• The impact of this case on ATO policy is discussed in Decision Impact Statement: Domestic Property Developments Pty Ltd as trustee for the Dals Property Trust and Commissioner of Taxation (2021/3014).

Domestic Property Developments Pty Ltd a/t for Dals Property Trust v FC of T

Members:
R Olding SM

Tribunal:
Administrative Appeals Tribunal, Sydney

MEDIA NEUTRAL CITATION: [2022] AATA 4436

Decision date: 23 December 2022

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R Olding (Senior Member)

WHAT IS THIS CASE ABOUT?

1. The applicant, a property developer, constructed a development comprising seven home units. A controversy has arisen in respect of the GST treatment of sales of two of the units, Unit 1 and Unit 3 .

2. The applicant rented the two newly-constructed units to tenants for around five years before selling them. Although it paid amounts as GST, calculated under the margin scheme, on both sales, the applicant says that was an error as the sales were input taxed. The applicant seeks a refund of the amounts it says were mistakenly overpaid.

3. The controversy has given rise to the following issues concerning the construction and application of the A New Tax System (Goods and Services Tax) Act 1999 (Cth).^[1] All legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (Cth), unless otherwise indicated.

The "liability issue" (Unit 1)

4. It is common ground that the sale of Unit 3 was an input taxed supply. However, the Commissioner does not accept that the sale of Unit 1 was an input taxed supply.

5. Broadly, a sale of "new residential premises" by a developer is a taxable supply and therefore subject to GST. The amount of GST payable is calculated concessionally if the parties agree the "margin scheme" applies to the sale.^[2] Section 75-5.

6. However, under s 40-75(2)(a), residential premises are not "new residential premises":

if, for the period of at least 5 years since . . . the premises first became residential premises . . . the premises have only been used for making supplies that are *input taxed supplies because of paragraph 40-35(1)(a).

7. For a supply to be input taxed because of paragraph 40-35(1)(a) it must meet the following requirement:

A supply of premises that is by way of lease, hire or licence . . . is input taxed if:

• (a) the supply is of residential premises . . .^[3] Excluding certain supplies relating to commercial residential premises that are not relevant to this matter.

8. To avoid repetition, I refer to such supplies as " Rental Supplies ".

9. Although it is common ground that it is satisfied in respect of the periods both units were rented, I set out s 40-35(2)(a) below as Mr Jones, who appeared for the applicant, referred to it briefly in submissions:

However:

• (a) the supply is input taxed only to the extent that the premises are to be used predominantly for residential accommodation (regardless of the term of occupation) . . .

10. So, if a developer constructs residential premises, immediately leases the premises to a tenant, and the premises are used only for making Rental Supplies for at least five years from completion of construction, a subsequent sale will be input taxed.

11. The liability issue raises constructional issues concerning s 40-75(2)(a) that have not previously been the subject of judicial or tribunal consideration. These concern the requirement that "for the period of at least 5 years" the premises "have only been used" for making Rental Supplies. In particular, whether premises that marketed for sale during the five-year period can be said to have only been used for making Rental Supplies and whether the five-year period must be a continuous period.

The "passing on issue" (Unit 1 and Unit 3)^[4] The passing on issue only arises for Unit 1 if the applicant succeeds on the liability issue. Because of the commonality of the facts it is convenient to follow the approach of the parties by addressing the passing on issues for both units together.

12. The Commissioner says that, even if he is wrong and the sale of Unit 1 was an input taxed supply, the applicant would be denied a refund by the provisions of Subdivision 142-A because any overpaid amount was passed on to the purchaser.

13.

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Under s 142-5(1), the subdivision applies if:

. . . your *assessed net amount for a tax period takes into account an amount of GST exceeding that which is payable.

14. Section 142-10 in turn provides that:

. . . so much of the excess from subsection 142-5(1) (the excess GST ) as you have *passed on to another entity is taken to have always been:

• (a) payable; and
• (b) on a *taxable supply;

until you reimburse the other entity for the passed-on GST.

15. The meaning of "passed on" is affected by s 142-25 which relevantly provides:

• (1) Some or all of an amount of GST may have been passed on to another entity even if:
  • (a) a *tax invoice is not issued to or by that other entity . . .^[5] Adding to the constructional challenges with Subdivision 142-A identified in the WYPF and M3K Services cases, s 142-25 refers to an amount of “GST” that may have been passed on and not to “excess GST”. For the provision to operate, that must be taken to be a reference to “an amount of GST exceeding that which is payable”: (s 142-5(1)) or excess GST (s 142-10) for it is only excess GST to which the concept of passing on, under s 142-10, can apply.

16. The Commissioner submits that if, contrary to his submission, the sale of Unit 1 is input taxed, s 142-10 applies to deny a refund of the excess GST because it was passed on to the purchaser. In respect of the sale of Unit 3, which the Commissioner accepts was an input taxed supply, the Commissioner also submits s 142-10 operates to deny the applicant a refund of the excess GST.

17. The applicant denies excess GST was passed on in respect of either unit.^[6] There is no suggestion any excess GST was reimbursed to the purchaser in either case.

DECISION UNDER REVIEW

18. The applicant reported GST of $96,927 on the sale of Unit 1 in its March 2017 activity statement and GST of $69,582 on Unit 3 in its June 2017 activity statement.

19. On 12 October 2021, the applicant lodged an objection against assessments of net amount for these periods on the basis that the sales of the two units were input taxed and sought a refund of, as the applicant submits, the excess GST.

20. The Commissioner disallowed the objection in full on 12 March 2021. It is that objection decision which is before the Tribunal for review.^[7] The applicant withdrew a submission that the Tribunal also had jurisdiction to consider whether, if excess GST was passed on, s 142-10 should be treated as never having applied in accordance with s 142-15. I raised with the parties whether s 43(1) of the Administrative Appeals Tribunal Act 1975 (Cth) might empower the Tribunal to make such a decision; the Commissioner submitted it would not and the applicant eschewed reliance upon s 43(1).

BURDEN OF PROOF

21. The applicant has the burden of proving the assessments are excessive.^[8] Taxation Administration Act 1953 (Cth), s 14ZZK(b)(i).

22. Accordingly, to succeed in relation to the March 2017 assessment, the applicant must prove that:

• (a) for the period of at least 5 years since the issue of the certificate of occupancy,^[9] The parties treated the date of issue of the certificates of occupancy as the date on which the premises first became residential premises for the purposes of s 40-75(2)(a). Unit 1 has only been used for making Rental Supplies; and, if so:
• (b) it did not pass on excess GST to the purchaser.

23. To succeed in relation to the June 2017 assessment, the applicant must prove it did not pass on excess GST to the purchaser of Unit 3.

THE LIABILITY ISSUE

Some uncontroversial background

24. These facts are uncontroversial:

• (a) The applicant intended to sell the seven units upon completion of the development, which was the first development it had undertaken.^[10] Transcript, P-10, line 45.
• (b) Certificates of occupancy were received for Units 1 and 3 on or about 28 October 2011.
• (c) Unit 1 was offered for sale at auction on 5 November 2011 but was passed in when no bids were received.
• (d) Consequently, the applicant changed its earlier intention to sell the units, determining they would be offered for lease "for the foreseeable future". However, one of the units was sold in 2012 to allow the applicant to repay finance secured on the property.^[11] Transcript, P-14, lines 15-25.
• (e) Unit 1 was leased to a single tenant from on or around 24 February 2012 to 23 July 2016.
• (f) Unit 1 was advertised for lease from on or around 1 August 2016 to at least 5 September 2016.
• (g) On or about 15 October 2016, the applicant engaged a real estate agent to market Unit 1 for sale.
• (h) A contract for the sale of Unit 1 for a price of $1,650,000 was entered into on 17 November 2016.
• (i) In accordance with the contract of sale and a separate licence agreement, the

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  applicant granted the purchaser a licence to occupy Unit 1 for $1,000 per week from 1 December 2016 until settlement which occurred on 28 February 2017.

25. The applicant says Unit 1 remained available and was marketed for lease from 29 July 2016 to 16 November 2016 when it was sold. The Commissioner says the applicant has not proved Unit 1 was marketed for lease after 5 September 2016 or that it remained available for lease after it was put on the market for sale until the sale contract was signed.

26. In view of the conclusions I have reached below, it is not necessary for me to resolve this controversy. Regardless of how the controversy might be resolved, it is clear that Unit 1 was:

• (a) marketed for sale before the expiration of five years from the issue of the certificate of occupancy; and
• (b) not leased or marketed for lease for a continuous period of five years.

27. It is these features that give rise to constructional issues concerning s 40-75(2)(a).

First constructional issue - meaning of "have only been used"

28. The first constructional issue concerns the s 40-75(2)(a) requirement that the premises "have only been used" for making Rental Supplies for the five-year period.

29. The parties agree premises are used for making Rental Supplies, even if there are short periods when the premises are unoccupied, if they are actively marketed for lease during those periods. However, they differ regarding the impact of the premises being made available for sale before the expiry of the five-year period.

30. The applicant says the requirement is still satisfied in those circumstances because the unit has "only been used" for making Rental Supplies. It has not been used in any other way.

31. In that regard, the applicant asserted a supply of real property by way of sale occurs upon completion of the contract of sale. Based on that assertion, the applicant submitted the marketing of the unit for sale should not be regarded as a separate use. The "relevant use" for the purpose of sale is, the applicant submitted, the use of a title to make the supply of the real property at settlement.

32. There is arguably an element of inconsistency in the applicant's submission. The applicant says marketing the unit for sale is not a "relevant" use and should be ignored but marketing the unit for lease is a use for making Rental Supplies.

33. The Commissioner did not deny a supply of real property by way of sale occurs on settlement.^[12] The authority cited by the applicant in support of the proposition that a supply of real property by sale occurs on settlement – Commissioner of Taxation v Reliance Carpet Co Pty Limited (2008) 236 CLR 342 ; [2008] HCA 22 , [42] – is concerned with when a taxable supply , not a supply, occurs. As the Court noted at [13]: “the circumstance that the contract did not proceed to completion does not necessarily prevent there having been a “supply” when the contract was entered into; the ultimate issue is whether there was “a taxable supply”. However, the Commissioner does not accept this means the holding and marketing for sale is not a use of the premises for the purposes of s 40-75(2)(a).

34. The Commissioner maintains "used" in this context includes having marketed or made the unit available for sale. In making that submission, the Commissioner says "used" in s 40-75(2)(a) should be construed consistently with the way "apply" in Division 129 is construed. Division 129 provides for annual adjustments when a business entity acquires a thing for a creditable purpose to a particular extent but subsequently applies to a different extent. In broad terms, the practical effect of Division 129 adjustments is to adjust an entity's input tax credit (" ITC ") entitlement on acquisitions where the extent of the creditable purpose pertaining to the actual application of the thing acquired differs from its intended application at the time of acquisition.

35. "Apply" is defined for this purpose as including to "supply the thing" acquired or to "consume, dispose of or destroy the thing": s 129-55. Those inclusions in the definition of "apply" for Division 129 do not assist in the current case; there is no suggestion the applicant, in making Unit 1 available for sale, had supplied, consumed, disposed of, or destroyed the unit.

36. When the purpose of Division 129 is considered, it would be surprising if, adopting the ordinary meaning of "apply", a business entity would not be considered to have applied goods or real property held for sale. One of the most common ways in which a business applies things acquired is as stock for sale.

37. The Commissioner says the same approach should be taken in determining whether residential premises have been "used" other than for making Rental Supplies for the

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purposes of s 40-75(2)(a). The Commissioner says in this context marketing residential premises for sale constitutes a use of the unit and is a use other than in making Rental Supplies.

38. The Commissioner submits that construction is consistent with the purpose of s 40-75 that sales of residential premises will not be taxable if the developer was not entitled to ITCs for acquisitions relating to the construction of the premises. The Revised Explanatory Memorandum to the Taxation Laws Amendment Bill (No. 8) 2000, which is the Bill for the Act that introduced s 40-75, explains the purpose of the provision in this way:

Sales of rented housing

1.16 An entity that constructs rental premises after 2 December 1998 which it subsequently rents out for a number of years will be denied input tax credits for the construction costs of the premises. This is because the acquisitions relate to an input taxed supply of a lease of residential premises under subsection 40-35. Upon the eventual sale, the premises will fall into the definition of 'new residential premises' and the sale will be subject to GST. The eventual sale of the premises may occur too far into the future to claim the original input tax credits on construction.

1.17 Item 9 inserts new section 40-75 into the GST Act. New subsection 40-75(2) will ensure that premises which have been used solely for the purpose of rental accommodation for a period of at least 5 years are not included in the definition of 'new residential premises'. The effect of this is that any subsequent sale of the premises which have been used solely as residential premises for at least 5 years will be input taxed. Item 16 substitutes the definition of 'new residential premises'.

Example 1.3

ABC Builders constructs a residential premise for the purposes of providing rental accommodation and therefore is not entitled to claim input tax credits for the acquisitions in relation to the construction costs. ABC Builders supplies short-term leases for residential accommodation in the premises to various tenants for a period of 7 years. The premises is then sold by ABC Builders. This amendment will allow the sale by ABC Builders of the residential premises to be input taxed rather than subject to GST.

39. On this basis, it may be accepted that the broad object of s 40-75 includes ensuring residential premises are not taxed where the developer would not have been entitled to ITCs on acquisitions relating to the construction. But does it follow that "used" in s 40-75(2)(a) should be given a meaning consistent with "apply" in Division 129? Put another way, is such a construction necessary to give effect to the stated policy of s 40-75?

40. There would be greater force in the argument if, so construed, there would be complete harmony between the operation s 40-75 and Division 129 - if Division 129 provided for adjustments to a developer's ITCs directly proportionate to changes in creditable purpose. If that were so, there would be a stronger policy argument for adopting a similar test for whether s40-75(2)(a) and Division 129 adjustments apply. Such a construction might prevent an inappropriate mismatch between the developer's entitlement to ITCs on acquisitions relating to the construction and the builder's liability for GST on sale.

41. However, Division 129 does not operate with such precision. It provides only a measure of "rough justice". The adjustments required achieve at best an approximation of the equivalent of the ITC entitlement that would have arisen if the actual application of the thing acquired had been known at the outset. That is especially so in the context of construction costs where any measure of the extent of creditable purpose will necessarily be a proxy-based approximation - for example, time or revenue-based proxies - and the choice of proxy may give rise to significantly different outcomes. There is inevitably a degree of arbitrariness and no doubt numerous examples could be identified where, on either the applicant's or the Commissioner's preferred approach, outcomes would favour taxpayers or the revenue. The same may be said

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of the five-rule rule in s 40-75(2)(a). These attributes reflect the reality that legislation commonly gives effect to compromises that balance competing objectives, including the precision with which competing policy objectives are pursued and considerations of complexity and practicality. Inevitably, there are contestable cases at the margin.

42. Additionally, Division 129 applies to entities generally. Unlike s 40-75, the application of Division 129 is not confined to residential premises.

43. Having regard to those considerations, it would require something of a leap to accept that Parliament should be taken to have intended that "used" not be construed in accordance with its ordinary meaning and instead consistently with another term, defined for the purposes of another provision that applies in a whole range of other circumstances unrelated to the provision in which "used" relevantly appears.

44. In those circumstances, I prefer to look to the meaning of "used" in the context in which it appears in s 40-75(2)(a) rather than endeavouring to base a conclusion primarily upon coherence or otherwise with Division 129 where the expression does not appear.

45. "Used" may take one of a number of meanings according to its context. Such meanings may include "apply to one's own purpose"^[13] Macquarie Dictionary Online , accessed 8 December 2022. or "hold as a means of accomplishing something".^[14] Oxford Online Dictionaries , accessed 8 December 2022.

46. The context in which "used" appears in s 40-75(2)(a) is the GST classification of sales of residential premises which arises only in respect of supplies in a business or other enterprise context.^[15] Section 9-5(b). According to the Dictionary meanings cited above, "used" is capable of embracing the holding or application of premises for the purposes of sale.

47. Putting aside use for rental or occupation for display or other purposes, in ordinary parlance a newly-constructed unit that had merely been marketed for sale might not be regarded as "used". However, in the context of carrying on an enterprise in which it is relevant for the purposes of s 40-75(2)(a), I am persuaded that "used" embraces being applied by a developer, through active marketing, as premises for sale in the course of the developer's enterprise.^[16] For completeness, I note Mr Jones raised whether the requirement in s 40-35(2)(a) that input taxing of Rental Supplies applies “only to the extent that the premises are to be used predominantly for residential accommodation” has a role to play in relation to this construction issue. However, that submission was not developed further. I am unable to see how this provision could assist the applicant.

48. Accordingly, I conclude Unit 1 ceased to be used only for making rental supplies when it was first marketed for sale.

Second construction issue - continuous period required

49. In my view, s 40-75(2)(a) requires a continuous period of at least five years in which the premises have only been used for making rental supplies. That appears from the use of the definite article - "the period of at least 5 years".

50. Mr Jones, who appeared for the applicant, quite properly conceded to conclude otherwise would require a strained construction of s 40-75(2)(a). Mr Jones sought to rely upon commentary^[17] Statutory Interpretation in Australia , Pearce and Geddes, 8 ^th edition, 358 and following. on authorities regarding the impact of provisions being regarded as "beneficial" on the approach to their construction, submitting they would support an interpretation favourable to the seller.

51. However, whatever force such authorities may have when construing modern taxation statutes which are riddled with provisions reflecting policy compromises, I do not understand the authorities to require or permit, without more, departure from the plain meaning of a provision. In my view, there is no contextual or other compelling reason for taking such a view in respect of s 40-75(2)(a).

52. Parliament had to draw the line for what would be sufficient use in making rental supplies somewhere. It chose the period of five years from completion of construction. In any case, the characterisation of an input taxed supply as "beneficial" is problematic; a purchaser seeking an ITC on acquisition of a supply would not regard that classification as beneficial.^[18] An ITC entitlement arises for a recipient of a “creditable acquisition”. The definition of that term requires the supply to the recipient to be a taxable supply: ss 11-5(b), 11-20.

Conclusion - the sale of Unit 1 is an input taxed supply

53. As the applicant has not, on the view that I have taken, used Unit 1 only for the period of five years since the completion of construction, the requirements of s 40-75(2)(a) are not satisfied. It follows the applicant has not proved the sale of Unit 1 is an input taxed supply.

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PASSING ON ISSUE

54. On the basis of the conclusion set out above, there has been no overpayment of GST on the sale of Unit 1. Accordingly, the passing on issue only arises for Unit 3.

55. However, in case I am wrong, I have considered the passing on issue in respect of both units. The following discussion is premised, contrary to my conclusion, upon the sale of Unit 1 being input taxed.

The applicable principles

56. I have considered the application of the passing on provisions in s 142-10 in two previous matters:
M3K Services Pty Ltd and Commissioner of Taxation^[19] (2021) 113 ATR 995 ; [2021] AATA 4416 . and
WYPF and Commissioner of Taxation.^[20] (2021) 113 ATR 724 ; [2021] AATA 3050 . Rather than repeat in similar terms what I said there, I have set out relevant extracts below.^[21] [CCH note: relevant extracts not provided] There has been no other court or tribunal decision concerning these provisions.

57. The High Court considered the passing on provisions in the former sales tax legislation in
Avon Products Pty Ltd v Commissioner of Taxation.^[22] (2006) 230 CLR 356 ; [2006] HCA 29 . In that regard, I noted in WYPF that:

The High Court observed that it is in the nature of sales tax for its economic burden to be passed on rather than borne by the entity liable to remit the tax. Similarly, the scheme of GST law, like value added tax regimes around the world, is for the burden of the tax to be borne by the consumer. This does not mean that [excess] GST must always be regarded as passed on. Section 142-10's reference to passing on would be otiose if that were the case.

In Avon Products, though, the High Court pointed out that:

… once it is appreciated that it is in the nature of sales tax to be passed on, there is nothing remarkable in the consequence that proof to the contrary will occur comparatively seldom.

These observations suggest it will be a rare case in which [excess] GST is not passed on to a customer. However . . . my task remains to determine whether the applicant has discharged its burden of proof based on the evidence before the Tribunal. In other words, while it may be a rare case in which a taxpayer succeeds in showing excess GST was not passed on, the hurdle the applicant must leap to discharge the burden of proof on this issue remains the civil standard of the balance of probabilities. Nevertheless, I am mindful of the High Court's observations.^[23] (2021) 113 ATR 724 ; [2021] AATA 3050 , [56]-[58].

(Footnotes omitted.)

58. I also observed in WYPF that:

Strictly speaking, to observe that GST is usually passed on does not greatly advance an understanding of whether an amount that is not GST has been passed on. However, since passing on only arises as an issue in respect of amounts that were never payable as GST (or sales tax as the case may be), it seems to be implicit in such statements that amounts wrongly treated as GST but not payable as such are also usually passed on.

Even so, it does not follow that that principle leads inexorably to a conclusion that an amount that was never payable must be taken to have been passed on. The design of the [GST] regime is premised upon the burden of GST being borne by consumers. It is not premised on amounts that are not GST being borne by consumers.^[24] (2021) 113 ATR 724 ; [2021] AATA 3050 , [66]-[67].

(Footnotes omitted.)

59. I adopted and applied these principles in the M3K Services case.

60. However, Mr Jones submitted for the applicant that the Tribunal should reject reliance on sales tax cases as sales tax was imposed under its own legislation that is completely different to the GST legislation. I accept, as the applicant submitted, the GST legislation must be construed and applied according to its own terms.

61. Mr Jones pointed to a number of aspects in respect of which he submitted sales tax differed from GST. One was "transparency" in relation to which I took Mr Jones to mean GST is visible to the customer when a tax invoice is issued. There are several answers to that submission.

62. First, sales tax was visible when payable on wholesale sales.^[25] Sales Tax Assessment Act 1992 (Cth), s 125 required sales tax to be specified on invoices for wholesale sales. Secondly, for GST purposes tax invoices are not required for all sales. For example, they are not required for low value sales.^[26] Section 29-80. Relevant to the current context, GST is not required to be displayed on

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a tax invoice for a sale under the margin scheme.^[27] Section 75-30. The sales of the units under the margin scheme are, in that respect, analogous to the retail sales considered in Avon Products: tax invoices showing GST were not required for the units and invoices showing sales tax were not required for Avon's sales.

63. In any case, to the extent there is any difference in transparency, I am unable to discern a reason why that difference should detract from the force of the High Court's observations in the GST context.

64. Secondly, Mr Jones pointed out that for income tax purposes GST is generally "stripped out" and disregarded when calculating assessable income and allowable deductions.^[28] Income Tax Assessment Act 1997 (Cth), ss 17-5, 27-5. Similarly, Mr Jones referred to, without citing, accounting standards under which GST is generally disregarded when calculating profit.

65. Again, I am unable to see how this detracts from the relevance of the High Court's observations in Avon Products. GST on a taxable supply of real property by a developer is a liability of the developer. The amount of GST payable by a developer is plainly of financial significance to the developer. This case would otherwise not be before the Tribunal.

66. Regardless of the income tax and accounting treatment, it is plain that an entity with a GST liability will incur a cost in meeting that liability. There is nothing in the nature of GST that relevantly distinguishes it in that regard from other costs of doing business. If an entity does not recover its costs, it will make a loss. Absent some special circumstances, a rational entity will seek to recover all costs it understands it will incur in carrying on its enterprise including amounts it understands it will be liable to pay as GST.

67. Sales tax was, like GST, a consumption tax the economic burden of which is intended to be borne not by the taxpayer but by the consumer. Mr Jones did not deny the passing on provisions are similar. In my view, the applicant did not identify a relevant difference between the taxes that would mean the High Court's observations in Avon Products, based as they plainly were on the high-level nature of the tax as a consumption tax, should not apply equally to GST.

68. Consistent with the approach adopted in the WYPF and M3K Services cases, I take into account the principles outlined above in the resolution of this matter.

The contractual terms

69. The parties' submissions regarding the passing on issue were primarily founded in the relevant terms of the contract of sale.

Unit 1

70. The general conditions of the contract for the sale of Unit 1 include:

13.1 The purchaser does not have to pay the vendor any GST payable by the vendor in respect of a taxable supply made under this contract in addition to the price unless the particulars of sale specify that the price is 'plus GST'. . .

13.2 The purchaser must pay to the vendor any GST payable by the vendor in respect of a taxable supply made under this contract in addition to the price if the particulars of sale specify that the price is 'plus GST'.

13.6 If the particulars of sale specify that the supply made under this contract is a 'margin scheme' supply, the parties agree that the margin scheme applies to this contract.

71. Beside the sale price, the following was inserted in handwriting:

(inc. of GST)

72. The particulars of sale in the contract for the sale of Unit 1 also include:

The price includes GST (if any) unless the words "plus GST' appear in this box.	[No words inserted.]
If the margin scheme will be used to calculate GST then add the words ' margin scheme' in this box.	Margin Scheme

Unit 3

73. The general conditions of the contract for the sale of Unit 3 are identical to those set out above for Unit 1.

74.

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However, unlike the Unit 1 contract, the Unit 3 contract does not include any reference to GST beside the sale price.

75. The particulars of sale include:

The price includes GST (if any) unless the words 'plus GST' appear in this box.	[No words inserted.]
If the margin scheme will be used to calculate GST then add the words ' margin scheme' in this box.	MARGIN SCHEME

76. As noted above, both parties relied upon the contractual conditions in support of their submissions on the passing on issue. I am not convinced those terms support either submission with the force the respective parties submitted.

77. I accept, as the applicant submitted, the contractual terms mean the applicant carried the risk of GST being payable. If either sale attracted GST, the applicant as vendor would bear that cost, albeit the GST would be calculated under the margin scheme.^[29] This is plain from the terms of the contracts and confirmed in the following case concerning standard real estate contracts in Victoria cited by the applicant: Duoedge Pty Ltd v Leong [2013] VSC 36 , [22].

78. However, I do not accept, as the applicant submitted, that it must follow the excess GST could not have been passed on to the purchaser in each case. The standard contractual terms merely prevent the vendor from adding an amount for GST. In my view, they shed no light regarding whether excess GST was recovered in the agreed price. They are certainly not sufficient in themselves to discharge the applicant's burden of proving the excess GST was not passed on to the purchasers.

79. The applicant also submitted that, if the sales were input taxed, no GST was payable and therefore no GST could be passed on to the purchasers. That is undoubtedly correct. However, Subdivision 142-A is not about passing on GST. It is about passing on an amount that was incorrectly treated as if it were GST.

80. On the other hand, at least in respect of Unit 3, I do not find particularly persuasive the Commissioner's submission that, since the contract price is inclusive of any GST payable, and the parties agreed the margin scheme would apply, the parties have necessarily "turned their minds" to whether GST was considered to be payable.

81. In my view, clauses of this kind need to be considered in their context as standard conditions. When the standard conditions are completed in the way the parties have for Unit 3, they may signify no more than that, if GST is payable the vendor must bear the cost, but it may be calculated under the margin scheme.^[30] Although I do not rely on this as there was no evidence to this effect, I would be surprised if there are not countless contracts completed in this way where the purchaser would have had no regard to whether GST is in fact payable on the sale or whether the price includes an amount for GST. That is because the purchaser has the benefit of a fixed price contract; the vendor is not able to add an amount for GST to the contract price. A purchaser acquiring residential premises for their own occupation or to rent out, would be indifferent to whether GST is payable or the margin scheme is applied. The vendor has the comfort that, if GST turns out to be payable, it would be calculated concessionally under the margin scheme.

82. The Commissioner's point is more persuasive in respect of the Unit 1 contract where the reference to GST has been added in handwriting. That suggests, as the Commissioner submits, the parties have turned their minds to GST, though whether out of abundance of caution rather than in anticipation of GST being payable, or in error, cannot be determined.

Sales were at market value

83. The applicant's directors, Mr John Dals and Mrs Magdalena Dals, provided witness statements. Mr Dals appended statements by the purchaser of Unit 1 and the real estate agents who marketed each unit to the effect that the sales prices represented the market value of the units.

84. It may be doubtful whether the purchaser of Unit 1 is qualified to give such evidence. Additionally, neither that purchaser nor the real estate agents were made available for cross examination. I have therefore afforded no weight to these statements.

85. However, there is no suggestion the sales were other than at arm's length. The evidence of Mr Dals, which I accept, was that the advertised price for Unit 1 was based on advice from the agent who sold two other units on the same floor of the development and Mr Dals undertook his own market research and took into account the previous sales to determine the advertised price for Unit 3.^[31] Transcript, P-25, lines 14-20.

86. As arm's length sales, I accept the prices achieved for the units fell within a range representing their market value.

Other evidence regarding GST

87. The applicant did not issue a tax invoice for either sale. This feature of the evidence

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carries little weight in relation to the passing on issue. As noted above, a tax invoice is not required if GST is calculated under the margin scheme. Further, s 142-25 provides that passing on may occur even if a tax invoice is not issued.

88. Mr Dals stated that:

On entering into the contracts for sale of Unit 1 and Unit 3, I assumed that no GST would be payable by either of the purchasers . I further was advised by my accountant at that time that if the Dals Trustee had to pay GST on the sale of Unit 1 or Unit 3 it would be calculated using the Margin Scheme. (Emphasis added.)^[32] Witness Statement of John Dals, 14 December 2021, [16].

89. I accept this evidence. It is consistent with the terms of the contracts. I also accept that Mr and Mrs Dals had, as they stated in their evidence, limited knowledge of GST. They relied on advice from the applicant's accountants as to when and how much GST would be payable.

90. Mr Dals went on to state:

On or about 21 February 2020, I discovered that, based on the exemption available for Unit 1 and Unit 3, the sales were of residential premises and not subject to GST. Unfortunately, prior to this discovery, I had caused business activity statements to be lodged on behalf of the Dals Trustee for the periods ended 1 March 2017 [I assume Mr Dals meant 31 March 2017] and 30 June 2017 respectively. Those business activity statements incorrectly recorded GST payable by the Dals Trustee on the sale of Unit 1 in the sum of $96,927, and Unit 3 in the sum $69,582.^[33] Witness Statement of John Dals, 14 December 2021, [17].

91. I also accept this evidence.

92. Submissions made on behalf of the applicant sought to characterise the error in the returns as a "reporting error". I accept that characterisation so far as it indicates the amounts were reported in error. However, it is important to note the errors were not, for example, in the nature of a mere keying error. In the context of a small business, the amounts are significant, and it must be inferred were reported deliberately based on the view, later found to be mistaken, that GST was payable.

93. Although Mr Dals gave evidence that in setting the selling prices he only took into account what the market would pay,^[34] Transcript, P-25, Lines 22-24. it is reasonable to infer the applicant's directors were aware there would be significant GST on the sales of Units 1 and 3 when pricing the units for sale or at least when determining the respective offers to purchase would be accepted. On any view, the liabilities which I have inferred Mr Dals understood to be payable were significant amounts which would have a material impact on the net return to the applicant. The applicant had paid GST on earlier sales of units in the development and so must be taken to have understood that significant GST would have been payable on the sales of Units 1 and 3. Even if the applicant did not calculate the (understood) GST liability with precision, the directors must have had in mind that the applicant would be liable for substantial amounts of GST.^[35] I raised with Mr Jones the prospect of the Tribunal drawing such an inference. Mr Jones confirmed that the applicant did not submit I should not draw the inference, but rather that any such inference in the applicant’s submission would be irrelevant to the passing on issue.

Pricing and profit

94. Mr Dals gave evidence the units were put on the market when he considered the applicant could achieve prices that covered all costs. As in the M3K Services case, the applicant did not seek to prove and did not prove the prices achieved did not cover all anticipated costs including the (erroneously) anticipated amounts for GST calculated under the margin scheme. Rather, Mr Dals confirmed that, apportioning the costs on a per square metre basis, the applicant achieved a small profit on each sale.^[36] Transcript, P-18, 1-46.

95. It is clear the prices achieved for both units covered all costs the applicant understood it would incur including substantial amounts for what turned out to be excess GST.

Windfall to the revenue?

96. The applicant also submitted that:

Refusal to make a refund would give the Commissioner a windfall administratively, as there is no underlying taxable supply only administrative error in completion of the BAS statement.^[37] Applicant’s Further Amended Statement of Facts Issues and Contentions and Analysis, [28.5].

97. In my view, that submission does not assist the applicant. If excess GST has been passed on by a supplier to the recipient of a supply and not reimbursed, inevitably there will be a windfall to either the supplier or the revenue. Refunding the excess GST to the supplier would result in a windfall to the supplier. If the excess GST is not refunded, the

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revenue would enjoy the windfall. It is clear from s 142-10 that in such circumstances Parliament has chosen the revenue as the beneficiary of the windfall.

Conclusion - applicant has not proved it did not pass on excess GST

98. The High Court, upholding the majority decision of the Full Federal Court in the Avon Products case, said:

The essence of the majority decision was correctly identified in this Court by the Commissioner as being that, where the facts disclose that the taxpayer has set prices at a level to ensure they exceed cost (including sales tax), it will be difficult for the taxpayer to satisfy its onus . . . to show that it has borne the burden itself.^[38] (2006) 230 CLR 356 ; [2006] HCA 29 , [21].

99. Noting those observations, because the applicant sold the units at prices that ensured they exceeded their costs (including substantial amounts erroneously understood to be payable as GST), it faces a difficult challenge in proving it has borne the burden of the excess GST itself.

100. I have explained why I consider the applicant's primary submission, that the contract required the applicant to meet any GST payable without adjustment to the price, does not mean the applicant necessarily bore the economic burden of the excess GST. Similarly, I have explained why I have rejected the submission that, because the sales were input taxed supplies, there was no GST payable and therefore could be no excess GST passed on. There is nothing else in the evidence that persuades me the applicant has proved the excess GST was not recovered in the selling prices of the units.

DISPOSITION OF REVIEW

101. It follows from these conclusions that the objection decision under review must be affirmed.^[39] Since the applicant has undergone a name change since the commencement of the review, I will also direct that the record of its name be updated.