CYONARA SNOWFOX PTY LTD v FC of T

Members:
PE Hack DP

Tribunal:
Administrative Appeals Tribunal, Brisbane

MEDIA NEUTRAL CITATION: [2011] AATA 124

Decision date: 25 February 2011

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PE Hack (Deputy President)

Introduction

1. The applicant, Cyonara Snowfox Pty Ltd (Cyonara) is a property developer. It is in dispute with the respondent, the Commissioner of Taxation, over the proper treatment of GST in respect of certain transactions entered into by it between September 2004 and February 2007. Two issues arise - the operation of what is known as the margin scheme and whether a particular sale was a supply of a going concern. A third, whether part of the claim was statute barred, has already been the subject of a preliminary ruling. It is briefly reprised in these reasons and will inform the ultimate decision made.

The legislation

2. The imposition and collection of GST is dealt with, in the main, by the A New Tax System (Goods and Services Tax) Act 1999 (Cth) (the GST Act). It is a sufficient explanation for present purposes of the scheme of the GST Act to say that the general rule is that a supply of goods or services is taxable (at the rate of 10% of the value of the taxable supply) if, relevantly, it is made for consideration in the course of an enterprise carried on by a person who is registered, or is required to be registered, for GST and if the supply is neither GST free nor input taxed. The enterprise is entitled to claim input tax credits equal to the amount of GST paid by it on supplies by others to it. On a monthly or quarterly basis the enterprise accounts to the Commissioner for the GST collected minus input tax credits claimed by a business activity statement (BAS) and pays to, or receives from, the Commissioner, any balance owed.

3. The general scheme is subject to exemptions and special rules. One exemption - the supply of a going concern - and one special rule - the margin scheme - are relevant to these proceedings.

4. The supply of a going concern is dealt with by s 38-325 of the GST Act. It provides:

• "(1) The *supply of a going concern is GST-free if:
  • (a) the supply is for *consideration; and
  • (b) the *recipient is *registered or *required to be registered; and
  • (c) the supplier and the recipient have agreed in writing that the supply is of a going concern.
• (2) A supply of a going concern is a supply under an arrangement under which:
  • (a) the supplier supplies to the *recipient all of the things that are necessary for the continued operation of an *enterprise; and
  • (b) the supplier carries on, or will carry on, the enterprise until the day of the supply (whether or not as a part of a larger enterprise carried on by the supplier)."

5. The margin scheme is set out in Div 75 of the GST Act. Property developers frequently acquire land in circumstances where no input tax credits are available because the land was acquired, as here, prior to the introduction of GST or because the land was acquired from an entity not liable to pay GST on the supply. The margin scheme operates to avoid the developer having to pay GST on the whole value of the completed development and permits a choice to be made to apply the margin scheme and to pay GST on a concessional basis.

6. For supplies made up to and including 16 March 2005 Div 75, so far as is presently relevant, was in these terms:

"75-1 What this Division is about

This Division allows you to use a margin scheme to bring within the GST system your taxable supplies of freehold interests in land, of stratum units and of long-term leases.

75-5 Choosing to apply the margin scheme

• (1) If you make a *taxable supply of *real property by:
  • (a) selling a freehold interest in land; or
  • (b) selling a *stratum unit; or
  • (c) granting or selling a *long-term lease;

  you may choose to apply the *margin scheme in working out the amount of GST on the supply.

• (2) However, you cannot choose to apply the *margin scheme if you acquired the freehold interest, *stratum unit or *long-term lease through a *taxable supply on which the GST was worked out without applying the margin scheme."

The Tax Laws Amendment (2005 Measures No 2) Act 2005^[1] No 78, 2005. altered the terms of Div 75 for supplies made on or after 17 March 2005 however the operation of the margin scheme after that date is no longer relevant to these proceedings.

Background

7. Much of the factual background is uncontroversial. I do not understand what follows to be in issue.

8. Cyonara was incorporated in July 1997. At the time of its incorporation and up until July 2007 (and thus for most of the time in issue in the proceedings) it was known as Zonebar Pty Ltd. All of the relevant transactions were undertaken prior to July 2007 and were undertaken by Cyonara under its former name. Generally I will refer to Cyonara regardless of the time but, where necessary, I will refer to Zonebar. Cyonara's controlling mind is, and always has been, Mr Leonardus Smits, a retired solicitor. In 1997 Cyonara purchased real property at Springwood on the southern outskirts of Brisbane. The land was thereafter subdivided. The present proceedings originally concerned the sales by Cyonara of five separate parcels of land from that subdivision - Lots 1, 6, 9 and 10 on SP150819 and Lot 8 on SP131663, all in the County of Stanley, Parish of Yeerongpilly.

9. Lot 1 on SP150819 was sold to Handii Pty Ltd. No contract of sale has been produced however a settlement statement, produced by the vendor's solicitors, indicates that the sale was completed on 16 September 2004, that the purchase price was $1.5 million and that $1,655,981.42 (including GST of $150,543.76) was paid to Cyonara on settlement. At the time of settlement Handii Pty Ltd was registered pursuant to Part 2-5 of the GST Act.

10. Cyonara did not account for GST on this sale in its business activity statement (BAS) for the July to September 2004 quarter.

11. Lot 9 on SP150819 was sold to Springwood Properties (Qld) Pty Ltd at a price of $1.5 million plus GST. Again, the only evidence of the sale is the settlement statement contained in a letter dated 29 October 2004 from the purchaser's solicitors to the vendor's solicitors. That letter indicated that settlement was to be effected on 1 November 2004 and that GST of $150,000 was payable by the purchaser to Cyonara. The GST was calculated on the contract price. At the time of sale the purchaser was registered for the purposes of Part 2-5 of the GST Act.

12. Cyonara reported GST on sales of $150,000 in its BAS for November 2004 and paid the net amount of that BAS to the Commissioner on 10 January 2005.

13. Lot 6 on SP150819 was sold to Norstorm Pty Ltd in January 2006 for $2,205,611 (excluding GST). Cyonara accounted for GST on sales of that amount in its BAS for January 2006 and paid the net amount of that BAS on 10 February 2006. Norstorm Pty Ltd was registered for the purposes of Part 2-5 of the GST Act at the time of the sale.

14. Lot 10 on SP150819 was the subject of a contract in writing dated 29 September 2006. The purchaser was Trade Tools Direct Pty Ltd and the purchase price was $1,075,000, exclusive of GST. The settlement statement produced by the solicitors for the purchaser showed that GST of $107,966.86 was paid on settlement on 31 October 2006. The purchaser was registered for the purposes of Part 2-5 of the GST Act.

15. Item 19 of the Item Schedule to the written contract provided a range of GST options which the parties could choose by selecting one of four boxes,

• "(a) Purchase Price includes GST…,
• (b) Purchase Price excludes GST…,
• (c) Going Concern…,
• (d) Margin Scheme…".

Option (b) was selected by the parties. Clause 34 of the contract, which applied when that choice was made, provided:

"By selecting option (b) in item (19):

• (1) the Seller states that GST was not included in the Purchase Price stated in Item (7) of the Item Schedule;
• (2) the Buyer agrees to pay to the Seller, the amount due for GST in addition to the agreed Purchase Price upon Settlement."

16. Cyonara did not report GST on this sale.

17. Lot 8 on SP131663 was sold to 3455 Pacific Highway Pty Ltd (as trustee) at a purchase price of $3.7 million. The contract, dated 18 October 2005 indicates that the sale was of a "going concern". The agreement was subject to a condition that Cyonara would take a two year lease over the premises from 6 December 2005. Completion was set for 7 December 2005. The contract was completed in that day. There is controversy, dealt with below, regarding the lease.

18. The purchaser first became registered for GST purposes on 1 January 2006. On 31 March 2007 Cyonara issued a tax invoice to the purchaser showing GST of $370,299.02 in consideration of the purchaser's promise to pay that amount to Cyonara.

19. The other transaction that was involved in these proceedings was the purchase by Cyonara, pursuant to a contract in writing dated 16 December 2005, of land described as Lot 202 on SP161001 in the County of Livingstone, Parish of Hewittville. The vendor was Mr Kevin Shirlaw, "personally and as Receiver & Manager of Ostabridge Pty Ltd", and the purchase price was $3.4 million. The purchase appears to have been completed on or about 23 December 2005.

20. In a BAS lodged on 21 March 2007 in respect of February 2007, Cyonara claimed input tax credits on creditable acquisitions of $3.4 million.

21. In the meantime the Commissioner had commenced an audit of Cyonara's BAS. In a letter dated 16 March 2007 the Commissioner raised questions with Cyonara about, inter alia,

• • the purchase of Lot 202 on SP161001
• • the sale of Lot 6 on SP150819, and
• • the sale of Lot 8 on SP131633.

In his reply dated 27 March 2007 Mr Smits,

• • advised of an intention to claim an input tax credit for the purchase of Lot 202
• • advised of a reduction by $50,000 in the sale price of Lot 6 which had been overlooked when the BAS for that period had been lodged, and
• • expanded upon his reasons for contending that the sale of Lot 8 had been a supply of a going concern.

22. The Commissioner's audit was completed, and the results of it notified to Cyonara by letter dated 24 May 2007. The Commissioner:

• • increased the GST payable for the September 2004 quarter from nil to $150,543 to bring into account GST on the sale of Lot 1 on SP150819,
• • increased the GST payable for the month of November 2004 from $150,000 to $151,778 to bring into account the adjusted sale price (rather that the contract price) of Lot 9 on SP150819
• • increased the GST payable for December 2005 from nil to $370,299 to bring into account GST on the sale of Lot 8 on SP131633. The Commissioner did not accept the sale of Lot 8 to be a supply of a going concern.
• • decreased the GST payable for January 2006 from $220,561 to $215,561 to adjust for the price reduction of $50,000 on Lot 6 of SP150819
• • increased the GST payable for October 2006 from nil to $102,481 to bring into account GST on the sale of Lot 10, and
• • reduced the input tax credits for the February 2007 from $313,892 to nil on the basis that the Commissioner did not accept that Cyonara was entitled to claim input tax credits on the acquisition of Lot 202.

Assessments of net amounts payable were made for each of those periods and evidenced by a notice of assessment dated 24 May 2007.

23. Additionally, the Commissioner imposed an administrative penalty for the various short falls as follows:

• (a) for the September 2004 quarter a penalty of 50% was imposed (on the basis of recklessness) and then reduced by 20%;
• (b) no penalty was imposed in respect of the November 2004 shortfall,
• (c) a penalty of 25% (lack of reasonable care) was imposed in respect of December 2005, however it was remitted in full,
• (d) a penalty of 50% was imposed for the October 2006 shortfall, reduced by 20% and then remitted by 50%,
• (e) a penalty of 25% was imposed in respect of February 2007, however it was remitted in full.

24. In the result penalties were ultimately imposed only in relation to the September 2004 quarter and October 2006. The penalties were evidenced by a notice of assessment dated 25 May 2007.

25. Cyonara objected to the assessments by notice dated 24 July 2007. On 27 May 2008 the Commissioner decided to disallow the objection against the substantive assessment, to disallow the objection against the assessment of penalty and to not remit further the penalties imposed. It is those decisions which are the subject matter of these proceedings which were commenced on 29 July 2008.

26. After the commencement of these proceedings the Commissioner conceded that Cyonara was entitled to input tax credits in respect of its acquisition of Lot 202. A notice of amended assessment dated 4 February 2010 gave effect to that concession, however both parties accept that a formal decision ought be made reflecting the substance of the concession.

27. Finally I note that in February 2010 I determined as a preliminary issue the question whether any of the GST in issue in the proceedings had ceased to be payable^[2] See [2010] AATA 137 . I concluded, for reasons that I need not repeat, that the notice of assessment operated to prevent the GST ceasing to become payable as might otherwise be the effect of s 105-50(1) of Schedule 1 to the Administration Act.

The parties' cases

28. It must be said that, up until shortly prior to the hearing, it was extremely difficult to discern the case that Cyonara was propounding, however Dr Greinke, counsel for Cyonara, helpfully provided a document which described "the real facts and issues in contention". Reference to that document^[3] Exhibit 6. shows that Cyonara advances three propositions:

• (a) that the GST Act, prior to the March 2005 amendments, allowed a taxpayer to make a choice to apply the margin scheme (and apply the cost to complete method) after the date of supply, indeed up to the time of proceedings in the Tribunal;
• (b) that the sale of Lot 8 was a supply of a going concern;
• (c) that the Commissioner was statute barred from recovering GST.

29. The argument concerning the timing of the margin scheme choice is raised in relation to Lot 1 and Lot 9, the going concern argument relates only to Lot 8 and the limitation point is relied upon in relation to Lot 1, Lot 9, Lot 8 and Lot 10. Not surprisingly, Cyonara makes no complaint about the reduction of GST in relation to Lot 6.

30. For his part the Commissioner contends that the margin scheme cannot now be applied in relation to Lot 1 and Lot 9, that Cyonara's evidence concerning Lot 8 would not satisfy me, as a matter of fact, that the sale was a supply of a going concern and that Cyonara's liability to GST was not barred through the effluxion of time.

The time for making a choice

31. Cyonara submits that, on the proper construction of s 75-5 of the GST Act (as in force in relation to supplies made before 17 March 2005), it may, as of right, apply the margin scheme after the date of the relevant supply and the ordinary period for accounting to the Commissioner for GST and, implicitly if not explicitly, it submits that it may do so despite giving the appearance of choosing not to do so. Cyonara points to the expression "in working out the amount of the GST on a taxable supply" in s 75-5(1) of the GST Act. Here, it is said, the Tribunal is engaged in the process of "working out" the amount of GST as a consequence of the Commissioner having made an assessment of GST. Thus, it is said, where the Commissioner makes an assessment of GST years after the transaction, Cyonara can choose to apply the margin scheme in the course of the Tribunal "working out" Cyonara's liability under the assessment.

32. The Commissioner submits that, to be entitled to apply the margin scheme under the GST Act prior to the 2005 amendment, the supplier must have chosen to apply the margin scheme at or before the time it made the relevant supply, that is, at or prior to settlement.

33. I do not accept Cyonara's argument. The construction is contrary to what I regard as the scheme of the Act. The Commissioner's argument is to be preferred.

34. The "basic rules", contained in Chapter 2 of the GST Act, explain that GST is payable on taxable supplies^[4] S 7-1(1). , that GST is payable by the supplier of any taxable supplies^[5] Division 9. , that there is an entitlement to input tax credits for creditable acquisitions^[6] Division 11. , that there is an obligation to periodically account to the Commissioner by means of a GST return (or BAS)^[7] Division 31. and that there is an obligation to pay to the Commissioner (on behalf of the Commonwealth) amounts of GST that remain after off-setting any entitlement to input tax credits.

35. It is notable, given Cyonara's reliance on the use of the expression "working out", that that expression is used in the introductory explanation of Chapter 2 of the GST Act, dealing with the "basic rules", which explains, amongst other things, that the rules within Chapter 2,

"… will tell you

• • …
• • how the amounts of GST and input tax credits are combined to work out the amount payable by you or to you;
• • …"

36. Thus the time at which one might ordinarily "work out" the amounts of GST would be expected to be at the time of accounting to the Commissioner, by means of a BAS, for the GST. In the context of s 75-5 of the GST Act, proceedings in the Tribunal do not involve "working out" the GST on a transaction, they involve a determination whether the objection decision made by the Commissioner was the correct or preferable one. The working out, in my view, is undertaken at the time when a taxpayer is required to account to the Commissioner for GST in accordance with the GST Act.

37. The scheme of the GST Act makes it plain that liability to GST is not dependent on the issue of an assessment; liability arises on the due date for payment by operation of s 33-3 or s 33-5 of the GST Act. Those sections fix the time at which "you must pay the net amount [of GST] to the Commissioner". And s 105-15 of Schedule 1 to the Taxation Administration Act 1953 (Cth) (the Administration Act) makes it explicit that,

"liability to pay *indirect tax … and the time by which a *net amount … must be paid, do not depend on … the making of an assessment under this Subdivision."

38. There is textual support for the Commissioner's submission to be found in s 75-10(1), 75-20(1), 75-25(1) and 75-30(1) of the GST Act. Each of those subsections makes reference to "a taxable supply under the margin scheme" or similar form of words. That rather suggests to me that the application of the margin scheme must be established by the time of the supply.

39. Cyonara's contention does not sit well with another aspect of the GST legislation, the allowance for input credits, that is, the offsetting of GST paid against GST payable. The purchasers of each of Lot 1 and Lot 9 were registered pursuant to Part 2-5 of the GST Act. Given that those purchasers were registered, or required to be registered for GST purposes, it may confidently be assumed that they claimed an input tax credit for the GST component of the settlement sum. Where the GST has been accounted for (and paid to the Commissioner) by the vendor, the allowance of an input tax credit has a balancing effect. Hill J described the legislative scheme in this way:

"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."^[8] HP Mercantile Pty Ltd v Commissioner of Taxation (2005)143 FCR 553 at [13] .

40. In the result I reject Cyonara's first contention. In my view the taxpayer's choice to apply the margin scheme must have been made no later than the time of supply. I need not decide whether the choice is in the nature of a binding election. It is enough to decide that it is no longer open to Cyonara to choose to apply the margin scheme to the sales of Lot 1 and Lot 9.

41. For completeness, I should finally make reference to the evidence regarding conversations said to have taken place between Mr Smits and one of the Commissioner's officers during the course of the audit in 2007. The effect of Mr Smits' evidence was that he had been told certain things regarding the application of the margin scheme to his development, in particular, that Cyonara was not entitled to use the cost of completion method in applying the margin scheme.

42. Cyonara does not rely on this evidence as founding any estoppel or suchlike; indeed it does not rely on the evidence as founding any affirmative case. It points to a public pronouncement of the Commissioner, in PSLA 2005/2, in which it is suggested that the Commissioner has power to allow an entity to choose to apply the margin scheme after the supply has been made. Cyonara submits that the power asserted does not exist and that the "audit conversations" are irrelevant. The Commissioner agrees. In these circumstances I propose to take the matter no further beyond observing that the Tribunal's task is to review the Commissioner's decision, not his reasoning.

Supply of a going concern

43. It seems to be common ground that the elements of s 38-325(1) of the GST Act are made out if the sale of Lot 8 was a "supply of a going concern". Thus the issue between the parties is whether the matters in s 38-325(2) of the GST Act are satisfied. Cyonara submits that those matters are made out because it was carrying on an enterprise, namely leasing property, it carried on that enterprise until the date of supply and it supplied to the recipient (3435 Pacific Highway Pty Ltd) all things necessary for the continued operation of the enterprise. The Commissioner accepts, as I understand the case presented, that the circumstances are such that there could be, as a matter of law, a supply of a going concern; he submitted however that the evidence presented (or not presented) by Cyonara would leave me unpersuaded that this was such a case. In short, the Commissioner submitted, Cyonara failed to discharge the burden of showing that the assessment, in this respect, was excessive.

44. Cyonara's submissions put the case in this way (omitting footnotes):

• "36 The evidence of Mr Smits is as follows:
  • 36.1 he describes the acquisition and development of Lot 8 by the construction of a commercial showroom;
  • 36.2 Jones Lang LaSalle and others were appointed as marketing agents for Lot 8, who carried out marketing including production of brochures;
  • 36.3 Lot 8 was initially leased in December 2003 to Swiss Group entities, but these leases were subsequently terminated for breach by the tenants;
  • 36.4 from 2004 the applicant continued to seek marketing advice and engage consultants for the purpose of leasing Lot 8;
  • 36.5 in July 2004 the applicant leased Lot 8 to Solartech Solutions Pty Ltd;
  • 36.6 Solartech occupied Lot 8 as tenant until 6 December 2005, when Solartech surrendered possession of the premises to the applicant after the lease was terminated for breaches;
  • 36.7 on 18 October 2005 the applicant sold Lot 8 to 3435 Pacific Highway Pty Ltd with a leaseback of the premises to itself, that transaction settling on 7 December 2005;
  • 36.8 the applicant also provided the purchaser with a guarantee of rent and outgoings by way of deposit of $575,160 with Suncorp."

45. Some further reference to the evidence need now be made to see the extent to which Cyonara has established those matters.

46. Lot 8 was part of a much larger development undertaken by Cyonara adjacent to the Pacific Highway at Springwood. It was one of nine lots within the development. It has an area of 3,894 m². A retail showroom, partitioned into three units, was constructed on Lot 8 in 2003. Cyonara engaged real estate agents to find a lessee of the premises.

47. According to Mr Smits, the premises were first leased "to three different lessees nominated and controlled by Swiss Group of Entities" for a term of seven years commencing on 1 January 2004. Mr Smits says that three leases were executed on or about 5 December 2003. The lessees, according to Mr Smits, entered into possession however "they defaulted entirely upon the monetary covenants included in the leases and were ejected from the premises." There is no evidence that the leases were registered. One only of the three leases has been produced. I have a poorly copied document^[9] Exhibit 10, page 470A and following. , unstamped and unregistered, which appears to be a lease by Cyonara to Austrubbertech Pty Ltd of "Shop 2/B" within Lot 8 for a term of nine years commencing 1 January 2004. Whilst Mr Smits statement does not refer to this document, referring instead^[10] Exhibit 7, paragraph [16]. to a creditor's statutory demand (and supporting affidavit of Mr Smits) issued in May 2008 and directed to Austrubbertech, I propose to assume that this is one of the three leases. Mr Smits' affidavit in support of the statutory demand describes the debt in these terms:

• "4. The Debtor Company in accordance with the Lease dated 5 December 2003 between the Debtor Company and the Creditor, has unpaid rents, GST and interest due in respect of part of the premises located at 3435 Pacific Highway, Springwood in the State of Queensland, comprised in Lot 8 on SP 131663, Title Reference 50363235, for the period 1 January 2004 to 7 December 2005."^[11] Exhibit 10, page 93.

48. It transpired, according to Mr Smits, that Cyonara was the victim of an elaborate fraud. The Swiss group, he said, was controlled by a fraudster who not only prevailed upon Cyonara to lease the premises but also executed an agreement to purchase Lot 8. The idea was, apparently, that the fraudster would seek to on sell Lot 8 using the leases to evidence a much higher value, and thus sale price, before either Cyonara or the purchaser realised that the leases were worthless. In any event, said Mr Smits, "those people didn't come in and trade from the premises; it was a scam"^[12] Transcript page 50, lines 44–45 . It did not emerge when Mr Smits established that the whole exercise was a fraud or when the tenants were "ejected from the premises".

49. Mr Smits has produced a valuation undertaken in April 2004 by R.V. Dimond (Properties) Pty Ltd^[13] Exhibit 10, page 101. in which this passage appears:

"We are advised that there is an agreement, in principle (copy attached)^[14] No copy is attached to the exhibit. , for the property to be leased for a term of seven (7) years, at an initial rental of $420,000 net per annum, plus GST, with 4% annual rent reviews …"

It was never made clear to me what use Mr Smits sought to make of the Dimond valuation. A footnote to his submissions suggests that the Dimond valuation corroborates that Lot 8 was leased.

50. Cyonara continued in the search for a lessee of Lot 8. The next attempt at a lease was to Solartech Solutions Pty Ltd whose controlling mind was a Mr Hastings. Mr Smits said that Solartech executed a lease in registerable form for a term of seven years commencing on 1 July 2004 at an initial rent of $420,000 per annum. Mr Hastings, it was said, executed a guarantee of Solartech's obligations in favour of Cyonara. Solartech went into possession, and remained in possession until December 2005. It paid no rent whatsoever and nothing was forthcoming from Mr Hastings as guarantor. He apparently became a bankrupt.

51. This lease was not registered and no executed copy has been produced because Mr Smits' former solicitor has "retained [the lease] unlawfully". Its existence was said to be verified by an email^[15] Exhibit 10, page 207. from that solicitor to a property valuer in which reference is made to the solicitor holding the lease "duly executed by both Lessor & lessee". The valuation letter subsequently produced by that valuer^[16] Exhibit 10, page 161. refers to the firm having been provided with a copy of the Solartech lease, however it is not clear whether that was an executed copy.

52. Solartech was, on any view, a poor tenant, yet Cyonara did little to enforce the obligations which it says were owed to it under the lease. On 30 September 2004 Mr Smits sent an email to Mr Hastings asking that the premises be vacated and all outstanding rent and outgoings be paid. Then in early December 2004 a statutory notice to remedy breach was prepared and "issued" to Solartech. Mr Smits said of this^[17] Exhibit 7, paragraph [24]. :

"Default Notices, including a Notice to Remedy Breach of Covenant under Section 124 of the Property Law Act 1974 (Qld.), dated 2 December 2004 … were issued by the applicant to Solartech and I called upon Ross Hastings, the principal of Solartech to vacate the Lot 8 premises and he agreed verbally that Solartech would do so. As a result of those actions, Solartech released possession of the demised premises voluntarily to the applicant by 6 December 2005."

53. According to Mr Smits, Solartech used the premises to store materials for its business. He was prepared to put up with a defaulting tenant, he said, because he hoped eventually to get some money from Mr Hastings under the guarantee, because having a tenant provided security for the premises and because he had no other tenant.

54. Lot 8 was eventually sold to 3435 Pacific Highway Pty Ltd (in its capacity as trustee) pursuant to a contract of sale bearing the date 18 October 2005. The copy of the contract in evidence^[18] Exhibit 4, pages 94-111. shows that the contract was due for completion on 7 December 2005. The contract noted that the sale was of a going concern. That being so, Clause 34.7 of the standard conditions provided as follows:

"If this clause 34.7 applies:

• (a) the Purchase Price does not include any amount for GST;
• (b) the parties agree the Supply of the Property is a Supply (or part of a Supply) of a Going Concern;
• (c) the Vendor warrants that:
  • (i) between the date of the Contract and the Date for Completion the Vendor will carry on the Enterprise; and
  • (ii) the Property (together with any other things that must be provided by the Vendor to the Purchaser at the Date for Completion under a related agreement for the same Supply) is all of the things necessary for the continued operation of the Enterprise;
• (d) the Purchaser warrants that at the Date for Completion it is Registered or Required to be Registered under the GST Act;

  …"

Clause 34.7 went on to make provision for the consequences of breach of those warranties. It is unnecessary to have regard to those matters.

55. The contract had special conditions as follows:

• "1. This contract is subject to and conditional upon the Vendor as Lessee delivering the Lease Annexure A hereto signed by the Lessee and the Guarantor named therein together with a cheque in payment of any stamp duty payable thereon and the unconditional bank guarantee referred to in the Lease to the Purchaser's Solicitors by not later 5 December 2005.
• 2. The Vendor as Lessee acknowledges that the Purchaser as Lessor is entitled to lease the premises on such terms as she in her absolute discretion sees fit in which circumstance the Vendor as Lessee shall be released from its obligations given by the Lease the Guarantee and the Bank Guarantee in respect of any area so leased on a pro rate basis based on the area leased (and without regard to the income received by the Lessor under such Lease).
• 3. [irrelevant]"

The document which Mr Smits identifies as the lease annexed to the contract of sale is an unexecuted lease between Lyndall Eve Smouha as lessor and Zonebar Pty Ltd as lessee, commencing on 6 December 2005 and expiring on 7 December 2007^[19] Exhibit 4, pages 113–160. . Ms Smouha was the controlling mind of 3435 Pacific Highway Pty Ltd. The lease schedule, which formed part of the contract of sale, disclosed a lease to Zonebar Pty Ltd in similar terms.

56. No lease from 3435 Pacific Highway Pty Ltd has been produced and none was ever registered. The Commissioner asked Cyonara to provide an executed copy as long ago as November 2007^[20] Exhibit 4, page 281. . Mr Smits said, in his reply of 19 December 2007^[21] Exhibit 4, page 284. , that he was "trying to get a copy of it sent to [the Commissioner] through the current solicitors for the Lessor."

57. The draft lease, apparently attached to the contract of sale, contemplated that the lessee (Cyonara) would provide a bank guarantee equal to two years rent plus GST. There is a further document, executed by the parties, including Ms Smouha (as guarantor of the obligations of 3435 Pacific Highway Pty Ltd), and bearing the date 10 November 2005^[22] Exhibit 10, page 472. . That document recites the fact of a contract of sale of Lot 8 by Cyonara to 3435 Pacific Highway Pty Ltd dated 18 October 2005 with Ms Smouha guaranteeing the performance of the obligations of 3435 Pacific Highway Pty Ltd. Clause 5 of that document deals with the question of the bank guarantee to be provided by Cyonara. The effect of the clause is that the parties agreed to replace the bank guarantee with an arrangement whereby 3435 Pacific Highway Pty Ltd was irrevocably directed to deduct from the purchase price the sum required for the bank guarantee and to deposit that sum into a bank account in its name. Clause 5.1 recites that special condition 1 of the contract of sale requires the delivery by Cyonara of an unconditional bank guarantee. That is not the content of special condition 1 of the contract in the material before me. That contract, so far as I can tell, contains no requirement for the provision of a bank guarantee; that obligation arises from clause 18 of the draft lease attached to the contract of sale.

58. It is not clear whether clause 5.1 of the 10 November 2005 deed is wrongly worded, whether the contract of sale in evidence is not the operative document or whether there is some other explanation for the inconsistency. It seems not to matter in a particular sense although, in a general sense, it is illustrative of the deficiencies in Cyonara's evidence. It is the case that the contract was completed, seemingly on 7 December 2005, and a stamped transfer^[23] Exhibit 4, page 357. is included within the documents. Also included with the documents is the settlement statement^[24] Exhibit 10, page 536. of the conveyance to 3435 Pacific Highway Pty Ltd which shows an amount of $575,160 deducted from the purchase price as "rental set off account". That sum was deposited to a bank account in the name of Zonebar^[25] Exhibit 10, page 533. and monthly thereafter from January 2006 to December 2007 an amount of $23,965 is shown as a withdrawal on the bank statements.

59. The Commissioner submits that the evidence would leave me unpersuaded that Cyonara was carrying on the enterprise of leasing Lot 8 prior to the sale to 3435 Pacific Highway Pty Ltd either at all or up until the day of supply and that it supplied everything necessary to the purchaser for the continued operation of the leasing enterprise. Whilst there was no evidence directly contradicting Mr Smits evidence, the Commissioner submitted that I ought not accept his evidence regarding the various leases of Lot 8. Dr Mellifont SC, who appeared for the Commissioner, invited me to draw a
Jones v Dunkel inference^[26] Jones v Dunkel (1959) 101 CLR 298 . from Cyonara's failure to call witnesses such as Mr Hastings.

60. Cyonara submits that it is not appropriate to draw such inferences in the present case. Mr Smits was not on notice that it was to be suggested that his evidence was false. That evidence, Cyonara says, was not contradicted by any witness and ought be accepted.

61. The Commissioner's attack on the quality of Cyonara's evidence is certainly not new. The Commissioner's reasons for decision accompanying the objection decision dated 27 May 2008 include this passage:

"… you have not provided any formal or informal documentation showing that a lease existed between you and Solartech for the property.

You have not been able to demonstrate to us that you as supplier carried on an enterprise until the day of supply to the purchaser."^[27] Exhibit 4, page 35.

That theme was taken up in paragraph 75 of the Commissioner's Amended Statement of Facts and Contentions dated 31 March 2010.

62. In
Jones v Dunkel^[28] (1959) 101 CLR 298 at 320–321 . Windeyer J accepted as correct this statement from Wigmore on Evidence^[29] (3rd ed 1940) vol 2, s 285, p 162. :

"The failure to bring before the tribunal some circumstance, document, or witness, when either the party himself or his opponent claims that the facts would thereby be elucidated, serves to indicate, as the most natural inference, that the party fears to do so, and this fear is some evidence that the circumstance or document or witness, if brought, would have exposed facts unfavourable to the party. These inferences, to be sure, cannot fairly be made except upon certain conditions; and they are also open always to explanation by circumstances which make some other hypothesis a more natural one than the party's fear of exposure. But the propriety of such an inference in general is not doubted."

63. There is no reason to doubt the operation of the principle in
Jones v Dunkel in proceedings in the Tribunal, a fortiori in cases in the Taxation Appeals Division where the statute imposes on an applicant the burden of showing that the assessment was excessive^[30] See e.g. Re Optimise Group Pty Ltd & Commissioner of Taxation [2010] AATA 782 ; (2010) 53 AAR 117 ; 2010 ATC 10-155 . . I consider that it has been plain all along that the Commissioner was contending that Cyonara's evidence was insufficient to discharge its onus. Mr Smits is an experienced solicitor and was, throughout, represented by solicitors. It may be accepted that some dispute had arisen with the former solicitor which may have made it difficult to obtain documents from that solicitor voluntarily, however no attempt was made to use the summons power of the Tribunal to obtain relevant documents from either the former solicitor or any other relevant parties. The absence of relevant witnesses and documents was raised directly with Mr Smits in the witness box and what was implicit in the questioning was made explicit in the Commissioner's written submissions, exchanged with Cyonara in advance of the final day of the hearing. No application was made to adjourn the hearing to allow further witnesses to be called or documents to be obtained.

64. I do not then regard it as unfair to draw appropriate inferences from the absence of appropriate witnesses and, perhaps more importantly, critical documents.

65. A critical element of the case for Cyonara is that it leased the premises to Solartech. I am not satisfied that it did so. I appreciate that Mr Smits said that there was a lease and that his evidence was not directly contradicted. But I do not accept his evidence for two reasons. First, and most importantly, the words and actions of Mr Smits and Cyonara at the time, as demonstrated by contemporaneous documents, are quite inconsistent with the notion that there was a lease in place between 1 July 2004 and 6 December 2005.

66. Additionally, no executed copy of the lease was produced and its absence was not adequately explained.

67. As to the first of these, it is apparent that there were negotiations between Cyonara (by Mr Smits) and Solartech (by Mr Hastings) in the first half of 2004. The material that Cyonara has produced demonstrates quite adequately that there were attempts being made to reach agreement on terms for a contract of sale^[31] See e.g. the emails from Mr Smits at pages 327 and 353 of Exhibit 10. . It is also apparent that there was an arrangement of some sort between, at least, Mr Smits and Mr Hastings. So much is evident from an email sent on 23 October 2004^[32] Exhibit 10, page 208. by the former to the latter. Omitting formal parts (and correcting typographical errors), it reads:

"I urgently need the keys for Lot 8 to go to Jon McLaren at Napier & Blakeley^[33] Napier & Blakeley Pty Ltd was a company engaged by Mr Smits to prepare capital allowance schedules for income tax purposes. That schedule (Exhibit 10, page 225 and following) indicates that a detailed inspection of Lot 8 was undertaken on 27 October 2004. … Please confirm you can do it and when."

68. The email demonstrates that Mr Hastings had keys to the Lot 8 premises in October 2004. That is consistent with Solartech having possession of the premises, however the language of the email is not, to my mind, the language of lessor to lessee. Had there been a lease on foot in the terms claimed by Mr Smits, Solartech was entitled, fundamentally, to quiet possession. The lease reserved a right of entry to effect works and to view^[34] Exhibit 10, page 184. but the inspection contemplated by the email did not come within either of those reservations.

69. In the material is an email from Mr Smits to a prospective tenant dated 23 August 2004^[35] Exhibit 10, page 367. . That correspondence asks the prospective tenant,

"Do you want a direct Lease from Zonebar P/L or a Sub-lease from SolarTech [sic]".

The notion of a sub-lease from Solartech lends support to the notion of a head lease from Cyonara, however the email demonstrates that Mr Smits was apparently of the belief that Cyonara was in a position to lease the entire area without regard to any existing lease.

70. It is also apparent from the material that throughout the period when, on Cyonara's case, Solartech had a lease of Lot 8, Cyonara, through Mr Smits, was seeking to find other tenants. There is an email from Mr Smits to a Mr Selby dated 30 October 2004^[36] Exhibit 10, page 727. in which Mr Smits refers to two entities "negotiating long term leases with me". And in that same month, Mr Smits gave detailed instructions^[37] Exhibit 10, page 372–3. See also exhibit 10, pages 728–730. to a real estate agent for the preparation of a brochure advertising the virtues of Lot 8 as a site available for leasing. The brochure spoke of the building as being "complete and ready for fit-out to the requirements of the client"^[38] Exhibit 10, page 83. . It made reference to the uses being made of adjoining premises but said nothing about the occupancy of Solartech, much less any reference to a lease in registerable form for a term of seven years which, on Mr Smits account, was then in existence.

71. In January 2005 Mr Smits emailed another real estate agent saying^[39] Exhibit 10, page 376. ,

"Lot 8 is still available … Negotiations are in progress with BHP who also want similar area."

Further negotiations with other prospective tenants took place in May 2005^[40] Exhibit 10, pages 706-7 & 721. . In July 2005, at a time when one real estate agent was seeking to show Lot 8 to a prospective tenant, the keys to the premises were held by another real estate agent^[41] Exhibit 10, page 720.

72. Finally, I note that in May 2008 Mr Smits said on oath (or affirmation), in his affidavit supporting the creditor's statutory demand directed to Austrubbertech, that that company was liable to pay rent for part of Lot 8 from 1 January 2004 to 7 December 2005. That latter date was, of course, the date on which Lot 8 was conveyed to 3435 Pacific Highway Pty Ltd. The existence of the liability affirmed or sworn to by Mr Smits is quite inconsistent with the existence of any lease to Solartech from 1 July 2004.

73. The circumstances surrounding the sale of Lot 8 became part of the focus of the Commissioner's audit in March 2007. The Commissioner's view that the sale did not satisfy the requirements for a GST free sale were conveyed in a letter dated 16 March 2007^[42] Exhibit 4, pages 236–7. . Mr Smits' reply^[43] Exhibit 4, page 240. argued why he had a different view. It included the following:

"Full particulars of the enterprise to be transferred to the Purchaser by the Vendor as an integral, essential and inalienable component of the relevant Supply were set out in the lease Schedule and indeed the actual Lease Agreement was attached to the Sale Contract. In other words, there was a legally enforceable agreement to lease in existence as from 18 October, 2005, being the date of the Sale Contract and it operated as a business transaction from 6 December 2005."

The reply, as Mr Smits pointed out, was sent without the benefit of advice and it would be wrong to limit Mr Smits to arguments formulated at first blush and I would not seek to do so. However it does seem to me that Mr Smits might have been expected to have made some reference in this letter to the existence of the Solartech lease had there been such a lease in place from 1 July 2004 to 7 December 2005.

74. It remains the case that no executed copy of a lease to Solartech has been produced. No summons to produce documents was ever sought to be served on the former solicitor or Mr Hastings who might be expected to have a copy of the executed lease. Neither of them was called to give evidence of the fact of execution. Mr Smits may well have had a falling out with his former solicitor but on Cyonara's case the solicitor was, at one time, in possession of an executed copy of that lease. The same is true of the real valuer whose valuation made reference to the lease. There was no suggestion, otherwise, that any of these people were prevented from giving evidence in the proceedings. The absence of all of them tells against there being a lease to Solartech.

75. I have not overlooked the existence of an email in which the former solicitor refers to holding an executed copy of the lease or the reference in the valuation to the lease. But each statement constitutes a hearsay assertion in circumstances where the maker of the statement is not called to give evidence. The existence of this lease has long been in controversy. It would be wrong to use those statements to demonstrate the existence of the lease when Cyonara did not call either author to give evidence.

76. I am then not satisfied of two of the factual elements of the case for Cyonara, that it leased Lot 8 to Solartech in July 2004 and that Solartech occupied Lot 8 as tenant until 6 December 2005 when it surrendered possession.

77. There is, as well, some considerable doubt about the transaction between Cyonara and 3435 Pacific Highway Pty Ltd. There was, undoubtedly, a sale and there was, equally undoubtedly, some arrangement whereby Cyonara paid money on a monthly basis to 3435 Pacific Highway Pty Ltd. But the draft lease attached to the contract of sale shows Ms Smouha as the proposed lessor. If it be assumed, favourably to Cyonara, that there was a contract of sale executed by the parties which attached a draft lease between 3435 Pacific Highway Pty Ltd as lessor and Cyonara as lessee a question arises about the consequences of an agreement to grant and take a lease expressed to take effect on the day prior to completion of the conveyance.

78. I find it impossible to conclude that there could be a valid lease granted from 6 December 2005 and no authority was cited to me for such a proposition. At best for Cyonara, I would have thought that a lease in such terms would operate as a lease commencing from the time when the lessor first became able to grant a lease, that is, when the legal title was conveyed to it.

79. Ultimately, it is not necessary to answer the interesting questions posed by this part of the transaction. That is so, in my view, because Cyonara fails to satisfy each of the requirements for the supply of a going concern. If the enterprise be regarded as being the leasing of Lot 8 (and no other enterprise was suggested), I am not satisfied that Cyonara carried on that enterprise until the day of supply. I am, indeed, not satisfied that it carried on the enterprise of leasing at any time within the period of many months prior to the day of supply. It was, at various times, attempting to obtain a tenant to take a lease but Cyonara did not suggest that the enterprise of leasing could be carried on merely by seeking to obtain a tenant.

80. Additionally, no things necessary for the continued operation of the enterprise were supplied to the purchaser.

81. I am not satisfied that the sale of Lot 8 was a supply of a going concern.

Is the commissioner statute barred

82. This question was the subject of a preliminary determination^[44] See [2010] AATA 137 . . Cyonara does not invite me to reconsider my earlier decision, rather it says that subsequent events have provided it with a further argument.

83. Section 105-50(1) of Schedule 1 to the Administration Act has the effect that GST "ceases to be payable 4 years after it becomes payable by you. However, s 105-50(3) provides that s 105-50(1) does not apply to an amount if,

"within those 4 years the Commissioner has required payment of the amount …by giving a notice to you."

84. In the earlier decision I concluded that the notice of assessment dated 24 May 2007 constituted a notice that satisfied s 105-50(3) and thus the Commissioner was not barred by s 105-50(1) from claiming payment of the amounts in issue here.

85. The net amount shown in that notice of assessment included the amount of input tax credits claimed by Cyonara on its purchase of Lot 202 but rejected by the Commissioner as part of the assessment. But the Commissioner now concedes that Cyonara was entitled to input tax credits on the acquisition of Lot 202. The result, submits Cyonara, is that,

"the statement in the notice that 'the total amount applied to your running balance account is $933,933' is incorrect. The total amount applied has now been reduced by $309,090."

Thus, submits Cyonara, whilst the notice of assessment dated 24 May 2007 was capable of constituting a notice under s 105-50 it did not, in fact, validly constitute such a notice since it did not require payment of the correct amount.

86. Cyonara submits that the position is analogous with cases for demands for payment and cites
Re a Debtor^[45] [1908] 2 KB 684 . ,
Walsh v Deputy Commissioner of Taxation^[46] (1984) 156 CLR 337 . and
Re Greenhill,
ex parte Myer (NSW) Ltd^[47] (1984) 5 FCR 84 . .

87. I do not regard the bankruptcy cases as providing a proper analogy because, at least so far as the Australian cases are concerned, the Bankruptcy Act 1966 (Cth) made explicit provision for the invalidity of a notice which overstated the amount due provided the debtor gave timely notice under s 41(5) of that Act that the validity of that notice was disputed.

88.
Walsh v Deputy Commissioner of Taxation^[48] Above, n 46. does however provide some guidance in the present case. There the Deputy Commissioner had obtained a judgement against Walsh and was seeking to invoke the processes of the bankruptcy law against him. Walsh carried out a scheme whereby he paid small amounts to the credit of the Deputy Commissioner at various offices around Australia. It was accepted that the bankruptcy notice correctly stated the debt at the time that it had been issued but that the debt had been reduced by payments made before service. The Court concluded that the validity of the notice should be tested as at the date of the notice.

89. To similar effect is the decision of the Queensland Court of Appeal in
Deputy Commissioner of Taxation v McArdle^[49] [2003] QCA 282 ; [2004] 2 Qd R 495 . . The notice in issue in that case was a director's penalty notice pursuant to s 222AOE of the Income Tax Assessment Act 1936 (Cth). The notice, when issued and served, particularised amounts of tax deductions as notified to the Deputy Commissioner by the company. Subsequently, and after the notice had been served, the company notified the Deputy Commissioner that the amounts earlier notified understated the position and that the deductions were in fact greater than as had earlier been understood. McArdle appealed against an order for summary judgment on the grounds that the understatement of the amount, in fact due, had the result that the notice was invalid. The argument was rejected. Davies JA, with whom Williams and Jerrard JJA agreed, concluded that the requirement of the notice was to inform the recipient of the amount of the debt as then known by the Commissioner.

90. In my view, a similar approach ought be taken here. A notice of assessment of GST net amount performs at least three functions. It notifies the recipient of the amount of GST that the Commissioner contends is due and, in that regard, it will be expected to differ from the amount that has already been accounted for by the recipient in a BAS. In the ordinary case, a notice of assessment will be the product of dissatisfaction by the Commissioner with the accounting provided (or not provided, if no BAS has been lodged in circumstances where the Commissioner contends that one should have been lodged). Next, it operates as conclusive evidence, except in review or appeal proceedings under Part IVC of the Administration Act, that the assessment was properly made and that the amount and particulars in the assessment are correct^[50] See s 105-100, Schedule 1 to the Administration Act. . Finally, it originates the process by which the recipient may contest the asserted liability by first objecting to the assessment and thereafter, if required, seeking a review or appeal of the objection decision.

91. The notice of assessment here notified Cyonara of the net amount which the Commissioner was then contending Cyonara was liable to pay. I do not consider that its validity is affected because subsequently the Commissioner was persuaded that an earlier view taken of, in this case, an entitlement to input tax credits, was wrong.

92. I reject Cyonara's argument that the Commissioner is precluded by s 105-50(1) of Schedule 1 to the Administration Act from recovering the GST, both the original argument, for the reasons already given^[51] See Cyonara Snowfox Pty Ltd & FCT [2010] AATA 137 . , and the new argument advanced at the hearing.

Penalties

93. The Commissioner's original decision on penalties has already been noticed^[52] See paragraphs [23] to [25] above. . The Commissioner has made a further concession which is that the base penalty amounts imposed for the September 2004 and October 2006 tax periods be reduced by 80% in lieu of the 20% reduction in the original penalty assessment. I did not understand Cyonara to raise any further issue regarding the appropriateness of the penalties following that concession nor did I understand that it contended that further remission of the penalties was warranted.

Conclusion

94. The result of this is that a decision ought be made to give effect to the Commissioner's concessions regarding Lot 202 and the further reduction of penalties but that the decisions under review should otherwise be affirmed.