC 4115; (1970) 120 CLR 487, a case related to the "second limb" of former paragraph 26(a), the Privy Council held that the relevant profit was not assessable. The respondent pointed out that in giving its reasons, (at 120 CLR page 495) the majority also made the following comments in relation to the first limb:

"Do these facts disclose a 'profit-making undertaking or scheme' within the meaning of s. 26 (a)? It is clear in the first place that not all such undertakings or schemes are caught by the section. Otherwise every successful wager would be within it. So also would the purchase of investments bought by a private investor as a hedge against inflation and sold - perhaps long afterwards - at more than the purchase price. The participator in a lottery would also be liable if he drew the winning ticket. The undertaking or scheme, if it is to fall within s. 26 (a), must be a scheme producing assessable income, not a capital gain. What criterion is to be applied to determine whether a single transaction produced assessable income rather than a capital accretion? It seems to their Lordships that an 'undertaking or scheme' to produce this result must - at any rate where the transaction is one of acquisition and resale - exhibit features which give it the character of a business deal. It is true that the word 'business' does not appear in the section; but given the premise that the profit produced has to be income in its character their Lordships think the notion of business is implicit in the words 'undertaking or scheme'. They are reinforced in their view by the opinion expressed by the respondent in par. 19 of his case. Referring to the fact that he did not submit in the High Court that the appellant had engaged in an adventure in the nature of trade, he nevertheless asked to be allowed to raise this contention before the Board on the ground that 'it is only an alternative way of presenting the respondent's case under s. 26 (a)'."

87. The respondent also relied on
M. Steinberg v. FC of T 75 ATC 4221; (1975) 134 CLR 640 where Barwick CJ made the following comments (at 134 CLR page 686):

"The presence of sec. 26(a) in the Act does not mean that property cannot be acquired as an investment, as a hedge against the loss of value in the currency; or that the only investment advantage of the acquired property which is outside the reach of sec. 26(a) is the income it will produce. The retention of property in the hope or expectation that its value will increase is a justifiable form of investment. That the increased value may only be realised by sale does not deny that the purpose of its acquisition was investment or establish that the purpose of its acquisition was to use it as a subject of trade by reselling it at a profit. No doubt in borderline cases, the distinction may tend to become blurred but it is none the less a valid distinction and capable of resolution by the Court."

88. Barwick CJ made similar comments in
Gauci v FC of T 75 ATC 4257; (1975) 135 CLR 81. In that case the taxpayers acquired vacant outer suburban land that was zoned industrial and otherwise unsuitable for residential or rural purposes. Approximately 6 years later, during which time several offers to purchase had been rejected by the taxpayers, the land was compulsorily acquired. The compensation received exceeded the cost price. The taxpayers were assessed on the profit. Barwick CJ said (at 135 CLR page 87):

"The question in the application of sec. 26(a) is not whether the taxpayer, when purchasing, hoped that at some time in the future he could sell the land at an enhanced value. The question is whether he was then intending to sell it at a profit, doing so as a matter of "business". The purchase of land as a long term investment, or as a hedge against the depreciating value of money does not, in my opinion, come under sec. 26(a)."

89. Likewise, according to Jacobs J (at 135 CLR page 90):

"Nor was there evidence from which it could be inferred that the appellants were trading in land as a matter of business. The Commissioner was therefore bound to rely on sec. 26(a) where the concept of trade or business in land buying and selling is not a necessary constituent. But even in sec. 26(a) the purchase of land for the purpose merely of long term investment or as a hedge against inflation does not establish the purpose which sec. 26(a) requires. I agree with the statement to this effect by Barwick C.J."

90. The decision ultimately turned on differing views of the evidence and on the way the onus of proof provision [then former s.190(b) of ITAA 36] applied in the circumstances. Barwick CJ, with whom Jacobs J agreed, adopted the same view of the operation of s.190(b) as that expressed by Barwick CJ in Steinberg. Mason J on the other hand was not prepared to disturb the findings of fact made by the judge at first instance and disagreed with Barwick CJ's application of s.190(b).

91. Despite this the respondent argued that Mason J appears to have agreed that the acquisition of property for long term investment as a hedge against inflation was excluded from the first limb of paragraph 26(a). At 135 CLR 90, after agreeing with the point made by Fullagar J. in
Pascoe v. F.C. of T. (1956) 30 ALJR 402 at 411 - i.e. that it is:

"broadly true to contend that, when a man invests money in the purchase of any kind of property, it will generally be either with a view to holding it and deriving income from it, or with a view to realising sooner or later an enhanced capital value… Evidence which tends to exclude one of the two contrasted 'uses' as the use intended will generally, I think, tend to support an inference that the other use was intended"

he commented that:

"This statement leaves out of account other purposes such as acquisition for capital appreciation as a hedge against inflation not falling within sec. 26(a) which are not relevant to this case."

92. The respondent also referred to the following passage in Whitfords Beach in which Mason J commented as follows (at 150 CLR page 379) in relation to the above passage from the Privy Council's reasons in McClelland:

"It is of importance to note their Lordships' statement (at pp. 494-495) that not only are wagers and lottery tickets excluded from profit-making undertakings or schemes, but 'also… the purchase of investments bought by a private investor as a hedge against inflation and sold - perhaps long afterwards - at more than the purchase price', and the further statement (at p. 495) that 'The undertaking or scheme, if it is to fall within s. 26(a), must be a scheme producing assessable income, not a capital gain.' There are two separate strands of thought embedded in these observations: (1) that the transaction must have about it some business or commercial flavour - the purchase of an investment by a private investor is not enough; and (2) the profit in view must be an income, not a capital, gain, according to ordinary concepts.

Not all that was said in McClelland can now be accepted. The majority judgment fails to differentiate between the United Kingdom and the Australian systems of arriving at taxable incomes and employs expressions derived from the United Kingdom Income Tax legislation which have no place in our legislation. And there is the possibility that it insufficiently acknowledges that the operation of the second limb of sec. 26(a) may extend to some gains of a capital nature according to general revenue law.

I do not doubt that the majority was right to exclude from the second limb of sec. 26(a) successful wagers and lottery windfalls. Perhaps the exclusion of private investments originally made as a hedge against inflation was more open to question but there is now a strong body of authority to support its exclusion."

93. The above dicta were applied by McInerney J of the Supreme Court of Victoria in
Firstenberg v FC of T 76 ATC 4141. In that case the taxpayer purchased, on terms, in 1957, 15 vacant residential building lots in an outlying area of a capital city. In 1970 he sold two, deriving a profit which the Commissioner assessed under the first limb of paragraph 26(a). He testified that his intention in acquiring the land was to provide an investment as a safeguard against inflation and that he had not, at the time of the purchase, directed his mind as to what he would do with the land in the future. In upholding an appeal by the taxpayer from a decision of a Taxation Board of Review that the profits were assessable, McInerney J said (at 76 ATC 4157-8):

"If the true facts were that the taxpayer bought this land simply to convert his money - which almost invariably depreciates in value if left uninvested - into an asset which would appreciate in value with changes in the value of money, I do not think that that in itself would be enough to bring the acquisition of the property within the ambit of sec. 26(a). To invest money in acquiring an asset which will appreciate in value in the manner corresponding at least with the movements in the value of money does not necessarily carry the consequence that the asset was acquired with the view to resale or, to quote the words of the Act 'for the purpose of profit-making by sale' or as part of any 'profit-making undertaking or scheme'. If no more is established than that the taxpayer wanted to secure the then value of his money so as to have that asset available as part of his estate at any given time, the case would not, in my view, fall within sec. 26(a). To buy property as a hedge against inflation must, of course, have the consequences that money could be raised on the security of the asset by mortgaging it. It would also carry the consequence that the assets so acquired would form a valuable part of the purchaser's estate to be disposed of by his will or to be divided among his next of kin on intestacy. I do not think that the fact of the purchase of fifteen residential building blocks necessarily requires the conclusion that resale of the properties must have been a constituent element of the taxpayer's purpose in acquiring these properties or that the stipulated purpose of the 'creation of a hedge against inflation' could not be achieved otherwise. Nor do I think that it was necessary for the taxpayer to prove that the acquisition was an 'investment' within the meaning of that word as understood by Mr. Todd, (member). The question under sec. 26(a) is not a question of investment: it is simply a question whether a property, on the sale of which profit has ex hypothesi been made, was a property acquired by the vendor 'for the purpose of profit-making by sale', or in the course of the carrying on or carrying out of any profit-making undertaking or scheme."

94. The respondent contends that these dicta suggest that based on the matters referred to above, in particular:

94.1 the small number of items sold over an extended period of time;

94.2 the fact that over an extended period of time attempts to actively market the artworks and antiques have been few, infrequent and restricted to a small number of items;

94.3 the fact that most of the artworks are kept at Mr A's private residences whereby they are effectively only available for his own private enjoyment; and

94.4 Mr A's statements which it was asserted imply that:

i. his purpose in acquiring artworks and antiques is to improve and maintain the quality of the "Swansea Collection" so that it consists only of "museum quality" pieces and becomes a "collection of note"; and

ii. he intends to indefinitely retain artworks and antiques that continue to appreciate at the desired rate (i.e. that double in value after 7 years)

any gains that might emerge as a result of the applicant disposing of artworks would not be assessable income according to ordinary concepts but rather should be characterized as capital gains derived from the realization of long term investments. It was argued that presumably any purchases that are made are done so at least in the hope that they ultimately satisfy Mr A's stated criteria - i.e. doubling in value every seven years and that they come to be regarded as museum quality pieces. If they continue to meet those criteria then, according to the respondent, it seems unlikely that Mr A would want to sell them.

95. The respondent also contends that the activities of the applicant are similar to those of the trustee in
Charles v FC of T 90 CLR 598. In that case the trustee of a unit trust maintained a large portfolio of shares for the purpose of deriving dividends for the unit holders. In the course of the administration of the trust shares were bought and sold. The evidence established that these dealings were considerable; they occurred frequently and produced substantial profits. Most sales of shares were made at prices in excess of cost. The resulting gains (i.e. the excesses of sales prices over the cost prices of the shares) were held by the High Court not to represent net income of the trust for income tax purposes.

96. The evidence of the only witness in that case, the managing director of the trustee company, was that at no time were shares acquired for the express purpose of re-sale at a profit, and that sales were normally made when the managers anticipated a fall in the value of shares. The purpose was to preserve for the fund any increase in value which had occurred and which it seemed likely would otherwise be lost. He said that the general policy of the managers was to hold the securities as investments, and that their purpose in buying was to buy the best available shares and to hold them unless there appeared to be some very good reason for selling. The factors they had before them in buying, he said, were security, realizability, yield and possibility of capital appreciation, in that order.

97. The respondent contends that this situation has parallels with the present case. The respondent contends that the artworks are acquired for either the private enjoyment of Mr A or as a long term investment for him as the applicant's only beneficial shareholder or both. There is evidence that there is no definite plan to sell any particular artwork that is acquired but that like the shares in Charles, Mr A will only cause the applicant to sell artworks that he anticipates have or are likely to lose value or not appreciate in value. In that regard also see "Example 24" - paragraphs 206 and 207 of MT 2006/1.

98. The respondent argued that the present case is distinguishable from
London Australia Investment Co Pty Ltd v FC of T 77 ATC 4398; (1977-1978) 138 CLR 106 where profits on the sale of "investment" shares were held to be assessable because here the disposals or "switching" of investments (i.e. artworks) are infrequent.

99. The respondent contends also that nothing said in
FC of T v. The Myer Emporium Ltd 87 ATC 4363; (1986-1987) 163 CLR 199 is inconsistent with this. The court implicitly limited assessable profits made in one-off transactions to profits derived in "business operations or commercial transactions" which the respondent contends the mere collection of artworks as long term investments is not. In addition, the respondent contends that it is apparent that the High Court did not intend to over rule the above decisions. At 163 CLR page 212 to 213 the court said:

"The judgments in some of the English decisions naturally reflect the language of the United Kingdom statutory provisions, which have no precise counterpart in this country. However, over the years this Court, as well as the Privy Council, has accepted that profits derived in a business operation or commercial transaction carrying out any profit-making scheme are income, whereas the proceeds of a mere realization or change of investment or from an enhancement of capital are not income;
Ruhamah Property Co. Ltd. v. F.C. of T. (1928) 41 C.L.R. 148 at pp. 151-152, 154;
McClelland v. F.C. of T. 70 ATC 4115 at pp. 4120-4121; (1970) 120 C.L.R. 487 at pp. 495-496;
London Australia Investment Co. Ltd. v. F.C. of T. 77 ATC 4398 at pp. 4402-4403; (1977) 138 C.L.R. 106 at pp. 115-116; and see Whitfords Beach."

100. The respondent contends that the reference to "enhancement of capital" is a reference to long term investment as a "hedge against inflation" or similar concepts.

101. Examples which illustrate the respondent's view of the distinction between business profits and capital gains are set out at paragraphs 72 to 94 inclusive of taxation ruling TR 92/3 and paragraphs 21 to 24 inclusive of taxation ruling TR 92/4.

102. The respondent also referred the Tribunal to the comments of Hill J in
Westfield Ltd v Commissioner of Taxation 91 ATC 4234; (1991) 28 FCR 333 at pages 341 to 344, including his reference to the discussion of the Lord Justice Clerk in
California Copper Syndicate v Harris (1905) 5 TC 159 at 165-166.

Tribunal's findings

103. When interpreting the GST Act, the analysis of the system of value added taxation as described by Hill J in
HP Mercantile Pty Ltd v FCT 2005 ATC 4571; [2005] FCAFC 126; 60 ATR 106 at 109 and following is of considerable assistance: see paragraph [10] to [15] where he said:

" The statutory scheme and relevant provisions

10 The Australian GST is an indirect tax. Indirect taxes may be single stage taxes, for example, a tax on retail sales found in many countries in the world, or a bed tax as imposed in New South Wales in respect of hotel accommodation. They may also, if taxing the consumption of goods, operate at multiple stages in the course of goods being manufactured or imported until such time as they go into consumption, such as the wholesale sales tax in operation in Australia until the commencement of the GST.

11 Where there is a multi stage tax which operates with a number of taxing points, a problem, generally known as "cascading" will arise. If nothing is done to avoid cascading, the tax levied at each taxing point will be imposed on a value which already will have included tax payable at the previous taxing point or points. Cascading was, at least partly, avoided by the Australian wholesale sales tax by a system of quotation of certificates, so that in its operation, the tax was payable on the last wholesale sale or, if there was no such wholesale sale, on an assumed value calculated as a proxy for the last wholesale sale:
Brayson Motors Pty Ltd (In liq) v Federal Commissioner of Taxation [1985] HCA 20; (1998) 156 CLR 651 at 657.

12 However, even though cascading was generally avoided in the Australian wholesale sales tax system, there was a problem that some inputs at least, attracted tax which was included in the amount upon which the tax was calculated and further, that there was no mechanism which enabled all inputs to be refunded in the event that the goods were exported. Arguably, therefore, Australian exporters might have been disadvantaged in competing with exporters from other countries which had taxing systems, such as value added taxation, which permitted the total tax payable to be identified and refunded to an exporter.

13 The genius of a system of value added taxation, of which the GST is an example, is that while tax is generally payable at each stage of commercial dealings ("supplies") with goods, services or other "things", there is allowed to an entity which acquires those goods, services or other things as a result of a taxable supply made to it, a credit for the tax borne by that entity by reference to the output tax payable as a result of the taxable supply. That credit, known as an input tax credit, will be available, generally speaking, so long as the acquirer and the supply to it (assuming it was a "taxable supply") satisfied certain conditions, the most important of which, for present purposes, is that the acquirer make the acquisition in the course of carrying on an enterprise and thus, not as a consumer. The system of input tax credits thus ensures that while GST is a multi-stage tax, there will ordinarily be no cascading of tax. It ensures also that the tax will be payable, by each supplier in a chain, only upon the value added by that supplier.

14 In
ACP Publishing Pty Ltd v Commissioner of Taxation [2005] FCAFC 57 at [2], I described the characteristics of the Australian GST as follows:
"The GST is, in essence, the tax known in most countries as value added tax, a name which, perhaps, best describes the essence of the tax. The characteristics of a value added tax were aptly described by the European Court of Justice in
Dansk Denkavit ApS v Skatteministeriet [1994] 2 CMLR 377 at 394-5 as being that it 'applies generally to transactions relating to goods or services; it is proportional to the price of those goods or services; it is charged at each stage of the production and distribution process; and finally it is imposed on the added value of goods and services, since the tax payable on a transaction is calculated after deducting the tax paid on the previous transaction.'"

15 I continued at [3]:
"These characteristics are displayed in the Australian legislation by the tax 'output tax' being levied, in effect, upon substantially all supplies (referred to in the GST Act as 'taxable supplies') being generally, although not exclusively, supplies of goods or services made by a registered person, or person required to be registered, for consideration… and the deduction referred to in Dansk (popularly known as an 'input tax credit') being given to a registered person, or person required to be registered, who makes a creditable acquisition, as that expression is defined."

104. The Tribunal is of the view, for the reasons which follow, that by reason of the circumstances relating to the applicant's past and intended future activities, the applicant has, at all relevant times, been carrying on an enterprise, done "in the form of a business" or "in the form of an adventure or concern in the nature of trade".

105. In the Tribunal's opinion the applicant's acquisitions of artwork as a process of acquiring and consolidating a valuable collection of sound saleable artwork, in order to turn it to account profitably, including the sale of some pieces which were found to be below the requisite standard, all took place as part of carrying on an enterprise, and not as the respondent contends only as an investment and hobby or recreational pursuit.

106. The Tribunal is of the view for the reasons which follow, that in its ordinary meaning, an enterprise consists of an activity or activities comprised of one or more transactions entered into for business or commercial purposes..

107. In
Thiel v FCT 90 ATC 4717; (1990-91) 171 CLR 338; 21 ATR 534 the issue for consideration was whether the activities of Mr Thiel in relation to the purchase of a parcel of shares, and the subsequent sale of about half of these shares, were an adventure in the nature of trade and gave rise to profits falling within the terms of the agreement between Australia and Switzerland for the avoidance of double tax.

108. In relation to "enterprise" Mason CJ, Brennan and Gaudron JJ said in Thiel at 21 ATR 534, (1990-91) 171 CLR 338 at 344:

"Moreover, we agree with Sheppard J in thinking that an enterprise may consist of an activity or activities and be comprised of one or more transactions provided they were entered into for business or commercial purposes".

109. It was pointed out by Dawson J that the word "enterprise" as used in the Swiss/Australia Double Tax Treaty could cover both the activity itself and the means by which the activity is engaged in.

110. That dual meaning appears to the Tribunal to be the only difference between the meaning of the term as used in the Treaty and as used in the GST Act, where the latter meaning is normally covered by the use of the words "the entity", or "you" see s 184 and s 195.

111. Dawson J went on to say, at ATR 538, (in the context of which it should be noted that a reference to profits of an activity or business are to be read as a reference to taxable income derived from the activity or business under s 3(2) of the Income Tax (International Agreements) Act:

"Article 7 is headed 'Business Profits' and, as that heading indicates, it deals with business profits. But once it is recognized that 'enterprise' includes an isolated activity as well as a business, business profits cannot be confined to profits (or taxable income) derived from the carrying on of a business but must embrace any profit of a business nature or commercial character. Profit from a single transaction may amount to a business profit rather than something in the nature of a capital gain even if it does not involve the carrying on of a business. Of course, the repetition of a transaction may constitute the carrying on of a business and so confirm its business character, but a single transaction may amount to a business dealing so as to characterize the profit derived from it as a business profit. If it were not so, Art.7(1) would have the capricious result of denying relief from double taxation simply because the same transaction was not repeated a sufficient number of times. I should add that it is far from clear that the appellant's activity amounted to a single transaction involving no element of repetition or continuity. But the finding of the trial judge that the appellant 'invested in the units with the clear purpose and intention of selling all of them and or the shares into which they might be converted for profit' confirms that what he did was by way of an adventure of trade and was of the requisite business character: cf.
Minister of National Revenue v. Tara Exploration and Development Co. Ltd. (1972) 28 DLR (3d) 135."

112. It appears to the Tribunal that the word "done" in s 9-20(1) in place of the words "carried on" or "carrying on" is used to ensure that a single transaction will suffice to constitute the activity of an enterprise, and to exclude the requirement for there to be a carrying on of business and its notions of repetition and regularity in relation to the enterprise. Those concepts arise in relation to taxable supply.

113. This approach in the Tribunal's opinion derives further force from the use of the words "in the form of" in both s 9-20(1)(a) and (b). The use of these phrases underscores the apparent legislative intention that "the form" of the activity by itself will suffice to bring the activity within the definition of "enterprise".

114. Further, the Tribunal is of the view that the words "in the form of" in s 9-20(1)(a) and (b) expand the scope of activities that may constitute an activity or activities as an enterprise. That is consistent with the use of the term "an adventure or concern in the nature of trade", which is clearly wider than the concept of "business" as defined in s 995-1 of the Income Tax Assessment Act 1997 ("ITAA 1997"). The same definition of "business" is used in s 195-1 of the GST Act, which defines "business" to include "any profession, trade, employment, vocation or calling, but does not include occupation as an employee."

115. The Explanatory Memorandum to the GST Act states:

"Enterprise is defined widely because the GST is intended to have a broad meaning. Certain things are included as enterprises so that input tax credits are available to them."

116. In the Tribunal's opinion it is clear that an activity or a series of activities which constitute or together constitute an enterprise will encompass activities that may not ordinarily constitute a business for taxation purposes.

117. In interpreting the provisions of the GST Act the observations of Stone J in
Sterling Guardian Pty Ltd v FCT 2005 ATC 4796; 60 ATR 502 at 514 are apposite, where Her Honour said:

"The clear thrust of the GST Act, both in its wording and as explained in the explanatory memorandum, is that of a practical business tax imposed with respect to the elements of commerce."

118. Activities that occur in the commencement or termination of an enterprise are, by definition, included as being within the activities which comprise an enterprise: s 195-1.

119. Section 23-10 of the GST Act stipulates that an entity may be registered for GST purposes if it is carrying on an enterprise, without regard to its annual turnover.

120. As noted earlier the definition in s 9-20(2)(b) excludes:

"an activity, or series of activities, done:

(b) as a private recreational pursuit or hobby."

121. The existence of an "enterprise" does not, of itself, create GST consequences.

122. A "taxable supply" is defined in the GST Act under s 9-5 as follows:

" 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."

123. The question which arises under s 9-5 is whether "the supply is made in the course or furtherance of an enterprise that you carry on". This is a compound expression which requires one to identify a supply and the relationship between that supply and the enterprise which is carried on.

124. Correspondingly, Division 11 sets out the creditable acquisition test, which is whether the acquisition was made "in carrying on your enterprise": s 11-15(1).

125. Section 9-20 of the GST Act was considered in
Toyama Pty Ltd v Landmark Building Developments Pty Ltd [2006] NSWSC 83; 2006 ATC 4160; The case arose from a dispute between two owners of a block of land in respect of which trustees were appointed for the sale of the land. Development approval for the construction of a 14 unit dwelling had been given in respect of the land. A house was built upon part of the land, containing two residences. The land was marketed by the trustees 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. The contract for sale provided that the sale was a taxable supply under the GST Act. The respondent contended that the sale was not a taxable supply because it was not made in the course or furtherance of an enterprise carried on by the trustees. It was argued it was an input taxed supply as it was a sale of residential premises to be used for residential accommodation.

126. White J held that the sale of the property constituted the carrying on of an enterprise in terms of s 9-20(1) of the GST Act. The enterprise which the trustees carried on was the series of activities required to be undertaken pursuant to their appointment as trustees for sale, and the sale, being what they were appointed to do, was in furtherance of that enterprise. The activity or activities which the trustees carried on was done in the form of a business, whether considered as providing their services to the beneficiaries, or from the point of view of effecting a sale of the land. White J noted at paragraph 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."

The carrying on of business

127. The definition of "business" in both the ITAA 1997 and in the GST Act is the same see s 995 ITAA 1997 and s 195 GST Act. Decisions in income tax matters as to what is included in or constitutes a "business" can be considered to be authoritative for GST purposes.

128. In
Federal Commissioner of Taxation v Murry 98 ATC 4585; (1998) 193 CLR 605 at para 54, the High Court said:

"A business is not a thing or things. It is a course of conduct carried on for the purpose of profit and involves notions of continuity and repetition of actions."

129. In Ferguson supra, the Court considered whether a taxpayer was engaged in the business of primary production through the breeding of exotic cattle. The taxpayer was a partner of a partnership set up to fund the project. None of the partners had any notable experience in breeding cattle. The partnership engaged experienced breeders to carry out the breeding program. The High Court considered the activities to be of a business nature. The Court held the activities carried out must demonstrate a commercial enterprise in the nature of a going concern which will derive a profit.

130. It was held at ATR 876-877; ALR 311:

"There are many elements to be considered. The nature of the activities, particularly whether they have the purpose of profit making, may be important. However, an immediate purpose of profit making in a particular income year does not appear to be essential. Certainly it may be held that a person is carrying on business notwithstanding his profit is small or even where he is making a loss. Repetition and regularity of the activities is also important. However, every business has to begin, and even isolated activities may in the circumstances be held to be the commencement of carrying on business. Again, organization of activities in a businesslike manner, the keeping of books, records and the use of system may all serve to indicate that a business is being carried on. The fact that, concurrently with the activities in question, the taxpayer carries on the practice of a profession or another business, does not preclude a finding that his additional activities constitute the carrying on of a business. The volume of his operations and the amount of capital employed by him may be significant. However, if what he is doing is more properly described as the pursuit of a hobby or recreation or an addiction to sport, he will not be held to be carrying on a business, even though his operations are fairly substantial."

131. In
Hanlon v FCT 81 ATC 4617; (1981) 12 ATR 540 the taxpayer was a farming controller for Landstrom Holdings Pty Ltd which conducted a stud property. It was held that the taxpayer's acquisition of pure bred calves in relation to a development of a pure bred Simmental cattle stud formed the first step in the achievement of a broader purpose, being the establishment of the herd, to which purpose the appellant had committed himself. The expenditure incurred in acquiring the lease was incurred by the taxpayer in carrying on a business for the purpose of gaining assessable income.

132. Carrying on a business is not a matter of owning an asset, but of engaging in a course of conduct: see
FCT v R & D Holdings Pty Ltd 2007 ATC 4731; [2007] FCAFC 107 at para 63.

133. In Walker supra, the taxpayer acquired a female angora goat for breeding purposes. Breeding operations and activities were undertaken with the purpose of profit making. The taxpayer engaged an expert veterinarian to carry out the detailed breeding program. The taxpayer did not have a very large degree of participation in the day to day activities of the business, but the taxpayer:

133.1 paid the fees for the breeding process;

133.2 purchased the goat which was used for breeding;

133.3 maintained communications with the expert;

133.4 maintained accounting records of the operations;

133.5 tried to be informed about market conditions through membership of the Angora Breeder Society and reading publications; and

133.6 made the ultimate decisions to sell the goats.

134. It was held that although the operations were carried out on a small scale, the capital invested in the program was not an insignificant amount. The taxpayer was interested in the acquisition of an angora goat for breeding purposes and making a profit. The taxpayer was carrying on a business, and had a reasonable expectation of profit.

135. In Hope supra Mason J concluded that the activities of the applicant in that matter amounted to the carrying on of a business of grazing, being activities engaged in for the purpose of profit on a continuous and repetitive basis.

136. In
Thomas v FC of T (1972) 72 ATC 4094, the taxpayer planted avocado and macadamia nut trees with the intention of selling the produce. The scale of the activity was small by comparison to industry standards. It was held that although the activities were on a small scale a business existed, and the activities were not the mere pursuit of a hobby or past-time. A person may carry on a business if only in a small and even inefficient or incompetent way:
Thomas v FCT 72 ATC 4094; (1972) 3 ATR 165 at 171; 46 ALJR 397 at 401; [1972-73] ALR 368 at 374.

137. The Tribunal also notes that it has been held that where there is no discernible trading pattern, the presence of an intention to carry on business is relevant in characterizing the nature of the activities undertaken:
John v FCT 89 ATC 4101; (1989) 166 CLR 417 at 430; 20 ATR 1 at 8; 83 ALR 606 at 614. Slimness in the prospect of making a profit (
FCT v Glennan) 99 ATC 4467; (1999) 90 FCR 538 at 555-556; 41 ATR 413 at 429 or the non-achievement of any sales (
Pedley v FCT)
2006 ATC 2064; (2006) 62 ATR 1014 at 1041 does not prevent the conclusion that a business has been carried on. The fact that with the benefit of hindsight, it is clear that a business venture was not viable is similarly inconclusive as to a conclusion that a business is being carried on: Case M 67 (1980) 80 ATC 479 at 482 and
Applicant for an ABN v Registrar of the Australian Business Register [2007] AATA 63.

138. In Pedley the taxpayer had worked as a professional artist for more than 20 years. She had engaged substantially in installation art and endeavoured to establish a career in that field. During that time she had applied for and received various grants to further her artistic career and had been chosen as artist in residence from time to time by various galleries and by the Arts Council of Australia. In the year ended 30 June 2003 she returned $4,810 income from her arts business. The question before the Tribunal was whether she was carrying on business for the purpose of claiming deductions under s 8-1 of the ITAA 1997. The Commissioner argued that while she was an artist and regarded as such by her peer group, she did not achieve any sales or trades during the year and therefore did not carry on a business.

139. The Tribunal held that the taxpayer was carrying on business as a professional artist. The fact that she had achieved so little success in commercial terms did not affect her self confidence or her belief that she would eventually become successful. She had more than a mere intention to carry on a business. There was repetition and regularity of activity, the activity was of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business, it was planned, organized and carried on in a businesslike manner such that it was directed at making a profit and was of the requisite size, scale and permanency.

140. As Hill J concluded in Stone, what is required to determine whether a person is carrying on a business depends on a number of factors. His Honour referred, at paragraph 64, to the combination of factors sometimes referred to in the English decisions as the "badges of trade". He went on to say, at paragraph 68:

"Although it has been said that it is the extent of the activity (I would prefer to say the nature and extent of the activity) and not the state of mind or intention of a taxpayer which determines whether the taxpayer carries on a business:
Inglis v Federal Commissioner of Taxation (1980) 80 ATC 4,001, that is not to say that the state of mind is irrelevant. Two different taxpayers may carry on the same activity (for example, carpentry) and both may sell the product of their activity on just the one occasion, yet the one may be carrying on a business and the other merely selling the product of a hobby. What must differentiate the two cases is the purpose for which the activity is carried on. Generally, as the extracts cited above illustrate, the profit motive is important in leading to the conclusion that the activity undertaken is a business."

141. In Ell supra Emmett J said at paragraphs 111-114:

"111 Although not determinative, intention is relevant where, for example, a particular activity produces no income (see
John v FCT (1989) 166 CLR 417) or where the first step in a business is undertaken (see
Fairwell States Pty Ltd v FCT (1970) 123 CLR 153). It is necessary to examine the activities engaged in, including their nature and extent (see
Martin v FCT (1953) 90 CLR 470 at 474). Activities may constitute the carrying on of a business even though the activities are carried on in a small way and it is not for the Commissioner to dictate to a taxpayer in which business the taxpayer engages or how to run a business profitably or economically (see
Tweedle v FCT (1952) 180 CLR 1). Provided that an activity said to constitute carrying on business is engaged in for the purpose of profit on a continuous and repetitive basis, that activity may constitute the carrying on of business (see
Hope v Bathurst City Council (1980) 144 CLR 1).

112. If there were no real expectation of a profit from engaging in a particular activity, there will be real doubt as to whether engaging in that activity can be said to be the carrying on of a business. Where the expenses and outgoings of an activity are disproportionate to any income that might reasonably have been expected from engaging in the activity that involved incurring those expenses and outgoings, it may be legitimate to draw an inference that the expenses and outgoings were not incurred in gaining or producing the relevant assessable income but were incurred for some other purpose.

113. Where expenses and outgoings claimed as deductions are disproportionate to the assessable income produced, subjective factors, including the direct and indirect objects of a taxpayer, may become determinative (see
Fletcher v FCT (1991) 173 CLR 1 at 17-19). Where an expense or outgoing claimed as an expense or outgoing of a business is disproportionate to any assessable income that may be gained, it will not be as easy to conclude that the expense or outgoing was incurred in gaining or producing that income (see
Spassked Pty Ltd v Commissioner of Taxation (2003) 136 FCR 441 at [64]).

114. The state of mind or intention of a taxpayer may be relevant to the question of whether or not that taxpayer is carrying on a business. Even where a transaction produces no income, if the intention of the relevant taxpayer is that the transaction is the first step in a business, that subjective state of mind may be relevant. The acquisition of Athena was, the Taxpayers say, the first step in the carrying on of a business (see
Fairway Estate Pty Ltd v FCT (1970) 123 CLR 153 at 166-8). Further, it is not for the Commissioner to dictate to a taxpayer in what way a business should be run. A business may be carried on even though it is not profitable or economical (see
Tweedle v FCT (1952) 180 CLR 1), provided it is carried on with the purpose of making a profit (see
FCT v Stone (2005) ATC 4234 at 4243). The Taxpayers say that they had a profit making purpose or intention in relation to the use of Athena."

142. In
Peerless Marine Pty Ltd v FCT 2006 ATC 2419; [2006] AATA 765; 63 ATR 1303, the taxpayer entered into an agreement with a boat designer in his personal capacity to design a catamaran. He later completed a document which is described as the Peerless Marine Business Plan which mainly consisted of notes as to the matters he had investigated concerning the project and the conclusions he had reached. He then negotiated with Nustar Pty Ltd for the construction of two buildings on land leased by Nustar of which Peerless Marine, which had not yet been incorporated, was to have exclusive use for two years for the building of a catamaran. The company was subsequently incorporated, and steps were then taken to construct a catamaran over a period of more than three years at a cost of $2.5 million. The boat was used as a demonstrator in order to try to sell similar boats and to sell the boat itself. No sales were made and the boat was ultimately sold for $1.25 million.

143. The Commissioner contended that the amounts claimed by the taxpayer as income tax deductions were not properly deductible, and disallowed the associated input tax credits claimed. The Commissioner further contended that the taxpayer did not incur a loss in carrying on a business, alternatively, that any loss was of a private or domestic nature, and s 26-50(1) denied the deduction because the boat was not used for a purpose essential to the efficient conduct of the business.

144. In relation to input tax credits the Commissioner argued there was no creditable acquisition as any acquisition was a non-deductible expense under s 69-5(3)(e) of the GST Act, and that there was no enterprise because any activity was undertaken as a private recreational pursuit or hobby, so there was no creditable purpose and no creditable acquisition.

145. It was held that Mr Stevenson and the taxpayer undertook the venture intending to make a profit. The profit may not have been attainable on the construction of the first vessel, and in fact a profit was not attained, but in circumstances where there was an expectation that the construction of the first vessel would lead to orders for more, the Tribunal was satisfied that the taxpayer undertook the venture with a view to profit and that it was carrying on a business from the outset. Section 8-1(1) of ITAA 1997 was satisfied.

146. The Tribunal finds that none of the indicia relied upon by the Respondent in paragraph 87 of Taxation Ruling TR 97/11 are present in this matter. The indicators on which the Commissioner there relies are that:

146.1 it is evident that the taxpayer does not intend to make a profit for the activity;
146.2 losses are incurred because the activity is motivated by personal pleasure and not to make a profit, and there is no plan in place to show how a profit can be made;
146.3 the transaction is isolated and there is no repetition or regularity of sales (which it is conceded is the case to date in this application);
146.4 any activity is not carried on in the same manner as a normal, ordinary business activity;
146.5 there is no system to allow a profit to be produced in the context of the activity;
146.6 the activity is carried on, on a small scale;
146.7 there is an intention by the taxpayer to carry on a hobby, a recreation or a sport rather than a business;
146.8 any produce is sold to friends and relatives and not to the public at large.

147. The Tribunal finds that in both an income tax and GST context there is no doubt that the activities of Swansea constitute the activities of a business.

Adventure in the Nature of Trade

148. As to an adventure in the nature of trade, see AAT Case 11,365 34 ATR 1023. It was held that the taxpayer had conducted an "adventure in the nature of trade" where he recovered a substantial amount of money as the result of legal action brought in respect of a joint venture agreement. It was held that from the outset the taxpayer researched and worked on the project specifically in order to profit from it. The joint venture agreement related to the provision of services rather than the sale of property. In reaching its conclusion, the Tribunal referred to v Myer and Westfield.

149. In Myer, the High Court said at CLR 209-10; ATR 697-8:

"Although it is well settled that a profit or gain made in the ordinary course of carrying on a business constitutes income, it does not follow that a profit or gain made in a transaction entered into otherwise than in the ordinary course of carrying on the taxpayer's business is not income. Because a business is carried on with a view to profit, a gain made in the ordinary course of carrying on the business is invested with the profit-making purpose, thereby stamping the profit with the character of income. But a gain made otherwise than in the ordinary course of carrying on the business which nevertheless arises from a transaction entered into by the taxpayer with the intentional purpose of making a profit or gain may well constitute income. Whether it does depends very much on the circumstances of the case. Generally speaking, however, it may be said that if the purpose in entering into the transaction was to make a profit or gain, the profit or gain will be income, notwithstanding that the transaction was extraordinary judged by reference to the ordinary course of the taxpayer's business. Nor does the fact that a profit or gain is made as the result of an isolated venture or a "one-off" transaction preclude it from being properly characterized as income (
FCT v Whitfords Beach Pty Ltd (1982) 150 CLR 355 at 366-7, 376; 12 ATR 692 at 698-705;). The authorities established that a profit or gain so made will constitute income if the property generating the profit or gain was acquired in a business operation or commercial transaction for the purpose of profit making by the means giving rise to the profit."

150. In
FCT v McNeil 2007 ATC 4223; [2007] HCA 5; 64 ATR 431 the High Court has re-stated this principle, where the High Court said:

"Secondly, as a general proposition, a gain derived from property has the character of income and this includes a gain to an owner who has waited passively for that return from property: Parsons. Income Taxation in Australia: Principles of Income, Deductibility and Tax Accounting (1985) at 87-89. The question then becomes one whether, as the Commissioner contends, the rights enjoyed by the taxpayer arose and were severed from, and were a product of, her shareholding in SGL, which she retained. The metaphor of severance and like expressions were used by Pitney J in
Eisner v Macomber (1920) 252 US 189 at 206-207 in a passage accepted in
Federal Commissioner of Taxation v Montgomery (1999) 198 CLR 639 at 660-663; 42 ATR 490-492 as identifying the core meaning of "income" where the character of a gain associated with property is at stake."

151. In
CIR v Frazer 24 TC 498, the taxpayer, in a one-off transaction, bought a large quantity of whisky. He did nothing further with it and then sold it at a large profit. He was assessed on the profit and appealed. The General Commissioners concluded on the appeal that he had merely made an investment. The taxpayer never took delivery of the whisky, nor did he have it blended or advertised. His object was to sell it at a profit. This was a single transaction. On a subsequent appeal by the Inspector of Taxes it was held:

"It is in general more easy to hold that a single transaction entered into by an individual in the line of his own trade (although not part and parcel of his ordinary business) is an adventure in the nature of trade than to hold that a transaction entered into by an individual outside the line of his own trade or occupation is an adventure in the nature of trade. But what is a good deal more important is the nature of the transaction with reference to the commodity dealt in. The individual who enters into a purchase of an article or commodity may have in view the resale of it at a profit, and yet it may be that that is not the only purpose for which he purchased the article or the commodity, nor the only purpose to which he might turn it if favourable opportunity of sale does not occur. In some of the cases, the purchase of a picture has been given as an illustration. An amateur may purchase a picture with a view to its resale at a profit, and yet he may recognize at the time or afterwards that the possession of the picture will give him an aesthetic enjoyment if he is unable ultimately, or at his chosen time, to realize it at a profit. A man may purchase stocks and shares with a view to selling them at an early date as a profit, but, if he does so, he is purchasing something which is itself an investment, a potential source of revenue to him while he holds it. A man may purchase land with a view to realizing it at a profit, but it may also yield him an income while he continues to hold it. If he continues to hold it, there may also be a certain pride of possession. But the purchaser of a large quantity of a commodity like whisky, greatly in excess of what could be used by himself, his family and friends, a commodity which yields no pride of possession, which cannot be turned to account except by a process of realization, I can scarcely consider to be other than an adventurer in a transaction in the nature of a trade, and I can find no single fact among those stated by the Commissioners which in any way traverses that view."

152. See also
Johnston (HM Inspector of Taxes) v Heath 46 TC 463, where the taxpayer purchased land from the company which employed him, with the intention to resell the land as soon as possible and not to develop it himself. He approached the company and investigated the possibility of borrowing the purchase price from relatives with the idea of selling once the drainage problem had been solved. He then contracted to sell the land to a company and a week later bought the land from the building company. It was held that the purchase and sale was an adventure in the nature of trade.

153. In
Wisdom v Chamberlain (Inspector of Taxes) 45 TC 92 Mr Wisdom was concerned in 1962 about the prospect of devaluation and resolved to purchase an amount of silver bullion. He did so and subsequently sold at a substantial profit. The Commission drew the inference that as the metal was useless in itself this was an adventure in the nature of trade. He was held to be assessable.

154. These decisions show that the acquisition of goods or property with the intention of a future sale, hopefully at a profit, will fall within the concept of an activity in the form of an adventure in the nature of trade. The same result would arise under s 15-15(1) and its predecessor, s 25A. In the case of artwork the person acquiring it may have a dual purpose, namely the sale of the artwork at a profit, but pending the favourable sale the artwork will provide aesthetic enjoyment. In the case of many public corporations, for instance, and many professional legal and accounting firms, considerable amounts of money are expended in the acquisition of artwork which is intended to improve the aesthetic appearance of the working areas. These are treated as business assets, which are for sale in due course, such as recently happened with the Qantas collection.

155. In Miscellaneous Ruling MT 2000/1, issued on 10 May 2000, but since withdrawn and replaced by MT 2006/1, effective 13 December 2006, the Commissioner refers in paragraph 68 and following of MT 2000/1, on which the objection decision is based - see T 53 p 100-101; T2 p 9-10; and in paragraph 233 and following to the concept of adventure in the nature of trade. At paragraph 258 and following the Ruling includes certain assertions about assets categorized as trading assets or investment assets. It should be noted, however, that that categorization does not apply to value added tax matters, or the concept of economic activity. The ruling specifies as much in paragraph 261. It appears that the Objection Decision does not take this differentiation into account, and in the Tribunal's opinion what is stated in those paragraphs should be disregarded for purposes of this matter.

Investment in Shares

156. Polysar supra is cited by respondent as authority for the proposition that the acquisition and holding of shares in a company is not an economic activity for the purposes of VAT, under EC Council Directive 77/388, Articles 4 and 17. See the discussion at paragraph [13] where it was held:

"13. It does not follow from that judgement, however, that the mere acquisition and holding of shares in a company is to be regarded as an economic activity, within the meaning of the Sixth Directive, conferring on the holder the status of a taxable person. The mere acquisition of financial holdings in other undertakings does not amount to the exploitation of property for the purpose of obtaining income therefrom on a continuing basis because any dividend yielded by that holding is merely the result of the ownership of property."

157. Floridienne follows Polysar. In paragraph [17] the Court refers to that decision and held -

"17 In that regard, it should be observed that the Court has consistently held that a holding company whose sole purpose is to acquire holdings in other undertakings, without involving itself directly or indirectly in the management of those undertakings, without prejudice to its rights as a shareholder, does not have the status of a taxable person and has no right to deduct tax under Article 17 of the Sixth Directive. That conclusion is based, inter alia, on the fact that the mere acquisition of financial holdings in other companies does not constitute an economic activity within the meaning of the Sixth Directive (see Case C-60/90
Polysar Investments Netherlands v Inspecteur Der Invoerrechten [1991] ECR I-3111, paragraph 17; and Case C-333/91 Sofitam [1993] ECR I-3513, paragraph 12)."

158. The above cases are referred to by the Commissioner in Miscellaneous Tax Ruling MT 2006/1: The meaning of entity carrying on an enterprise for the purposes of entitlement to an ABN. At paragraphs 198 - 201, the Commissioner states as follows:

"198. The following two overseas VAT cases may assist even though they consider 'economic activity' rather than 'enterprise'.
Polysar Investments Netherlands BV v. Inspecteur der Invoerrechten en Accijnzen, Arnhem (Case C-60/90) [1993] BVC 88 considered the activities of a Dutch holding company and whether they constituted carrying out any 'economic activity'. It was found that Polysar's activities did not constitute 'economic activities' and there was discussion of other sorts of activities that may satisfy that test.

199. The second VAT case is
Floridienne SA & Berginvest SA v. Belgian State (Case C-142/99) [2001] BVC 76. Both companies were holding companies (within a larger group) supplying administrative, accounting and information technology services to their subsidiaries. The main question was the form of their 'economic activity' and the connection between that activity and the dividends and interest they received from subsidiaries. The judgment analysed the passive nature of dividend income from shares. Broadly, it was found that the passive holding of shares did not amount to 'economic activity'. Australian courts may be guided by this approach for ABN and GST purposes in determining whether an entity carries on an enterprise.

200. From this range of cases the following indicators may give some useful guidance when deciding whether a holding company or other entity is carrying on an enterprise:

• Active involvement in the management of subsidiaries.

• Providing loans, guarantees or indemnities to subsidiaries.

• Providing equipment, premises or rights to intellectual property to subsidiaries.

• Providing specific management services to its group such as secretarial, financial, legal, taxation, information technology or recruitment and human resources expertise.

201. While these indicators may give guidance as to whether an entity's activities are sufficient for it to be considered to be carrying on an enterprise, deciding that question is ultimately a matter of fact having regard to the scale of the activities undertaken, the form of operation of the corporate group and the commercial context in which it occurs."

159. It is the Tribunal's opinion that the decisions in those matters are not applicable to the question involved here ie whether or not the activities of the applicant relating to the acquisition of artworks are an activity in the course of furtherance of an enterprise carried on by the taxpayer. The holding of shares and the receipt of dividends are not in issue here and those decisions are clearly distinguishable on the facts.

160. The Tribunal notes that, in
Brookton Co-operative Society Limited v FCT 81 ATC 4346; (1981) 147 CLR 441 Aikin J, with whom Gibbs CJ agreed said:

"28. There remains the question whether the taxpayer carried on another business in addition to providing services to its members. Its activities (to use a neutral term) have been described above and in the reasons for judgment of my brother Mason. Do they amount to carrying on a business? Generally speaking it is a question of fact whether what an individual or a company does constitutes carrying on a business. It has often been said that it is easier to draw an inference that an income earning activity of a company is a business than to do so when the same activity is undertaken by an individual; see, e.g., the observations of Lord Diplock delivering the advice of the Privy Council in
American Leaf Blending Co. Sdn. Bhd. v. Director-General of Inland Revenue (Malaysia) (1979) AC 676, at p 684. That was a case of a company which had closed down its tobacco business and thereafter let its premises and received the rent therefrom. In the case of a company which had no activity other than receipt of dividends from shares which it had purchased, it would ordinarily be regarded as carrying on a business even if it did not actively manage its portfolio of investments, though an individual who did the same would not necessarily be regarded as carrying on such a business; cp.
Esquire Nominees Ltd. v. Federal Commissioner of Taxation (1973) 129 CLR, at p 212 per Barwick C.J. and (1973) 129 CLR, at p 221 per Menzies J. (at p469)

29. The present case presents the unusual feature that the taxpayer did not employ its own funds or borrowed funds in acquiring its shareholding in each of its subsidiaries. Indeed the Co- operation Act prohibited it from so doing. It became a shareholder in those companies as the recipient of gifts from other companies controlled by three of its directors in the manner described above. This does not mean that the taxpayer was entirely passive for its directors resolved to accept each gift and executed the various transfers under its common seal in respect of each of the gifts, including the transfer by one of its subsidiaries of shares in its sub- subsidiaries. (at p469)

30. It is perhaps not surprising that there appears to be no authority dealing expressly with such a situation. It is hard to visualize a situation in which the holding of, and receipt of dividends from, shares the subject of a gift by an individual would be regarded as the carrying on of a business. However a company stands in a different position for most companies are formed for the purpose of carrying on business and having the capacity to carry on business; the taxpayer was certainly so formed. (at p470)

31. All these circumstances, including the repetition of acceptance of gifts of shares constituted activities of a business character designed and intended to obtain a business advantage for the taxpayer, i.e. the acquisition of income-earning assets for the receipt of dividends must have been expected by at least some of its directors, and one would expect that the other directors were informed. It was no doubt a set of unusual transactions but it improved the capital structure of the taxpayer and gave it a prospect, if not a probability, of receiving amounts of income. In my opinion the acquisition of these shares and their retention were business activities and constituted the carrying on of the business of holding investments in the expectation of receiving dividends, notwithstanding that the shares in question were received by way of gift. Such a business however is not within the categories set out in s. 117 (1) of the Act. (at p470)."

Hobbies

161. The Tribunal rejects the respondent's assertion that the taxpayer's operations amount to a hobby. The Tribunal finds that the facts do not support any such conclusion.

162. In the Tribunal's view there are no facts to support a conclusion that the applicant's activities fall within the exclusion, either on the basis that this is a private recreational pursuit or hobby of the applicant or that of Mr A.

163. On the contrary, the evidence shows that the business and commercial activities of the applicant are conducted in accordance with a pre-formulated policy, coupled with a carefully devised investment strategy. The applicant retains specialist art consultants. It keeps detailed records. It uses a database of records. It has an annual budget and banking facilities. It purchases valuable property, which is insured and properly stored and housed. All its activities are characterised by system, repetition and regularity. Such activities are in the Tribunal's opinion consistent only with the carrying on of a business and the conduct of an enterprise.

164. In determining whether what was initially a pastime or hobby has developed and become a business operation or not, the use of a system and the systematic conduct of the activity is often particularly important.

165. In Martin supra, the taxpayer owned, raced and bred racehorses, but the Court concluded that the activities were "not so considerable and systematic and organised that it could be said to exceed the activities of a keen follower of the turf and amount to the carrying on of a business". The position in this case is clearly different.

166. In Case N27 (1991) 13 NZTC 3229, at 3240 Bathgate DJ described a private recreational pursuit to be:

"in essence, a private pastime or pursuit carried on for the personal refreshment, pleasure or recreation of the person or persons concerned".

167. In the Tribunal's opinion the applicant's activities cannot be said to fall within that description, having regard to the manner in which they are carried out, its corporate character and the size and scale of activities. The fact that the artworks are displayed or stored in premises owned by related entities or by Mr A does not convert the activity of the applicant to that of a hobby or other pastime. Conceptually it is difficult to see how a corporate entity could be said to be carrying on a hobby or private recreational pursuit of an associated director or shareholder. This finds support in the United Kingdom VAT cases referred to below.

168. It is the opinion of the Tribunal that the costs incurred by the taxpayer in the present case are neither "private" nor "domestic". It cannot be said that these are:

"Losses and outgoings which relate solely to the house, home or family organization of the person incurring them. (CTBR (NS) Vol 5, Case 50 at 332)."

169. In
Tarrakarn Ltd v C&E Commissioners [1996] V&DR 516, the Court was required to consider the existence or otherwise of an economic activity (enterprise) in relation to the ownership and use of motor vehicles by the taxpayer company. The taxpayer had purchased three classic cars which were to be restored, maintained, repaired and then resold. A director of the taxpayer company occasionally drove the cars, which were kept at his home, but he and his wife had other cars for ordinary use. The taxpayer was unable to sell the cars. The cars were insured in the name of the director and of his wife.

170. The Commissioners there argued that the cars had been purchased for personal use and were not part of the taxpayer's business. It was also argued that the length of time that the taxpayer held the cars meant it was not engaged in an economic activity. The Respondent had argued that the taxpayer was+ not in the business of selling motor cars and had not sold any cars. It was argued that the purchase of the cars was in the nature of an investment - see paragraph [23]. The submission was that an investment activity is of an essentially passive nature, and could not be said to be an occupation or function actively pursued with reasonable or recognizable continuity, and that a person simply making an investment in expectation of making a capital gain at some future time was not carrying on a business for value added tax purposes.

171. Significantly, in reaching its decision the VAT and Duties Tribunal referred to the decision in LHA, decided in 1994, where a software company had restored four vintage motor vehicles and claimed input tax credit on the expenditure. The Tribunal had there allowed the appeal, stating:

"This [i.e. investment] is a very ambivalent term. We are not dealing here with direct taxation, where there is a clear distinction between revenue expenditure and capital expenditure; that distinction is almost entirely irrelevant for value added tax, with the exception of such highly specialized matters as registration limits and the capital items scheme. An object may be an investment - even a very long term investment - and still have been bought for the purpose of eventually disposing of it by way of business."

172. It was held that the cars were purchased, renovated and maintained with a view to resale at a profit. Any personal use of the cars by the director and his wife was considered to be "insignificant". The taxpayer was held to be engaged in an economic activity and was entitled to claim input tax credits for the associated restoration, maintenance and repair costs.

173. The Tribunal held, at paragraph 42:

"Here we think that a distinction should be drawn between the use of the expenditure and the use of the cars. Under s 24(1) it is the expenditure which has to be used for the purposes of the business. Having regard to the fact that the cars were purchased in the name of the Appellant that they appear as assets in the accounts of the Appellant, that any profit in their sale will accrue to the Appellant, and that value added tax will be charged on their sale, we consider that the expenditure on the restoration, maintenance and repair of the cars was used by the Appellant for the purpose of its business which is to resell at a profit. We accept that Mr Richards (and Mrs Richards on one occasion) drove the cars but that could have been in his capacity as director of the Appellant to make the cars known and to attract buyers. If there was any personal use it was, in our view, insignificant."

174. In another UK case
Ian Flockton Developments Ltd v Commissioners of Customs and Excise [1987] STC 394, the taxpayer company was a manufacturing company of plastic mouldings and storage tanks, registered for value added tax. Its customers were project engineers in chemical factories. The taxpayer's orders were not sought by advertising but by personal contact and recommendation. At the material time the taxpayer was anxious to find new customers and conceived the idea that the purchase and running of a racehorse would in someway advance the taxpayer's business. The question arose whether for the purpose of VAT the expenses relating to the purchase and upkeep of the racehorse were incurred wholly for the purposes of the business carried on by the taxpayer company. The Tribunal had held that although the taxpayer's object was to use the racehorse for the purposes of the business, it ought not to have had any commercial belief that the purchase and running of a racehorse could have been for the purposes of its business. The taxpayer's claim for input tax was disallowed, and the taxpayer appealed.

175. On appeal it was held by Stuart-Smith J at p 400:

"The test is where the goods or services which were supplied to the taxpayer used or to be used for the purpose of any business carried on by him? The test is a subjective one: that is to say that the fact finding tribunal must look into the taxpayer's mind as it was at the relevant time to discover his object. Where the taxpayer is a company, the relevant mind or minds are those of the person or persons who control the company or are entitled to and do act for the company.

In a case such as this, where there is no obvious and clear association between the taxpayer company's business and the expenditure concerned, the tribunal should approach any assertion that it is for the taxpayer company's business with circumspection and care, and must bear in mind that it is for the taxpayer company to establish its case and the tribunal should not simply accept the word of the witness, however respectable. It is both permissible and essential to test such evidence against the standards and thinking of the ordinary business man in the position of the applicant. If they consider that no ordinary businessman would have incurred such an expenditure for business purposes that may be grounds for rejecting the taxpayer company's evidence, but they must not substitute that as the test. It is only a guide or factor to take into account when considering the credibility of the witness, and no doubt there will be many other factors which bear on that question which the Tribunal should well understand."

176. The Court found, on the basis of the findings of fact made by the Tribunal, that Mr Flockton's object was to use the horse for the purposes of the business and that is what was in his mind. The appeal was upheld.

177. In
KPL Contracts Limited v Commissioners for Her Majesty's Revenue and Customs LON/04/1605 Decision Number V 19629 the question related to the taxpayer's decision, following the adverse publicity of an Inland Revenue raid, to acquire motor cross rallying motor vehicles as a method of promoting the company. Mr Lynch, the director of the taxpayer, had no prior involvement in motor rallying, but chose to become involved to demonstrate he could apply the business strategy that he had employed successfully in relation to his business to a sporting venture, and that this would enable him to counteract adverse publicity and to demonstrate his dedication to achieving results in sporting as well as in the business field.

178. The taxpayer acquired one rally car as a secondhand vehicle, followed by another second hand vehicle. As a result of some success in rallying, a new vehicle was acquired on hire purchase, and thereafter another new vehicle was purchased. Based on the Tribunal's findings of fact, it accepted that the expenditure on the motor sport activity was:

175.1 embarked upon (whether wisely or not) to restore the company's image; and

175.2 the decision resulted in a genuinely incurred expense to further the business objective on the particular facts of the case, even when tested against the guidance given in Flockton.

175.3 The Tribunal was satisfied that motor racing had been intended to promote the appellant's business by demonstrating its capacity to achieve results. That was the purpose of the appellant incurring the expenditure and that purpose did meet the test of the ordinary businessman in the appellant's position on the particular facts in the case.

179. In Australia, in
Applicant for an Australian Business Number v Registrar of the Australian Business Register [2007] AATA 63 the President of the Tribunal, Downes J held:

"34 On the face of it, what the applicant was doing looks exactly like a business. I suspect that is why the Registrar placed emphasis on the issue of whether there was a reasonable expectation of profit or gain. Once the issue of hindsight is put to one side, it seems to me that the applicant did have a business with respect to which there was a reasonable expectation of profit or gain, even although in fact that profit was not realized.

35 Viewed objectively, the business was exactly the sort of business which would be likely to be successful. It was not like a hobby farm which could never be a successful primary industry because there was not enough land to support a viable business. I am satisfied that the applicant did not put in the long hours he must have just for the love of working. In any event, I find both that the activities proposed by the applicant and actually carried out were done with a reasonable expectation of profit or gain whether that depends upon an objective or subjective assessment. I note that the phrase 'profit or gain' has been little considered. I have come to my conclusion on the basis that it adds little or nothing to 'profit'. However, I note that it may encompass gain which falls short of 'profit' or 'net gain'."

180. In reaching that conclusion Downes J warned against the danger of using hindsight, where he said:

"30 The first is the danger of using hindsight. It is necessary for an application to be made for Australian Business Number at the time that a business is commenced, not after it has already become profitable. Accordingly, most judgements as to whether a business has a reasonable expectation of profit and gain will be made at a time prior to the business actually having become profitable. This fact is a reminder that one should be careful about the use of hindsight when a business does not become profitable. There must be a legion of failed companies in Australia who have had Australian Business Numbers and which did not have their business numbers cancelled when they failed on the basis that there was no reasonable expectation of profit at the time the businesses were commenced.

31 In terms of its trappings, the activities of the applicant amount to what one might think of as the classic type of business, a business of manufacture and sale. He did manufacture, he did sell, he did so for part of the time by using premises in the nature of a factory or workshop for which he paid substantial rent. There is a lot to be said for the view that few people would commit themselves in the way the applicant appears to have committed himself if they did not think the business was reasonably likely to be successful. It is true that the business, throughout its period, does not from the business activity statements appear to be making substantial profits, but it was making sales."

181. In
Block v Commissioner of Taxation 2007 ATC 2735; [2007] AATA 1897 the Tribunal held, in relation to the respondent's contentions that the horse breeding activities of the first applicant were not carried on in the form of a business, that his sheep breeding activities were not carried on in the form of a business, and that the applicant was not entitled to be registered under s 23-10 of the GST Act, that the first applicant was carrying on a business of horse and sheep breeding at all relevant times. The Tribunal found that the first applicant had conducted its activities in a businesslike and commercial manner, and prepared and maintained all appropriate books and records. It had maintained full and proper accounts in respect of the business and engaged accountants to prepare the tax returns and accounts for it.

182. In that matter the applicant had incurred significant losses because of the capital costs of setting up the business, the costs of restructuring the business and as a result of unforeseeable set backs. The Tribunal also found that the applicant did not undertake the horse or sheep breeding activities as a private recreational pursuit or hobby, but conducted the business in a proper businesslike and commercial manner with an intention of making profits. The Tribunal makes a similar finding in this case.

183. The purchase of art as an investment has been held not to be speculative in terms of the decision in Case U79 8780 C465. (That appears to be the only case in which the acquisition of art has been considered in Australia.) In that matter, the acquisition was on a very small scale, of only $500 or $600 but the Board was satisfied that there were sound returns, which were perhaps better than returns in mining companies.

184. Overall, the Tribunal finds that the activities of the applicant are consistent with the conduct of a business. The expenditure incurred in relation to the acquisition of paintings and artworks would in the Tribunal's view be deductible under s 8-1 of the ITAA 1997, and would not be excluded by s 26-50. In fact the taxpayer has accounted for the artwork and paintings as plant and equipment, and has not claimed a deduction for the purchase of such items. The taxpayer has accounted for such items as plant and equipment because the taxpayer did not expect to sell those items within 12 months of purchase. In the Tribunal's opinion that does not defeat the taxpayer's purpose of embarking on the acquisition and eventual sale of artwork and antiques at a profit which is a business for both income tax or GST purposes.

185. In the Tribunal's opinion the operations and activities of the taxpayer over a period of seven years also establish clearly the carrying on of an enterprise for GST purposes. The activities are in the Tribunal's view clearly activities done in the form of a business or in the form of an adventure or concern in the nature of trade: s 9-20 of the GST Act.

186. The Tribunal finds that at all relevant times it was the intention of Mr A, as the shareholder and director of the applicant, to acquire and to hold the paintings and the artwork, including antiques, with a view to turning these to account when circumstances are right, in order to derive a profit.

187. The Tribunal takes the view that the income on sale of such artworks and antiques will be assessable income. It is highly unlikely that such proceeds would not form part of the taxable income of the applicant when in due course they are sold. As the High Court has held, as a general proposition, in McNeil a gain derived from property had the character of income and this included a gain to an owner who has waited passively for that return, at [21].

188. On the evidence before the Tribunal all of the indicators identified in matters such as Ferguson supra, Stone supra and Ell supra are present and satisfied. There is and has always been the requisite intention to make a profit. The activities are organized and are carried out in a businesslike fashion. The Tribunal also notes that the dictionary definition of "trade" also refers to "a purchase, sale, or exchange". The volume of capital employed in the relevant purchases is also clearly significant.

189. The Tribunal notes that, on the authority of what Hill J said in Stone at para 64, Mr A's state of mind is clearly relevant. What differentiates the case of a taxpayer engaged in business and one engaged in a hobby is the purpose for which the activity is carried on. The profit motive is important in leading to the conclusion that the activity undertaken is a business. The evidence demonstrates that Mr A, as the sole shareholder and director, caused the applicant to acquire the artworks with the intention of eventually selling them at a profit. The Tribunal finds that the applicant's activities constitute an enterprise for the purposes of the GST Act.

Long Term Investment

190. The Tribunal notes further that the definition of "enterprise" in s 9-20 does not exclude an activity or series of activities which may represent an investment in property if that is carried on in the form of a business or in the form of an adventure or concern in the nature of trade. In that regard the acquisition of an object, even by way of a long term investment, is still the acquisition of an object with the purpose of eventually disposing of it by way of or in the course of business: see Tarrakarn supra. The Tribunal rejects the respondent's assertion that an acquisition of an asset as a long term investment cannot be viewed as being an acquisition for business or commercial purposes. In the Tribunal's view none of the cases cited by the respondent support this proposition.

191. In the Tribunal's opinion the test should be whether the applicant has, objectively viewed, as a matter of fact commenced or continued to engage in an enterprise, being an activity or series of activities comprised of one or more transactions entered into for business or commercial purposes, done in the form of a business or in the form of an adventure in the nature of trade. In the Tribunal's view this test is clearly met by all the facts in evidence.

192. The Tribunal accordingly finds that the applicant is entitled to be registered as an enterprise in accordance with the GST Act.

Decision

193. The Tribunal sets aside the decision under review and remits the matter to the respondent with a direction to restore the applicant's GST registration with effect from 1 October 2001.

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