Decision impact statement

Toyama Pty Ltd v Landmark Building Developments Pty Ltd

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Court Citation(s):
[2006] NSWSC 83
2006 ATC 4160
62 ATR 73
(2006) 197 FLR 74

Venue: Supreme Court
Venue Reference No: 4541/02
Judge Name: White
Judgment date: 28 February 2006
Appeals on foot:
No

Impacted Advice

Relevant Rulings/Determinations:

• GSTR 2000/20

Subject References:
GST
whether sale of property was input taxed as residential premises to be used predominantly for residential accommodation
Whether 'enterprise' was being carried on

Brief summary of facts

Landmark and Toyama were co-owners of a property. Landmark owned two-thirds of the land as tenants in common with Toyama, which owned one-third. Trustees for sale of the property were appointed. The contract for sale provided that the sale was a taxable supply under the GST Act.

Development approval had been given by the Council for the erection of a 14-unit development upon the land. A house containing two residences was situated on part of the land. The land was marketed as a development site. The trustees expected that the land would be purchased by a developer, the house demolished, and new units built on the site.

Prior to settlement, two private rulings were obtained from the Tax Office. The advice in these rulings included that the sale was input taxed on the basis of physical characteristics of the premises and that no 'enterprise' was being carried on by the trustees.

Landmark contended that the sale was not a taxable supply and that, as a result of the trustees' alleged mistake in describing the sale as a taxable supply, the trustees acted in breach of trust and were liable to compensate Landmark.

The Court concluded that the sale was a taxable supply and in any case the trustees did not fail to exercise the requisite standard of care.

Issues decided by the court or tribunal

Although the case concerned a claim for equitable compensation against a trustee, White J considered GST issues in his judgment.

1. Private Rulings

White J held (at 4168) that the issue was not whether the private rulings were wrong, but whether the trustees had breached their duties. Determination of that issue 'cannot be precluded by the opinion of an officer of the ATO'.

2. Enterprise

The judge held that the trustees were carrying on an 'enterprise', that being a series of activities done in the form of a business for s 9-20(1)(a) purposes.

3. Residential premises to be used predominantly for residential accommodation

His Honour considered the interpretation of the expression 'to be used predominantly for residential accommodation' in subsection 40-65(1) of the GST legislation. Broadly that subsection provides that supplies of real property are input taxed to the extent that the property is residential premises to be used predominantly for residential accommodation. A similar issues arises under paragraph 40-35(2)(a) in relation to supplies by way of lease, hire or licence.

His Honour concluded that the expression requires a prediction of the use of the property and that the main factor to be considered in making that prediction is the subjective intention of the purchaser or lessee.

The Commissioner was not a party to the proceedings. His Honour noted in his judgement that his conclusions on the GST issues would not bind the Commissioner.

Nevertheless, the comments in the judgement relating to the interpretation of the expression 'to be used predominantly for residential accommodation' have been carefully considered by the Tax Office.

Tax Office view of Decision

The Tax Office is concerned that the approach outlined by his Honour may cause difficulties to vendors in particular cases as a result of the liability of the vendor being determined on the basis of the subjective intention of the purchaser which may not be known to the vendor. As a practical matter, the vendor may not be aware of a relevant change in the purchaser's intention which may impact upon the vendor's GST liability and contractual remedies may not always be effective for any misrepresentations that may be made.

The Tax Office notes that the considerations that led to the interpretation by the Full Federal Court, in the decision in Marana Holdings Pty Ltd v Commissioner of Taxation [2004] FCAFC 307, of the word 'intended' in the definition of residential premises also apply in respect of the phrase 'to be used predominantly for residential accommodation'. In particular, the person having the relevant intention is not identified in the Act.

For these reasons, the Tax Office respectfully prefers the view that an objective approach is required to the interpretation of the phrase 'to be used predominantly for residential accommodation'. Accordingly, the Tax Office will continue to administer the provisions in accordance with the views in GSTR 2000/20 pending further judicial clarification.

While the Tax Office will continue to administer the legislation on this basis, it will also seek further judicial clarification of the issues if an opportunity arises in other litigation. The Tax Office has agreed to provide test case funding for a Federal Court case which is likely to provide judicial guidance on this issue.

His Honour's conclusion is contrary to the view published by the Tax Office in Goods and Services Tax Ruling GSTR 2000/20: Goods and Services Tax: commercial residential premises that the expression 'to be used predominantly for residential accommodation' is to be applied objectively by reference to the characteristics of the premises. Entities making supplies of residential premises that rely on that Ruling continue to be protected where section 105-60 of the Taxation Administration Act 1953 applies.

The following Tax Office precedential decisions have been reviewed and it is not considered that they require amendment as a result of this decision:

GSTR 2000/20

This case is also discussed in the minutes of the 14 May 2007 meeting of the National Tax Liaison Group GST Subcommittee.

Administrative Treatment

Implications on current Public Rulings & Determinations

None

Implications on Law Administration Practice Statements

None

Legislative References:
A new Tax System (Goods and Services Tax) Act 1999
section 9-20(1)(a)
section 40-65(1)
section 40-35(2)(a)

Case References:
Northern Engineering Pty Limited v Federal Commissioner of Taxation
42 FLR 301
29 ALR 563
80 ATC 4025
10 ATR 584

Marana Holdings Pty Ltd v Commissioner of Taxation
214 ALR 190
2004 ATC 5068
57 ATR 521