SUNCHEN PTY LTD (AS TRUSTEE OF THE SUNCHEN FAMILY TRUST) v FC of T

Members:
J Block DP

Tribunal:
Administrative Appeals Tribunal, Sydney

MEDIA NEUTRAL CITATION: [2008] AATA 838

Decision date: 19 September 2008

---

J Block (Deputy President)

Part A - preliminary and background

1. The objection decision under review in this matter is the disallowance by the Respondent (on 8 June 2007) of an objection (dated 7 February 2007) by the Applicant against a GST assessment referable to the quarter commencing 1 July 2006 and ending on 30 September 2006 ("the relevant quarter").

2. The Applicant was represented by Mr D E Perrignon of counsel instructed by Jordan Antonopoulos & Co, solicitors, while the Respondent was represented by Mr M A Wigney SC and Mr D F C Thomas of counsel, instructed by the Australian Government Solicitor.

3. The Tribunal had before it the T documents lodged pursuant to s 37 of the Administrative Appeals Tribunal Act 1975; it also admitted into evidence exhibits as follows [not reproduced]:

Exhibit A1:	An affidavit dated 29 February 2008 by Jian Wei (David) Sun (referred to henceforth in these reasons as "Mr Sun"); Exhibit A1 includes its own (lengthy) exhibits marked JWS 1 and JWS 2 respectively;
Exhibit A2:	A further affidavit dated 14 April 2008 by Mr Sun;
Exhibit A3:	A contract dated 23 March 2007 for sale of land between the Applicant as vendor and Designation B Pty Limited as purchaser of the land situated at 117 Bridge Street, Port Macquarie and contained in Folio Identifier 4/594052 (referred to henceforth in these reasons as "the Property");
Exhibit A4:	A letter dated 23 October 2007 from the Applicant's solicitors Jordan Antonopoulos & Co to Baron & Associates, enclosing a notice of termination of the contract referred to in Exhibit A3;
Exhibit A5:	A letter dated 31 October 2006 from the Applicant's solicitors Jordan Antonopoulos & Co to The Professionals in Port Macquarie;
Exhibit A6:	An undated (draft) contract for the sale of the Property prepared by the Applicant's solicitor; it differs from Exhibit A3 in that it refers to the Vendor's Agent as Professionals Real Estate Port Macquarie, whereas Exhibit A3 refers to the Vendor's Agent as "Nil";
Exhibit A7:	A third affidavit by Mr Sun dated 8 September 2008;
Exhibit A8:	An affidavit by Mr Jordan Antonopoulos dated 8 September 2008;
Exhibit A9:	An affidavit by Ms Elaine Elsey dated 5 September 2008; and
Exhibit R1:	A witness statement dated 25 March 2008 by Ms Susan Kendall who is employed by the Respondent.

4. Some of the documentation before the Tribunal refers to the Applicant as the Sunchen Family Trust, while other documentation refers (correctly) to the Applicant in the manner set out on the decision page forming part of these reasons.

5. The Respondent's Statement of Facts and Contentions ("SoFaC") dated 9 April 2008 includes a section entitled "Part 1; Facts." Paragraphs 1 to 11 in that Part 1 do not appear to include anything which is in material dispute and it is convenient to include them in these reasons as follows:

"…

Purchase of property

• 1. The applicant is an Australian company, registered for GST and lodges its business activity statement quarterly on a cash basis.
• 2. By a contract for the sale of land exchanged and dated 8 August 2006 (' Contract '), the applicant purchased a property located at 117 Bridge Street, Port Macquarie, in the State of New South Wales (' Property ') from Dable Holdings Pty Limited (' Dable ').
• 3. The Contract:
  • 3.1 specified the date for completion as 20 September 2006;
  • 3.2 stated that the purchase price for the Property was $525,000, inclusive of GST;
  • 3.3 was expressed to be subject to existing tenancies;
  • 3.4 stated that, in the event the Property was zoned for residential purposes, or was used predominantly for residential purposes, the applicant warranted that it did not have any intention to change the use of the property (Special condition 16).
• 4. At the time of settlement of the contract:
  • 4.1 a single storey house with car port was located on the Property.
  • 4.2 the Property was subject to a continuing residential tenancy agreement;
  • 4.3 the Property was the subject of an approval for its development into a five storey residential flat building with strata subdivision (' DA '), which had been issued to Dable on 22 December 2005 by Port Macquarie-Hastings Council. (The benefit of Dable's interest in the DA, together with all rights in respect of plans and other documents relating to the DA, was assigned to the applicant under the Contract (Special condition 18));
  • 4.4 the applicant desired, at some future time, to develop the Property in accordance with the DA, depending on a variety of financial and other considerations.
• 5. The Property has not been developed in accordance with the DA.
• 6. The Property has continued to be leased to one or more residential tenants up to the present day.

  Claim for input tax credits and subsequent disallowance

• 7. In its business activity statement for the quarter ending 30 September 2006, the applicant claimed an input tax credit of $47,807, which comprised $47,727 in respect of the purchase of the Property and $80 in respect of other acquisitions.
• 8. On 25 January 2007, the Commissioner disallowed the applicant's claim for an input tax credit of $47,727 in respect of the purchase of the Property. On 31 January 2007, the respondent issued a notice of assessment of GST net amount for the period 1 July 2006 to 30 September 2006 (' Assessment '), which resulted in a debit adjustment of $47,277 to the applicant's GST account.
• 9. On 7 February 2007, the applicant objected to the Assessment.
• 10. On 8 June 2007, the Commissioner has disallowed the objection (' Objection Decision ').
• 11. By Application for Review of Decision dated 7 August 2007, the applicant seeks the review of the Objection Decision.

…"

6. It is convenient also in these reasons to utilise the definitions contained in Part 1 of the Respondent's SoFaC (as referred to above) and so that words and phrases defined in that document have (unless the context expressly otherwise requires) the same meanings when used in these reasons.

7. Oral evidence was given only by Mr Sun, and, as will be noted, on two separate occasions. Ms Kendall was not required for cross-examination and so that her evidence as set out in Exhibit R1 can be accepted. Mr Antonopoulos and Ms Elsey were also not required for cross-examination; the content of their affidavits was of little assistance to the Tribunal.

8. This matter was heard on three days; 15 April 2008, ("first hearing day") 27 June 2008 ("second hearing day") and 10 September 2008 ("third hearing day"). References in these reasons to the transcript (TS) refer to the transcript for the hearing on the first hearing day.

9. Although the size of the documentation before the Tribunal is very large indeed, the issue to be decided by the Tribunal falls within a narrow compass. That issue turns on the interpretation of s 40-65 of A New Tax System (Goods and Services Tax) Act 1999 ("the Act") which reads as follows:

"…

Sales of residential premises

• (1) A sale of real property is input taxed , but only to the extent that the Property is residential premises to be used predominantly for residential accommodation (regardless of the term of occupation).
• (2) However, the sale is not input taxed to the extent that the *residential premises are:
  • (a) commercial residential premises; or
  • (b) new residential premises other than those used for residential accommodation (regardless of the term of occupation) before 2 December 1998.

…"

10. Section 40-65 of the Act must be read in conjunction with the definition of "residential premises" contained in s 195-1 of the Act, as follows:

"…

"residential premises" means land or a building that:

• (a) is occupied as a residence or for residential accommodation; or
• (b) is intended to be occupied, and is capable of being occupied, as a residence or for residential accommodation;

(regardless of the term of the occupation or intended occupation) and includes a *floating home.

…"

11. The issue in succinct terms turns on the question of whether the Applicant was entitled to an input tax credit in respect of its acquisition of the Property. It will not be entitled to an input tax credit (and the acquisition in question will be input taxed), where (subject to the provisions of section 40-65) it related to residential premises as defined in s 195-1 of the Act.

12. Considering, as the Tribunal must, the definition of residential premises in the context of s 40-65 of the Act, it can readily be seen that (subject to s 40-65(2) of the Act), a sale of residential premises is input taxed where it falls within the definition but only where the residential premises are "to be used predominantly for residential accommodation (regardless of the term of occupation)".

13. Oral evidence was, as set out previously, given (on the first hearing day) by Mr Sun. Although he was given the assistance of an interpreter in the Mandarin language, it soon became apparent that he had little need of her services and his evidence proceeded on the basis that her services would be used only as required. In fact her services were needed on comparatively few occasions only. On the third hearing day Mr. Sun again gave evidence, although briefly, and the provisions of this paragraph 13 apply also to his evidence on the third hearing day, and notwithstanding the fact that a different interpreter in the Mandarin language was employed.

14. It is convenient at this juncture to note that the Property was purchased pursuant to the Contract on 8 August 2006 from Dable. In accordance with the Contract, the price was $525,000 (GST inclusive); the Property was purchased subject to a lease in favour of a sitting tenant whose right of occupation then had some four months to run and it was purchased inclusively of the development application ("DA") which related to the construction of 10 units. Having regard to paragraph 8 of the SoFaC (quoted previously in these reasons), the Tribunal is concerned only with the question of whether or not the Applicant is entitled to an input tax credit of $47,727 in respect of its acquisition of the Property and not with any other amounts which were referred in the Applicant's GST return for the relevant quarter.

Part B - the evidence of Mr Sun; evidence in chief on the first hearing day

15. Although Mr Sun was asked a few questions in chief, his evidence in chief consisted to a large extent of his confirmation of the contents of Exhibits A1 and A2 which, without the exhibits referred to in Exhibit A1, are attached to these reasons and marked with the letters "A" and "B" respectively.

16. Exhibit A1 includes two large exhibits marked JWS1 and JWS2 and they are referred to by reference to those markings.

17. Mr Sun said that his occupation was that of a manager in respect of building construction.

18. Mr Sun said (TS 14) that when the Applicant acquired the Property, it intended to develop it. He went on to say (TS 15) that he expected that construction would commence "around - after six months".

19. Mr Sun said that in order to proceed with the construction the Applicant needed an engineering plan and council approval in order to build 10 residential units in accordance with the DA. Mr Perrignon referred Mr Sun to special condition 16 of the Contract (p81 of JWS1 attached to Exhibit A1) and which reads as follows:

"…

• 16. In the event that the subject property is zoned for residential purposes, or is used predominantly for residential purposes, then the purchaser hereby warrants at the time of entering into this Contract that the purchase does not have any intention to change the use of the Property. Should the vendor incur any Goods and Services Tax (GST) liability arising out of a change of use of the Property by the purchaser then the purchaser shall indemnify the vendor in relation to the amount of such liability together with any interest, fines, costs and expenses incurred by the vendor in connection with the change of use and imposition of such GST liability. This clause shall not merge on settlement but continue for the benefit of the vendor.

…"

20. Mr Sun said because the Applicant intended to develop the Property by constructing residential units, he did not believe that the Applicant was "going against the warranty in this section" (TS 18). As he put it, the fact that the Property was to be developed by the construction of residential units and not as an office block, had the effect that the Applicant was not in breach of special condition 16 of the Contract.

Part C - the cross-examination of Mr Sun on the first hearing day

21. Mr Sun agreed that the Contract was prepared by the Applicant's solicitors in accordance with instructions given by him; he agreed in particular that he was aware of all of its terms and including in particular special condition 16.

22. Mr Sun agreed (although somewhat hesitantly) that he knew that the Property was the subject of a residential lease, that he was aware of its terms and that the tenancy would expire on 29 November 2006. Mr Sun referred to the relevant period after purchase as two months (TS 22); it is likely that he intended in this context to refer to the period between completion of the Contract (on 20 September 2006), rather than execution of the Contract, and the date of termination of the tenancy.

23. Mr Sun agreed that the purchase of the Property was inclusive of a list of items included in the purchase and including in particular clothes line, air conditioner, dishwasher, fixed floor coverings and items of a like or similar nature (TS 23).

24. Mr Sun agreed also that pending the development, the Applicant wished to derive income from the renting out of the Property (TS 24).

25. Mr Sun was then asked whether the Applicant had sufficient money to enable it to develop the Property without obtaining external finance. His answer was "possibly". When asked the form of the assets of the trust were in, his answer was "borrow from my personal" (TS 24), and he amplified that statement by saying that he intended to "borrow from my bank".

26. Mr Sun agreed that the Applicant could not develop the Property without borrowing. He agreed also that the Applicant had not secured any finance for the purpose of the development and moreover that the Applicant had not taken any steps to do so.

27. Mr Sun said that he could not approach his bank until he obtained a quotation from a builder as to the amount which would be required to undertake the development.

28. It was then put to Mr Sun that in order to obtain finance he would have to demonstrate some sales off the plan. Mr Sun disagreed; his answer at lines 38 to 41 of TS 26 was as follows:

"…

THE WITNESS:

If my company have a 30 per cent to 40 per cent, I don't need to have a pre-sale. I can borrow from the bank. If we don't have the money, 100 per cent borrowed from construction, we have the pre-sale. If we have 30 to 40 per cent in my account, I don't have a pre-sale.

…"

29. Mr Sun agreed that at the time of the purchase, the Applicant did not have 30 to 40 percent of the anticipated development costs and which he thought would be in the region of $2.5 million. He said also that when the Property was acquired for $525,000, mortgage finance amounting to $420,000 was obtained from Westpac Bank in order to complete the purchase.

30. Further evidence by Mr Sun indicated that one month after acquisition, the Applicant had made no efforts to obtain finance. He agreed that the Applicant knew that it would, in order to carry out the development, need to obtain finance (TS 30).

31. Further cross-examination of Mr Sun indicated that by December 2006 he had in mind that finance might be obtained by the sales of other property owned by the Applicant. He went on to say that finance might be obtained through sales or as an alternative there might be presales off plan.

32. A lengthy cross-examination then ensued as to what steps were taken as to the raising of finance through sales of other property. The answers were confused; at one stage Mr Sun said that properties had been sold; the Tribunal refers in this context to TS 33, lines 4 to 45 reading as follows:

"…

MR WIGNEY:	To obtain, to use towards the development of this property.
THE WITNESS:	Part of. Like time we don't know how much total it costs, so we put it on the market, sell my property. If sell the property, I can develop that property. Part of the money to come in to develop the property.
THE D.PRESIDENT:	Well, you say it did sell other property. What other property did this company sell at that time?
THE WITNESS:	Other units.
MR WIGNEY:	Other units in a different land - bit of land altogether. Is that right?
THE WITNESS:	Yes, we put it on the market so other unit on a sale.
THE D.PRESIDENT:	You say you put it on the market or it sold?
THE INTERPRETER:	No, we haven't sold them yet.
THE D.PRESIDENT:	You said a moment ago, "It did sell other property". Have I recorded that answer wrongly? Did you not say that?
THE INTERPRETER:	Just for sale, but not yet sold.
THE D.PRESIDENT:	What was - it had put property for sale, but it hadn't sold.
THE WITNESS:	Yes.
THE D.PRESIDENT:	Just put that in Mandarin, please?
THE INTERPRETER:	That is, we put the properties on the market for sale, but not sell them yet.
THE D.PRESIDENT:	Units where? Where were these other units which were on the market?
THE INTERPRETER:	Sydney, Port Macquarie.
THE WITNESS:	Maryland.
THE D.PRESIDENT:	Sydney, Port Macquarie, and Maryland.
THE WITNESS:	Yes.

…"

33. Further and in the same context the Tribunal refers to from line 15 on TS 35 to line 10 on TS 36 reading as follows:

"…

MR WIGNEY:	Well, let's limit it in - let's accept that for the present. In the six months from the time that you entered into the contract, to the end of the year, you entered into the contract in August. So let's just say, from August, when you executed the contract, up to the end of the year 2006, you knew that the position was that the company was not able to develop in accordance with the development application without obtaining bank finance or finance from a finance institution, correct?
THE D.PRESIDENT:	Could we have that translated, please? The question is - this is the first proposition: in the period of six months from the time of the contract, that is, in August, the company could not develop without obtaining finance.
THE INTERPRETER:	Yes.
MR WIGNEY:	And, in fact, that continued to be the case throughout 1997, that's correct, isn't it? That you knew that, all the way through - I'm sorry 2007, that the company was not in a position to fund this development, that is, the development in accordance with the DA, unless it obtained finance from the bank. Right?
THE WITNESS:	Yes.
MR WIGNEY:	As I understand the evidence you gave before, you understood throughout the time period that, for the company to get finance, you had to do one of two things: either demonstrate pre-sales of the units, or demonstrate that you had 30 to 40 per cent of the estimated two and half million development costs in the bank. Is that right?
THE WITNESS:	Yes.
THE INTERPRETER:	Yes.
MR WIGNEY:	Now, let's just take each of those in turn. If you elected to make pre-sales so that you could get finance, the position was making pre-sales of such units very much depended on the state of the property market, relevantly, in the Port Macquarie area, correct?
THE WITNESS:	Yes.
MR WIGNEY:	And, in fact, the position was that, at least by the end of 2006, you had been made aware of the fact that the property market in the Port Macquarie area was not particularly favourable for the making of pre-sales, right?
THE WITNESS:	Yes.

…"

34. Mr Sun agreed that construction could not take place without a construction certificate. Mr Sun was then referred to conditions contained in a letter from Port Macquarie Hastings Council (pp 53 and following of JWS1), which would have to be complied with in order to obtain the necessary construction certificate. Those (numerous and in some respects onerous) conditions are contained in pp 54-59 of JWS1 and which are attached to these reasons (to avoid burdening the body of this decision unduly) and marked with the letter "C" .

35. It was put to Mr Sun that there were a large number of matters to be done in order to obtain a construction certificate. Mr Sun said that he did not agree. The Tribunal refers in this context to the transcript starting with line 4 on TS 39 and ending with line 15 on TS 40 as follows:

"…

MR WIGNEY:	And just to be precise, if you go to the bundle in front of you to page 53, you'll see there's a letter from the Port Macquarie Hastings Council which encloses, in the following pages, the schedules of conditions relevant to the development approval? Correct?
THE WITNESS:	Yes.
MR WIGNEY:	And often obtaining a construction certificate involved a large number of things that you had to do. Correct?
THE WITNESS:	Yes.
MR WIGNEY:	And in this particular case, that is this particular development approval, before a construction certificate was issued, the company, as the proposed developer, had to do a large number of things, didn't it?
THE WITNESS:	No.
MR WIGNEY:	You don't agree with that?
THE WITNESS:	No.
MR WIGNEY:	Well, if you go to -
THE WITNESS:	I will -
MR WIGNEY:	No. No. No, just wait, please, sir. Page 54 you'll see, under General Matters, numbered paragraph 2 says:
	No work shall commence until a construction certificate has been issued and the applicant has notified Council of the appointment of the principle certifying authority and the date on which work will commence.
	Do you see that? The question is, do you see that numbered paragraph 2 on page 54 basically says, "You can't commence any work until the construction certificate has been issued and you've notified Council of some things." Do you see that there?
THE WITNESS:	Yes.
MR WIGNEY:	And if you go over the page, towards the bottom of the page there's a subheading, Prior to Issue of a Construction Certificate, and then you will see one numbered paragraph on that page and then, if you go to page 56 you'll see a series of other paragraphs; 57, page 58, page - all the way though to two-thirds of the way down page 59, each of those paragraphs containing a detailed list of things that you, as the proposed developer, would have to attend to before a construction certificate was issued. Correct?
THE WITNESS:	I'm not agree.
MR WIGNEY:	I'm sorry?
THE WITNESS:	I'm not agree with your talk to me this - I - my way, I find the builder, I leave it to the builder to do these things, I can't do this.
MR WIGNEY:	Okay. So you didn't turn your mind, yourself, to exactly what you had to do to get a construction certificate.
THE WITNESS:	Yes, but all my job is - like, I found the builder, I pass the DA condition; the builder have to look through all that documentation and doing the job.

…"

36. The answers set out previously then led to cross-examination of Mr Sun as to evidence given by him previously. It was put to him that he had told the Tribunal that he was an experienced property developer. His answer was "no I am not". The ensuing cross-examination again resulted in confused answers; see in particular the passage from the transcript which commences with line 15 on TS 44 and ends with line 27 on p45 as follows:

"…

MR WIGNEY:	Yes. Well, just go to page 1 of your first affidavit, that's the one dated 29 February 2008. And you see paragraph 2, on the third line down, there's a sentence that reads:
	The Sunchen Family Trust is a trading trust which carries on business as a property developer.
	Do you see that?
THE WITNESS:	Yes.
MR WIGNEY:	Well, you had no trouble when you signed this affidavit and agreed with Mr Perrignon that it was true, with that proposition, did you?
THE WITNESS:	But the meaning -
MR WIGNEY:	No, listen. When you signed this, that contained that sentence and you had no problem in signing the affidavit and attesting to its truth with that statement in there, correct?
THE WITNESS:	That's why I ask you is what does developer mean? Developer including - what's including?
MR WIGNEY:	Well, Mr Sun -
THE WITNESS:	Soon as you tell me what's including, I can answer your question.
MR WIGNEY:	Sir, this is your affidavit, right?
THE WITNESS:	My meaning that developer is like I buy property, I get a build it, I sell them, I say yes.
MR WIGNEY:	This is your affidavit, isn't it? The document, 29 February -
THE WITNESS:	Yes.
MR WIGNEY:	You read over it and you've attested to its truth, correct?
THE WITNESS:	Yes.
MR WIGNEY:	And it said:
	The Sunchen Family Trust is a trading trust which carries on business as a property developer.
	What I'm asking you is why you said that in the affidavit and yet you have difficulty agreeing with that proposition before the learned Deputy President. Do you understand my question?
THE WITNESS:	Okay, yes.
MR WIGNEY:	Well, why do you have difficulty agreeing now, in the witness box, that Sunchen carried on business as a property developer?
THE WITNESS:	I just tried to make sure your developer mean, what exactly mean, what's included.
MR WIGNEY:	Okay.
THE WITNESS:	For my developer mean is I buy the property, I build up with my builder, I sell it, so I'm developer.

…"

37. Mr Sun agreed that to obtain a construction certificate can take a long time and that the process can be very expensive (TS 46). It became clear that the Applicant had done virtually nothing in respect of compliance with the necessary conditions.

38. Further cross-examination indicated that the Applicant had talked to a builder but had done little else. Mr Sun said (TS 54) that after the lapse of a lengthy period nothing much had been done for two reasons. One reason was that the property market was going down. The other reason was that "somebody want to buy my property" (TS 54). Mr Sun agreed that throughout the period the same tenant remained in occupation (and indeed the same tenant is still, some two years later, in occupation of the Property).

39. Mr Sun said that in November 2006 an offer was received for the purchase of the Property for a price of $590,000. The Applicant accepted the offer but the sale did not proceed. Mr Sun was asked whether there was a contract of sale which did not complete and he answered "yes". When asked whether that contract document was included in the papers before the Tribunal, his answer was that it was not.

40. Further cross-examination resulted in Mr Sun telling the Tribunal that an offer was received in November 2006 and a contract was made in December 2006. It fell through because "they couldn't come up with the money" (TS 60).

41. Mr Sun's evidence thereafter as to the proposed sale was (and this is putting it kindly) confused. The purchaser, referred to by him as a Mr Simon, sought and obtained a number of extensions of time but was never able to complete the purchase. Mr Sun's evidence indicated that he still had hopes of concluding that sale and notwithstanding the fact that Exhibit A4 indicates in clear terms that the sale was cancelled by notice given on 23 October 2007.

42. Mr Sun was asked whether the Applicant had abandoned its intention to develop the Property and his answer was in the negative. He said that the Applicant was "waiting for the market to come back" (TS 62).

Part D - re-examination of Mr Sun on the first hearing day

43. Mr Perrignon commenced by showing Mr Sun a contract which is Exhibit A3 dated 23 March 2007 and where the purchaser is described as Designation B. He said that Designation B relates to the Mr Simon to whom he had referred earlier.

44. It may be noted that Mr Perrignon was permitted to re-examine on matters which had not been canvassed previously and which in other words had not been raised in evidence in chief. Here too the evidence was at times confused; it would appear that sums of money were from time to time paid by Designation B to keep the Contract which is Exhibit A3 on foot. The Tribunal refers here to lines 30 to 42 of TS 70 reading as follows:

"…

THE D.PRESIDENT:	You do remember that you did say that one of those extensions took you all the way up to December 2007?
THE WITNESS:	Yes. In December -
THE D.PRESIDENT:	But how could you be extending and terminating at the same time?
THE WITNESS:	They still want it. He say, "Keep it for me. I give you another ten grand." I said, "Okay." Like, after tomorrow, he would give me another 15,000 to keep it for him, don't sell to somebody else. So - so they gave me another 15,000 - I don't know if he gave it to me or not give it to me, I don't know.

…"

Part E - analysis of the evidence of Mr Sun on the first hearing day

45. It is nearly two years since the Property was acquired and the same tenant is still in occupation and at the same rental of $200 per week.

46. The Tribunal does not consider that the evidence of Mr Sun can be treated as reliable. It is clear that at the time of purchase the Property was acquired together with a DA and a sitting tenant who did not have a long lease. At the same time the Applicant did not have any clear intention as to what might occur in the future. The Applicant was possessed of other property but that other property appears to have been geared to a significant extent. The Property was purchased for $525,000 with the aid of a mortgage of $420,000 or in other words, a mortgage for a substantial proportion of the price.

47. Mr Sun started by describing himself as a property manager but under cross-examination, resiled from that description. His attitude was that he would have to rely on the builder. (Having regard to the considerable other property owned and developed over years by the Applicant, that statement cannot be accepted as truthful.)

48. To obtain a construction certificate was plainly an expensive and lengthy exercise; the Applicant has made virtually no effort to comply with the conditions and moreover, he has made little or no effort to obtain the finance which it needs.

49. Mr Sun has been in this country for a number of years and his English is fluent enough when he wants it to be so. His evidence as to other property owned by the Applicant indicates that he is experienced in the world of real property and including the development of real property.

50. At the end of the first hearing day the parties were given an opportunity to furnish submissions dealing with the evidence which had been heard. The Respondent thereafter furnished further submissions dealing in categoric terms with the evidence; the evidence to which the Respondent referred results in some (slight) degree of overlap with the evidence to which the Tribunal has referred in these reasons; clauses 6 and 8 of the Respondent's submissions are included in these reasons for the sake of completeness (although the Tribunal does not consider it necessary to include the actual content of the specific references) as follows:

"…

• 6. In cross-examination, Mr Sun stated that:
  • (a) At the time the Property was supplied to Sunchen (in September 2006) and during September, October and November 2006, he had given no thought to how he would finance the development of the Property: T29.1 - T30.22.
  • (b) In the six months from the date of completion of the contract of sale, the Property could not have been developed unless finance was obtained from a Bank: T35.34.
  • (c) In order to obtain finance, Sunchen would need either to have sold several of the proposed units 'off the plan' or sell several of its other investments: T30.46 - T31.30; T35.43.
  • (d) Sunchen's ability to sell units 'off the plan' was heavily dependent on the state of the property market in the Port Macquarie area: T36.4. Mr Sun had become aware, from at least the end of 2006, that that property market was not favourable to pre-sales: T36.10. He expected any sale of units 'off the plan' to take a considerable period of time: T37.9.
  • (e) Sunchen's ability to sell some of its existing properties to finance part of the development costs was also very dependent on the state of the property market: T37.35l T38.5. Mr Sun accepted that if the property market was not favourable, the sale of these properties could take a considerable period of time: T38.10.
  • (f) Work could not commence on the development until a construction certificate was obtained from Port Macquarie Hastings Council: T38.29.
  • (g) He would normally retain a builder to take the steps necessary to obtain a construction certificate: T40.14-15. Mr Sun spoke to a builder about obtaining a construction certificate but never formally retained anyone to do so: T40.33.
  • (h) It was potentially a very lengthy and expensive process to obtain a construction certificate and there was no guarantee that the Council would grant a certificate: T46.26-46; T47.37.
  • (i) Although he had talked to his builder and to an architect regarding likely costs for the work necessary to obtain a construction certificate, he had not taken (and has still not taken) any steps to retain people to complete that work: T50.26.
  • (j) The development of the Property did not proceed because: (a) the Port Macquarie property market deteriorated; and (b) a third-party had offered to purchase the Property but that sale did not go through: T54.30 - 55.47; T57.19-45.
  • (k) He presently has no intention to develop the Property until the property market recovers: T62.30.

  …

• 8. In cross-examination, Mr Sun stated that:
  • (a) He was aware that the Property was supplied to him subject to a continuing residential lease: T21.20-38.
  • (b) He had taken steps to ensure the Property was supplied to him with inclusions necessary for it to continue to be occupied by tenants: T22.35 - T23.36.
  • (c) He preferred that the Property was rented out to tenants rather than sitting unoccupied: T24.11. It was in the best interests of the Sunchen Family Trust for this to occur: T58.27.
  • (d) He intended, until the actual development of the Property commenced, to keep tenants in the Property: T22.40; T58.39; T60.12.

…"

51. The Applicant also furnished a document entitled "Outline of Applicant's Further Submissions" in which it dealt with the law but not with the evidence which had been given by Mr. Sun.

Part F - developments on the second and third hearing days

52. The Applicant closed its case after Mr Sun's evidence on the first hearing day had been completed. Given that Ms Kendall was not required for cross-examination, the Respondent did not tender any other evidence and the matter proceeded to submissions.

53. During the course of his submissions Mr Perrignon said that efforts are being made on a continual basis to sell units off-plan. When it was put to him that there was no evidence before the Tribunal to this effect, the Applicant was granted a postponement in order to present evidence in support of this contention; it should be noted that this concession was made specifically in respect of this aspect only and not in respect of any other aspect. On the day prior to the third hearing day, the Applicant in fact filed Exhibits A7, A8 and A9 and including in particular a third affidavit by Mr Sun and also an affidavit by his solicitor. These three exhibits are collectively referred to as the "later exhibits"; it cannot be said that in general terms they advance the Applicant's case to any significant extent and indeed might be thought at least in some respects to be counter-productive. Mr Wigney did not think it necessary to cross-examine any of the three witnesses, and including Mr Sun, whose oral evidence had been completed on the first hearing day.

54. Mr Perrignon nevertheless sought leave for Mr Sun to give further evidence and in particular to correct an error contained in paragraph 12 of Exhibit A1. Leave was granted for Mr Sun to give evidence again but on this aspect only. Accordingly Mr Sun (and an interpreter in the Mandarin language) were again sworn.

55. Mr Sun said the development related in fact to two penthouses (and not one) and two units on each of the other four levels making 10 units (including penthouses) in all. It is relevant to note that when the Applicant acquired the Property, it acquired, pursuant to clause 18 of the Special Conditions, the DA and also certain architectural drawings and plans which had been prepared in respect of the DA. Those drawings and plans appear in Item 4 of JWS1.

56. Mr. Sun confirmed also that the price contained in paragraph 12 of Exhibit A1 should be construed as the price per unit. He said moreover that except for level 1 the two units on each level would be the same; on level 1, one unit would include one bedroom and a study while the other unit on level 1 would include two bedrooms. He expected that the price for the one-bedroom unit would be $345,000 while the price for the two-bedroom unit would be $400,000. If all of the units and including the penthouses sold for the prices specified by him and in other words the prices hoped for by the Applicant, the aggregate amount receivable would be approximately $4.9 million.

57. Mr Sun said that steps were being taken to sell units off-plan in that real estate agents had been instructed and that advertisements were appearing on the Internet and in the local paper in Port Macquarie.

58. Although Mr Wigney had not intended to cross-examine Mr Sun if his further evidence were confined to that set out in Exhibit A7, he did cross-examine him briefly in respect of his additional oral evidence on the third hearing day. Mr Sun agreed that the Applicant has still not obtained a construction certificate; it has still not entered into a building contract; it has not obtained a quote from a building contractor as to the cost of construction; moreover the Applicant has made no sales of units off-plan, and no financial accommodation has been obtained or even sought; the tenant in occupation of the Property at the time of completion is still in occupation of the Property.

59. In answer to two questions from the Tribunal Mr Sun said that the market in Port Macquarie fell in 2006; when asked whether it fell before or after purchase his answer was that it fell at "the same time". When then asked why the Property was acquired at a time when the market had fallen or was falling he said that he thought that the price was reasonable.

Part G - case authority

60. There are two judgments of superior courts which are of particular relevance in this connection. They are the judgments of the Full Federal Court in
Marana Holdings Pty Limited v Commissioner of Taxation 2004 ATC 5068; (2004) 141 FCR 299 ("Marana") which dealt with a related but differently worded section of the Act.
Toyama Pty Limited v Landmark Building Developments Pty Limited 2006 ATC 4160; (2006) 197 FLR 74 ("Toyama") dealt in its terms with the section (s 40-65) with which this application is directly concerned.

61. Although the Respondent had originally contended that while a senior member of this Tribunal is bound by the judgment of a superior court, a presidential member is not. That contention was subsequently withdrawn and it was conceded that the Tribunal is bound by the judgment in Toyama. Although the Respondent's submissions refer in respect of Toyama to "dicta of White J" in that case, it was contended by the Respondent that the judgment in Toyama was in the relevant context either obiter or not obiter but that even if obiter should be followed by this Tribunal. It is thus unnecessary for the Tribunal to express a view as to whether the relevant remarks by his Honour Mr Justice White in Toyama formed part of the ratio or were merely obiter. The Tribunal notes in this context that while it accepts that it is bound to follow the judgments of superior courts it considers that it is bound only by the judgments proper and not by obiter dicta. In this matter the Respondent conceded that the Tribunal should regard itself as bound by remarks of His Honour White J whether or not obiter and in the light of that concession the Tribunal considers that it is best that it act accordingly. It will be seen though that in the end result and on a proper consideration of this case as a whole the Applicant must fail if the test is that set out in Toyama and a fortiori must fail if the test is that set out in Marana.

62. Marana, put in brief and succinct terms, is authority for the proposition that the test must be considered objectively while Toyama in turn is authority for the proposition that the test must be considered subjectively but having regard to the objective circumstances.

63. The Respondent in his written submissions contended that Marana is correct and that Toyama is not. The Tribunal refers to paragraphs 44 to 51 of the Respondent's submissions as follows:

"…

• 44. The construction of s 40-65 apparently favoured by White J in Toyama is wrong and should not be followed for a number of reasons.
• 45. First, for the reasons set out above, "to be used" more likely contemplates the appropriateness or suitability of residential premises to be used predominantly for residential accommodation, with such an assessment to be determined objectively.
• 46. Second, there is nothing in the terms of s 40-65(1) which suggest that the subjective intention of the purchaser is relevant to the operation of the section.
• 47. Third, the construction adopted by White J renders s 40-65(1) largely unworkable. For example, it would mean that the liability for taxation of the vendor is dependent upon the subjective intentions of a different person (ie the purchaser). That intention may never have been communicated to the vendor prior to the acquisition. Even if the intention was accurately communicated at one point in time, it may have changed prior to acquisition.
• 48. Moreover, the subjective intentions of the purchaser may be uncertain, conditional or wholly unviable. The intention of any purchaser as to the future use of property will almost always be contingent upon factors outside that person's control and will accordingly be open to change: for example, wider economic factors, the ability to raise finance, the extent to which any change in use is approved by the relevant development authority, movements in the property market and other such factors. At what point is an intention so qualified by external contingencies that it cannot be said to provide an accurate reflection of the likely future use of the Property? As a practical matter, it follows that the apparent aim of s 40-65(1), namely to ensure the comparable treatment of residential premises irrespective of the way in which such premises are supplied, breaks down in the face of an examination of subjective intention.
• 49. Fourth, if the vendor was assessed by the Commissioner on the basis that s 40-65(1) did not apply, the court or tribunal in subsequent proceedings brought by the vendor to challenge the assessment would have the invidious task of determining the result largely on the basis of evidence as to the subjective intention of a non-party to the proceedings. There is no indication in the terms of the Act or the extrinsic material that this was Parliament's intention in enacting the provision.
• 50. It is well-established that a construction of the Act which leads to unworkable results should be rejected if a different construction is otherwise available: eg
  Cooper Brookes (Wollongong) Pty Ltd v Federal Commissioner of Taxation (1981) 147 CLR 297 at 320-1.
• 51. The suggestion made by White J (at [97]) that a vendor can protect himself or herself from the uncertain application of s 40-65(1) by including a provision in the contract for sale of land is not practical. The insertion of a clause in the sale contract to the effect that the purchaser did not intend to use the property in a way that could make the sale a taxable supply is unlikely to be determinative of the subjective intention of the purchaser at the date of acquisition (although it would be evidence to which the Court or Tribunal could have regard in determining that intention). Indeed, the Contract in the present case contained just such a clause (special condition 16). Moreover, it is unlikely that Parliament intended that liability for a tax on the sale of residential premises pursuant to s 40-65(1) could be imposed or avoided by agreement between the parties to the transaction. Yet this is the practical effect of White J's suggestion.

…"

64. The Tribunal does, with respect, agree with the view expressed by the Respondent that Marana is to be preferred to Toyama and in part for the reasons set out in the Respondent's submissions. This point is made purely in case this question again comes before a superior court. The Tribunal is prepared (for the reasons set out previously) to accept that it should treat itself as bound by the judgement of White J in Toyama and whether or not any relevant remarks contained in it were or were not obiter.

65. In a document entitled "Supplementary Note", the Respondent set out in paragraph 2 the manner in which the relevant phrase is to be construed, in the following terms:

"…

• 2. Whilst there is some degree of uncertainty about White J's findings concerning the proper construction of s 40-65(1), it would appear that his Honour found, or expressed the opinion, that the proper construction of the phrase "to be used predominantly for residential accommodation (regardless of the term of occupation)" was as follows:
  • (a) the question whether premises were to be used predominantly for residential accommodation requires a prediction as to the future use of the premises;
  • (b) the most important factor in such a prediction is the intention of the future owner (in the case of a sale) or lessee (n the case of a lease);
  • (c) the intention of the future owner or lessee (by which his Honour appears to mean subjective intention) is to be assessed having regard to objective circumstances, such as the physical condition of the premises, the zoning or any restrictive covenants (though is Honour plainly did not intend this to be an exhaustive list of the potentially relevant objective circumstances);
  • (d) the inquiry in relation to the objective circumstances is not limited to the physical characteristics of the premises at the time of supply."

…

The Tribunal considers that paragraph 2 of the Supplementary Note can (inclusively of the additional subparagraph set out in the next succeeding clause) be regarded as accurate.

66. Mr Wigney in his oral submissions contended that paragraph 2 as referred to in the preceding paragraph could usefully be amplified by a further subparagraph (e) to the effect that is relevant to have regard to whether a relevant future use is or is not probable.

67. Paragraph 99 (at page 93) of the judgment in Toyama reads as follows:

"…

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

…"

68. Moreover paragraph 105 (at page 94) of the judgment in Toyama reads as follows:

"…

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

…"

69. Mr Wigney contended, and correctly in the view of the Tribunal, that Toyama is readily distinguishable in respect of two important aspects. In the first instance the building in Toyama was in fact "disused". In the second instance the building in Toyama was not intended for use as residential accommodation and demolishment at the time of sale was probable. In this case the situation is significantly different. Firstly, the Property was in fact leased as a residence and it is still leased as a residence and to the same tenant. In the second place the evidence indicated that demolishment was contemplated but only prior to construction, and construction could not occur (if at all) before the expiry of a considerable period.

Part H - closing submissions

70. Mr Perrignon argued that it was necessary to have regard to events at the date of completion, and not to events which occurred after that date. Mr Wigney contended (correctly in the view of the Tribunal) that what occurred after completion is relevant in so far as it throws light on the situation at completion. Mr Wigney contended that to have regard only to Mr Sun's subjective intention, at the time of completion, to the effect that the Applicant intended at some future time to develop the Property was far too simplistic, in that it was conditional on a number of important factors and including inter alia a recovery in the real property market, the ability to make resales, and/or, the ability to obtain finance generally, the conclusion of a satisfactory building contract with an acceptable builder and the grant of a construction certificate which would be obtainable only after the fulfilment of a number of conditions. At the time of completion none of these aspects had been accomplished and indeed little or no attempts to accomplish them had been made. Moreover little or no attempts have been made to accomplish them, or any of them, at any time thereafter. All of these factors are so heavily conditional that fulfilment (i.e. the development) at that time was extremely dubious and so that (using the test of White J in Toyama) on a predictive basis must have been unlikely or improbable in the extreme. Put another way, a purely subjective intention so heavily conditional cannot outweigh a prediction that the continued use of the property as residential accommodation was by far the most likely result.

71. Mr Wigney referred to the later exhibits and more particularly as to the content of Exhibit A8 as to the "to and fro" negotiations with the proposed purchaser. Mr Wigney referred also to Exhibit A9 as to negotiations with possible purchasers but on the basis that the content of Exhibit A9 makes it clear that in all the circumstances sales of units off plan in respect of a development (colloquially referred to as "pie in the sky") was simply not realistic. The Respondent accepts that the Applicant obtained the DA by assignment and that this factor is favourable to the Applicant. The Respondent contends (and correctly in the view of the Tribunal) that virtually all of the other factors indicated that the Property would continue to be used as residential accommodation.

72. Mention was made of the fact that there was some slight evidence of a deterioration in the condition of the house on the Property, but the Tribunal does not consider that any such deterioration (if deterioration there was) was a relevant factor. The Applicant pursuant to the contract (JWS1 at page 76) entered into a contract for the purchase of land. It thereby acquired the improvements and of course the house, subject to the rights of the tenant, and the contract specifically listed a number of items which were required to make the Property suitable as a residence. (See TS23 lines 30 to 35).

73. The Applicant in other words was concerned to ensure that the use would be residential and at TS 22 (lines 28 to 31) made it clear that it had no intention to terminate the lease. Moreover TS 58 indicated that the Applicant intended that the Property would continue to be leased until, if ever, it was demolished.

74. The Applicant was aware that finance would be required for the development and that as at the date of completion no steps had been taken in order to obtain finance (see TS 25, lines 15 to 20 and lines 30 to 31). The Applicant said at TS 26 that there had been no attempt to obtain finance and TS 30 indicates that this was the case until December 2006. The Applicant did not at the time of completion even have any form of rough estimate of the cost of development; an estimate was obtained some months into 2007.

75. Exhibit A9 indicates that Mr Sun asked Ms Elsey to contact a builder in April 2007; in response to that request an estimate of $4.73 million was obtained. As set out previously Mr. Sun's evidence was that if the units could be sold for the amounts specified by him the gross amount realised would be about $4.9 million. This assumes of course that these prices could be obtained at a time when in accordance with his evidence the market was falling. If the cost of building were $4.73 million then the financing, professional and other costs would ensure a loss overall, and in all probability a substantial loss.

76. Mr Sun said in evidence that the development could not commence for at least six months because this would be the time required to obtain a construction certificate (TS 51). (The Tribunal considers that having regard to Annexure C [not reproduced] that it is likely it would have taken a longer period within which to obtain a construction certificate). He thought that the Applicant would have to sell other assets but did not in fact procure sales (TS 35 lines 35 to 45).

77. Mr Sun accepted that pre-sales were dependent on market conditions. Mr Sun said that market conditions were poor from the date of purchase in mid-2006 which in turn would have had an adverse affect on pre-sales. There was never any real evidence presented to the Tribunal as to market conditions specific to Port Macquarie bearing in mind that the sub-prime crisis, which affected real property in Australia generally, took place some time later.

78. The Applicant is involved in real property and there can be no doubt that it purchased the Property in the hope of making a profit. There are a number of ways in which its profit objective could be achieved. A profitable resale was one such method and in fact it was not long before the Applicant took steps to this end, but they were not successful. Development was another possibility but all of the actions of the Applicant (or to be more exact failure to take such actions by the Applicant) indicate that it was not by any means regarded either as the only or even the predominant method; on the contrary the evidence in this context indicates that it was nothing of the sort. The Applicant in effect contends that the Property was bought for development but that the market fell at the time of acquisition and that development will take place in the future when the market recovers; that contention cannot suffice more particularly where the Applicant took virtually no steps of any kind in order to proceed with the development.

Part I - conclusion

79. Mr. Sun's evidence was, as I have indicated, and in a number of respects not worthy of credit. He said that the Applicant bought the Property at a time when the market was falling. On this basis the Applicant bought the Property at a time when at least for the foreseeable future the development was not a feasible proposition at all. That this must be so is borne out by the Applicant's own failure to take any of the necessary steps.

80. The Property since being purchased, has been rented out as residential accommodation and it is highly likely that this will be so for the foreseeable future. In Toyama the bulldozers required for demolishment were in effect in place; this is not so in respect of this case.

81. The Tribunal does not accept that there are in fact and at present genuine attempts to sell units off plan. It is not conceivable that anyone would contract to buy a unit which might, if it is ever built at all, be built at some unspecified future time.

82. The case for the Applicant can be stated in these simple terms. It bought the Property and including the DA on the basis that even though the market was falling, or had fallen, at the time of purchase, it does have an intention to proceed with the development when the market recovers. The Applicant contends that having regard to Toyama, the Applicant's intention, however subjective and however unlikely, is sufficient to allow it the credit that it seeks.

83. Even on the basis that Toyama is binding on the Tribunal, the judgment of His Honour White J makes it clear that the subjective intentions of the Applicant are not to be considered in isolation and must be considered in the light of the prevailing objective circumstances, nearly all of which are against the Applicant. It is clear also that the facts in Toyama are, in important respects, distinguishable.

84. If only for the sake of completeness I should note that Mr Perrignon argued that the sale was made on the basis that it was GST inclusive and that GST was paid by the seller of the Property, and thus entitling the Applicant to a corresponding credit. That factor alone however does not of itself entitle the Applicant to the relief which it seeks. There is no necessary symmetry between the payment by one person of the tax and in consequence of which another party is necessarily entitled to a credit.

85. It follows that the Applicant cannot succeed where the test is that set out in Toyama and a fortiori cannot succeed if the test is that laid down in Marana. Accordingly the objection decision under review must be affirmed.