Issued
2012
Decision
28 Aug 2012
Appeal Status
Not appealed

Conducting a taxable activity

2012 case note – CIR determined taxpayer not conducting a taxable activity – taxpayers must show that activities are both continuous and regular.

Case
A Taxpayer v Commissioner of Inland Revenue
Legal terms
Conducting a taxable activity, continuous and regular

Summary

The Commissioner determined that the taxpayer was not conducting a taxable activity, because the activity undertaken in relation to the disputant's property was insufficient to constitute a taxable activity in itself, and there was insufficient evidence of any activity in relation to the disputant's asserted intent to undertake further developments. The Commissioner therefore considered that the disputant should have its goods and services tax (GST) registration cancelled pursuant to sections 52(5) and 52(5A) of the Goods and Services Tax Act 1985. The disputant challenged the Commissioner's decision by filing challenge proceedings in the Taxation Review Authority ("TRA").

Impact of decision

This case reaffirms the standard position in Newman v CIR [1994] NZCA 150, NZTC 1 12097 about the need for a taxpayer to show that the activity in question was both continuous and regular and as such does not have any binding implications. This case is very fact-specific.

Facts

In June 2007, the disputant purchased a residential property in St Heliers, Auckland, ("the property") for $8.7 million (including GST). It claimed the purchase price of the property as an input credit for GST purposes on the basis that it was conducting a taxable activity involving the purchase, subdivision, refurbishment and sale of high-end residential properties.

The disputant says it intended to subdivide and resell the property, as the first of a number of property projects. The property was duly listed for sale nine days after purchase, subject to the proposed subdivision. At this point, approximately $40,000 had been spent on repairs and maintenance. The property was eventually resold, undivided and undeveloped, back to the original vendor (and second mortgagee) in August 2008. The disputant paid GST output tax on the sale back to the vendor, which resulted in a net GST position of $60,000 in favour of the disputant. The disputant has undertaken no further activity.

The Commissioner determined that the disputant was not conducting a taxable activity, because the activity undertaken in relation to the property was insufficient to constitute a taxable activity in itself, and there was insufficient evidence of any activity in relation to the disputant's asserted intent to undertake further developments.

The Commissioner declined the disputant's claim for a GST input credit and deregistered it for GST. The disputant challenged those decisions.

Decision

The evidence for the disputant was given solely by Mr K who was listed as a general manager but for many years had been an experienced property developer. The TRA noted that he was closely associated with the disputant and another trust which acted as a development manager for the disputant as well as being the husband of the sole shareholder and director of the corporate trustee of the disputant.

A summary of the submissions made by the disputant in relation to why it had conducted a taxable activity on a continuous basis is given at [61].

The Commissioner argued that the disputant's activities did not constitute "continuous or regular" activities and therefore could not constitute a "taxable activity" for GST purposes.

The TRA made a finding at [96] that Mr K was a credible and honest witness and that the disputant had purchased a substantial property for three prime reasons, namely: first, to sever part of it and sell that part to its associated trust; second, to substantially upgrade the house on the remainder of the property and sell it; and, third, to reinvest those funds with profits into a similar project and so on indefinitely.

The TRA did not regard the activity in selecting the property and purchasing it (which included financing arrangements) as merely preparatory steps to commencing a taxable activity. The TRA also noted that there were some substantial survey and subdivision costs and evidence of significant expenditure in upgrading the property, and the further activity of marketing it. Further, the TRA found that the activity was "continuous" and it was intended to be "regular" but did not get to that as events unfolded.

The TRA did not accept the Commissioner's contention that the venture was never financially viable and found that the venture failed through lack of capital and a deteriorating property market.

For these reasons, the TRA found that at all material times, until the sale of the property at issue, the disputant was carrying on the taxable activity of a property developer and needed to be registered for GST and was entitled to the said GST input.

Goods and Services Tax Act 1985