Disposal of trading stock outside the ordinary course of business
On 6 June 2011, the AAT considered the application of the income tax law and the GST law to a sale of property between associated persons at prices that were found to be set in an arbitrary manner and were so low as to take the sales outside an ordinary business transaction.
The first question before the Tribunal was whether section 70-90 of the 1997 income tax law applied so that vendor’s assessable income included the market value of the trading stock. In determining that the section applied, the AAT confirmed the comments of Dr Beck, a member of Taxation Board of Review in Case R85 84 ATC 569 where the member said that :
- “whether one regards transactions as being in the ordinary course of business depends on one’s assessment of:
(a) the precise nature of the business that is being carried on;
(b)the character of transactions one could reasonably expect to be called for in the course of going about that business; and
(c) the character of the disputed transaction.”
The second part of the decision of the AAT involved the amount of GST payable on the disposal of the trading stock. The Senior Member stated that there seemed to be no dispute that the disposals
- “were taxable supplies in accordance with s 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). The sales … were supplies of real property located in Australia and they were made for consideration. They attracted GST in accordance with s 940 of the GST Act.”
It is surprising that the Senior Member, having engaged in no less than 7 pages of consideration of the income tax question, made no mention of the requirement that the sales be made “in the course or furtherance of” the taxpayers business to come within the definition of taxable supply for GST purposes.
The Commissioner, no doubt, would have argued that the disposal was in the course or furtherance of the business because, prior to the disposal, it had “some connection” with the business. In GSTR 2003/13, the ATO applies the broadest meaning to the “in the course or furtherance” test in the following terms:
- “It is noted that a supply that has no discernible relationship and hence no connection with an entity’s enterprise cannot be a taxable supply even if the asset is applied by entity in carrying on the enterprise. The Commissioner considers that it will be an exceptional circumstance for a supply of an asset that is applied in the supplier’s enterprise not to have a connection with the enterprise. “
Nevertheless, one would have thought that the taxpayer might have successfully argued that the remedy for the application of an asset of the business in this case was not an application in carrying on the business (for the same reasons that section 70-90 could apply) and that, rather than a taxable supply, the change of use adjustments in Division 129 might have been invoked. The similarity between the two phrases was noted by Bathgate DJ in the in the New Zealand Case K55 (1988) 10 NZTC 453 where he said:
- In the course or furtherance of’ a taxable activity is not an altogether different concept from the income tax situation of ‘… in gaining or producing, assessable income”.
It is disappointing that the Commissioner’s “model litigant” code do not require him to highlight and explain the conflict in his argument in income tax and GST.
The case can be found at http://www.austlii.edu.au/au/cases/cth/AATA/2011/390.html