Activities

THE GST FOOD EXEMPTION ________________________________________________________________________________
GST AND AN "ENTERPRISE": A CONSIDERATION OF TRADE IN THE CONTEXT OF THE SUBDIVISION OF LAND
By Andrew Maples
An entity that is carrying on an "enterprise" may be required to register for the Goods and Services Tax ("GST") in Australia if the relevant registration turnover threshold is met. The term "enterprise" includes an activity that amounts to less than a business, ie an activity, or series of activities, that is done "in the form of an adventure or concern in the nature of trade". Isolated transactions, such as the subdivision and subsequent sale of land, may amount to trade and be subject to the GST. This article reviews the limited guidance provided by the ATO on the interpretation of the concept of "an adventure or concern in the nature of trade". The concept has its origins in United Kingdom revenue law. The United Kingdom approach to interpreting and applying this concept is reviewed, in relation to the "badges of trade", with a particular focus on its potential application to the subdivision of land in Australia.
1. INTRODUCTION
The concept of an "enterprise" is important for the application and operation of the Goods and Services Tax ("GST"). A person must register for GST if they are carrying on an "enterprise" and their annual turnover meets the relevant registration turnover threshold.1 Registration below the relevant registration turnover threshold is optional provided the person is, or intends to, carry on an enterprise. In addition, a supply is a "taxable supply" for GST purposes if, inter alia, it is made in the course or furtherance of an "enterprise" that is carried on by a person.2 The term "enterprise" is defined in A New Tax System (Goods and Services Tax) Act 1999, s 920(1) ("GSTA") to include:
... an activity, or a series of activities, done: (a) in the form of a business; or (b) in the form of an adventure or concern in the nature of trade ...
An "enterprise" does not include (GSTA, s 920(2)):

... an activity, or a series of activities, done: ... (b) as a private recreational pursuit or a hobby; or (c) by an individual ... or a partnership (all the members of which are individuals), without a reasonable expectation of profit or gain ...
The inclusion of the phrase "an adventure or concern in the nature of trade" in the definition of "enterprise" has the potential to mean that an activity, or series of activities, that is something less than a business, such as an isolated transaction, may constitute an enterprise. An activity that may fall into this category is the subdivision (and subsequent sale) of land.3 The concept of an adventure or concern in the nature of trade is not to be found in Australian income tax legislation; rather it has its origins in United Kingdom revenue law. Some guidance as to its likely interpretation in the Australian context is, however, provided in Miscellaneous Taxation Ruling MT 2000/1 ("MT 2000/1").4 Part
1 A New Tax System (Goods and Services Tax) Act 1999, s 23-5 ("GSTA"). The registration turnover threshold is $50,000 or $100,000 for non-profit bodies: GSTA, s 23-15. Among those also required to be registered are taxpayers who supply taxi travel: GSTA, s 23-99. 2 GSTA, s 9-5. 3 The Australian Tax Office has found that over 70 per cent of the enquiries it has received concerning the GST relate to real estate in general: J Hockley, "Real Estate and the GST: A Review" (2000) 27 BRIEF 11. 4 Available at [http://law.ato.gov.au/atolaw/view.htm?locid=' MXR/MT20001/NAT/ATO].
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2 of this article briefly outlines particular aspects of the definition of the term "enterprise" as detailed in MT 2000/1. In MT 2000/1, the Australian Tax Office ("ATO") comment that the United Kingdom law is "a useful starting point" in considering the meaning of an adventure or concern in the nature of trade.5 The Final Report of the United Kingdom Royal Commission on the Taxation of Profits and Income 1955 ("Radcliffe Report"),6 identified six major relevant considerations from case law, known as the "badges of trade", in determining whether a transaction of purchase and sale, which had given rise to a profit or gain, should be treated as a trading transaction. Additional badges have since been identified as relevant to determining the character of a transaction or activity. These badges, including those identified in the Radcliffe Report, and their possible application to determining whether trade exists when land is subdivided (and then sold) are discussed in part 3.7 In particular, under what circumstances will the subdivision (and sale) of land be classified as an adventure or concern in the nature of trade and therefore, an enterprise?8 The points discussed will, however, apply equally to many isolated transactions or transactions that amount to less than a business. The New Zealand GST is based on the concept of a "taxable activity" rather than that of an "enterprise".9 The term "taxable activity" means, inter alia, any activity that is "carried on continuously or regularly by any person". The New Zealand test is clearly different to its Australian counterpart. Accordingly, in the author's view, the relevance of New Zealand authority (on the term "taxable activity") both to this paper and in the Australian context is primarily limited to:
(a) the interpretation by the New Zealand courts of the term "activity"; (b) providing examples of the different factual situations and issues that may arise in the Australian context; and (c) potentially providing some guidance to the application of the third badge of trade (the frequency of similar transactions).10
Part 4 concludes with some final comments and observations.
MT 2000/1, para 68. Cmd 9474, para 116. 7 Discussion of the potential income tax and capital gains tax implications of the subdivision and sale of land is outside the scope of this article. Neither is it the purpose of this article to discuss the situation of a taxpayer who is carrying on the subdivision of land on such a regular basis that the activity would be considered to be carried on in the form of a business. 8 Concessions concerning the application of GST to land transactions are outlined in the GSTA. GSTA, s 38-475, for example, provides that the supply of potential residential land to an associate for less than market value is GST-free where the land has been farmed for at least five years. Similarly, where farm land is supplied and that farm land had been farmed for at least five years preceding the supply, provided the purchaser intends to continue carrying on a farming business on the land, the supply will be GST-free: GSTA, s 38-480. Consideration of these, and other provisions concerning the application of the GSTA to real estate, is beyond the scope of this article. For further information see C Spicer, "Understanding the Basics - GST and Property Transactions" (2000) 14 Australian Property Law Bulletin 97; D Davine, "GST and Property Investment" (2000) 14 Australian Property Law Bulletin 109; P Butt, "Conveyancing and Property" (2000) 74 Australian Law Journal 77; P Butt, "Conveyancing and Property" (2000) 74 Australian Law Journal 211 and Hockley, above n 3. 9 Goods and Services Tax Act 1985 ("NZ GSTA"), s 6. In order to register for GST in New Zealand a person must carry on, or intend to carry on, a "taxable activity". Section 6 provides that the term "taxable activity" means "Any activity which is carried on continuously or regularly by any person, whether or not for a pecuniary profit, and involves or is intended to involve, in whole or in part, the supply of goods and services to any other person for a consideration; and includes any such activity carried on in the form of a business, trade, manufacture, profession, vocation, association, or club". 10 New Zealand authority on the interpretation of "taxable activity" may be of more direct relevance in the interpretation of GSTA, s 9-20(1)(c) which provides that an "enterprise" includes an activity, or series of activities done "... on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property ...".
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THE GST FOOD EXEMPTION ________________________________________________________________________________ 2. "ENTERPRISE": MISCELLANEOUS TAXATION RULING MT 2000/1
The definition of "enterprise" in the GSTA is substantially the same as that used in A New Tax System (Australian Business Number) Act 1999, s 38 ("the ABN Act"). The meaning of "enterprise", as defined in the ABN Act, is considered in MT 2000/1. The discussion of the term "enterprise" in MT 2000/1 is said by the ATO to apply equally to the use of the term in the GSTA "and can be relied upon for GST purposes."11 MT 2000/1 outlines the view of the ATO concerning the meaning of certain key words and phrases used to define an enterprise. 2.1 "Activity or Series of Activities" An enterprise may be comprised of one activity or a series of activities. The relevant activity, or series of activities, of the entity need to be identified to determine whether or not an enterprise is being carried on by the entity. The term "activity or series of activities" is not defined in the ABN Act. MT 2000/1 states:
... an 'activity' is essentially an act or series of acts that an entity chooses to do. Entities can undertake a wide range of activities with varying degrees of interrelationship. The meaning of an 'activity, or series of activities' for an entity can range from a single transaction to groups of related activities or to the entire operations of the entity.12
activity", for which an "activity" must exist. Based on the New Zealand experience, the term "activity or series of activities" will be given a broad construction. Indeed, the above emphasised phrase appears to be a refinement of a comment by Fraser J in the New Zealand High Court decision Newman v C of IR.13 Fraser J stated:
['Activity'] is a word of considerable breadth. The New Shorter Oxford English Dictionary 1993 ascribes a number of varying meanings or shades of meaning, none of which is exactly apposite to the word in s 6. The nearest, I think, is 'an occupation, a pursuit' and (in the plural) 'things that a person, animal or group choses to do.' (emphasis added).14
It is possible that more than one enterprise is being carried on by an entity. It is only necessary, however, to establish that there is one enterprise in order for an entity to be entitled to an ABN. A hobby, activity or private recreational pursuit will not, however, constitute an enterprise.15 MT 2000/1 provides a number of examples of the operation of the term "activity".16 2.2 "Business" An entity carrying on a "business" is carrying on an enterprise. The term "business" is defined in s 41 of the ABN Act17 and is the same as the definition of "business" in Income Tax Assessment Act 1936 (Cth), s 6(1) ("ITAA36"). To determine whether an activity or series of activities amounts to a business, it will be necessary for the activity to be considered against the various indicators of "business" established in case law. This essentially is a question of fact. It
As indicated in part 1, the equivalent concept to an "enterprise" in New Zealand is a "taxable
Goods and Services Tax Determination GSTD 2000/8 ("GSTD 2000/8"). MT 2000/1, para 57. 13 (1994) 16 NZTC 11229, 11233 (HC) ("Newman"). 14 The New Zealand Court of Appeal made no comment on the issue on appeal (Newman v C of IR (1995) 17 NZTC 12097 (CA)). 15 GSTA, s 9-20(2)(b). Hobbies and recreation are discussed in Taxation Ruling TR 97/11, paras 86-93. 16 MT 2000/1, para 58. 17 ABN Act, s 41 provides that "business includes any profession, trade, employment, vocation or calling but does not include occupation as an employee".
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is not proposed to discuss the concept of business in this article. Taxation Ruling TR 97/11 ("TR 97/11") considers the meaning of business as used in ITAA36. While TR 97/11 considers the carrying on of a primary production business, the ATO states that those principles apply equally to any type of business and can be referred to for a discussion on whether an activity constitutes the carrying on of a business.18 2.3 "In the Form of" The ABN Act, s 38 and the GSTA, s 9-20 refer to an activity "in the form of" a business or adventure or concern in the nature of trade. MT 2000/1 states that the use of this phrase includes an activity or series of activities that would satisfy the test of "business" or "adventure or concern in the nature of trade", if the activity or activities had been done for profit. According to the ATO, the phrase contemplates "a broader set of activities",19 "activities that have the appearance or characteristics of activities that would constitute a business or an adventure or concern in the nature of trade."20 The effect of the phrase, in the ATO's view, is that many non-profit organisations, clubs and associations will meet the definition of an enterprise.21 2.4 "An Individual, or a Partnership [of Individuals], Without a Reasonable Expectation of Profit or Gain" An individual, or a partnership of individuals, carrying out an activity, or series of activities, must have a reasonable expectation of profit or gain for that activity, or series of activities, to be an enterprise. The ATO states that
22 23
a reasonable expectation "requires more than a possibility."24 The requirement of a reasonable expectation of profit or gain:
is not limited to specific years and may cover a number of periods. Some activities do not make profits or gains in the short term. However, the period to be covered by the test must be relevant to the nature of the activity undertaken.25
There is no such equivalent requirement in the definition of "taxable activity" in the NZ GSTA. For NZ GST purposes, the activity in question does not have to be carried out for the purpose of profit making. The definition of "taxable activity" specifically refers to an activity that is, carried on "whether or not for a pecuniary profit"26 and is therefore, broader in its potential application to individuals, and partnerships of individuals, than the term "enterprise". 2.5 "An Adventure or Concern in the Nature of Trade" The term "an adventure or concern in the nature of trade" is not defined in the ABN Act (nor is it used in Australian income tax legislation). According to MT 2000/1:
Trade commonly means operations of a commercial character where goods or services are provided to customers for reward. An adventure or concern in the nature of trade includes a commercial activity that does not amount to a business. Isolated transactions fall into this category. However, the sale of the family home, car and other assets are not, in the absence of other factors, adventures or concerns in the nature of trade. The fact that the asset is
18 19
MT 2000/1, para 61. Ibid para 27. 20 Ibid para 27 and 75-78. 21 GSTD 2000/8, para 7. 22 This term is defined in the ABN Act, s 41 to mean "a natural person". 23 GSTA, s 195-1 provides that the term "partnership" has the same meaning as the term in the Income Tax Assessment Act 1997 (Cth), s 995-1 ("ITAA97"). 24 MT 2000/1, para 30. 25 Ibid para 31.
26
NZ GSTA, s 6. See note 9 above.
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sold at a profit does not, of itself, result in the activity being commercial in nature.27 (emphasis added) (McClelland v FC of T (1970) 120 CLR 487 at 495; (1970) 2 ATR 21 at 26; 70 ATC 4115 at 4120).30
The ATO states that, given the reference in s 38(1)(a) of the ABN Act to an activity or activities done "in the form of a business", the inclusion of the phrase "an adventure or concern in the nature of trade" in s 38(1)(b) is intended to cover "commercial activities of a trading nature that do not amount to activities in the form a business."28 A business, according to MT 2000/1, will generally include a trade that is carried out on a regular or continuous basis.29 An adventure or concern in the nature of trade, on the other hand:
may be an occasional or one-off transaction that does not amount to a business. That is the view of Jacobs J in AB v FC of T (1997) 37 ATR 225 at 242; 97 ATC 4945 at 4961: See also the discussion in R W Parsons, Income Taxation in Australia, The Law Book Company Limited, Sydney, 1985, p 159-63 in which the learned author expresses the view that "an adventure in the nature of trade" is equivalent to an "isolated business venture" as opposed to a continuing business. I respectfully agree. I also accept that such a transaction must "exhibit features which give it the character of a business deal"
The ATO further comment that the concept of "an adventure or concern in the nature of trade" has arisen in the context of United Kingdom revenue law, the United Kingdom law proving to be "a useful starting point" in considering the meaning of the phrase.31 A number of Australian decisions are also noted in MT 2000/1.32 The ATO states that assets are categorised as either trading assets or investment assets in the United Kingdom cases.33 Assets which:
are purchased with the intention of holding them for a reasonable period of time, to be held as income producing assets or to be held for the pleasure or enjoyment of the person, are more likely to be purchased for investment purposes rather than trading purposes: see Johnston v Heath [1970] 3 All ER 915. Investment assets may be used by entities in carrying on enterprises. To determine whether or not the use of these assets constitutes an enterprise, reference needs to be made to the enterprise definition and factors such as the indicators of a business and the meaning of 'in the form of a business'.34 (emphasis added)
MT 2000/1, para 24 and 25. Ibid para 64. 29 Ibid para 67. 30 Ibid. 31 Ibid para 68. 32 FC of T v The Myer Emporium Ltd 87 ATC 4363; FC of T v Whitfords Beach Pty Ltd 82 ATC 4031 ("Whitfords Beach"): McClelland v FC of T 70 ATC 4115 ("McClelland"); AB v FC of T 97 ATC 4945. The focus of this article is on the United Kingdom authority considering the concept of an adventure or concern in the nature of trade, rather than Australian case law for two reasons. First, the Australian income tax legislation does not refer to the concept of an adventure or concern in the nature of trade; rather, as noted here, it is an English concept. Second, it appears from the ATO's statement in MT 2000/1 (that the United Kingdom revenue law on the subject is "a useful starting point" in considering the concept), that United Kingdom authority on the concept may play a part in the interpretation and application of the concept by the ATO. 33 MT 2000/1, para 69. Parsons observes that the distinction in the United Kingdom cases is variously described as a distinction between "business" and "investment" or between holding (property) for "business" and holding (property) for "enjoyment" or "pride of possession". In respect of the former distinction (between "business" and "investment"), Parsons comments that it "does not always sit well with the aspect of the Australian notion of continuing business seen in the judgment of Gibbs J in London Australia Investment Co Ltd (1977) 138 CLR 106. But it is clearly a relevant distinction in the context of an isolated venture": RW Parsons, Income Taxation in Australia (1985) 162. 34 MT 2000/1, para 69 and 70.
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The phrase "indicators of a business" is a reference to the factors outlined in TR 97/11.35 As already noted, the ATO comment that "an occasional or one-off transaction that does not amount to a business"36 may constitute an adventure or concern in the nature of trade. The author believes that the "indicators of a business" will have only limited relevance to the characterisation of many "occasional" or "oneoff" transactions, which by their very "one-off" nature will not display the characteristics of a business outlined in TR 97/11, such as repetition and permanency. MT 2000/1 adds that to constitute an adventure or concern in the nature of trade, the relevant transaction(s) "should have the characteristics of a business deal."37 This phrase is essentially taken from the passage in the Privy Council's judgment in McClelland,38 already quoted in this article (as cited by MT 2000/1). As noted by Parsons39 the phrase in McClelland is not "exactly definitive" (nor is it particularly helpful). The ATO state that investment assets include rental properties, business plant and machinery, the family home, family cars and other private assets.40 The realisation of these investment assets does not amount to trade. On the other hand, MT 2000/1 observes41 that certain types of assets, such as shares and land, can be purchased for either investment purposes or trading purposes.42 While this last statement is true, it should be kept in perspective, ie there is arguably still a presumption that these assets are held for investment rather than trading purposes:
The cases may suggest that it is less likely that a conclusion that there is a trade will be reached if the transaction is in shares or land rather than in some other kind of property. Shares and land are traditional subjects of investment activity activity that is not directed to profit-making in the turning over of the property acquired. An isolated transaction in land or shares does not necessarily yield an objective inference of profit purpose, when the same transaction in another kind of property may yield such an inference.43
Assets that are capable of being purchased for either investment or trading purposes, cannot be held at the same time for both purposes: Simmons (as liquidator of Lionel Simmons Properties) v IRC.44 The character of an asset, while it is held, can change from investment to trade or from trade to investment.45 MT 2000/146 refers to four United Kingdom cases where it was found that an adventure or concern in the nature of trade existed.47 According to the ATO these cases show that in order for an adventure or concern in the nature of
Ibid para 63. Ibid para 67. 37 Ibid para 74. 38 70 ATC 4115, 4120. 39 Parsons, above n 33, 162. 40 MT 2000/1, para 71. 41 Ibid. 42 This view is supported by United Kingdom commentators such as Pearce who comments that "...[land] is capable both of retention for use and occupation, or as an investment, and also of resale as a commercial commodity": J Pearce, "The Characteristics of Trade in Relation to Property Deals" (1962) British Tax Review 144, 146 and Parsons, above n 33, 163 (in respect of both land and shares). 43 Parsons, above n 33, 163. 44 [1980] 2 All ER 798 ("Simmons") and MT 2000/1, para 71. 45 MT 2000/1, para 71. 46 Ibid para 72. 47 Edwards (Inspector of Taxes) & Anor v Bairstow 36 TC 207; [1955] 3 All ER 48 ("Edwards") (concerning the sale of a cotton spinning plant); Johnston v Heath 46 TC 463 ("Johnston") (in respect of the sale of land); Wisdom v Chamberlain [1969] 1 All ER 332; 45 TC 92 ("Wisdom") (concerning the purchase and sale of silver bullion held for short term) and IRC v Fraser 24 TC 498 ("Fraser") (which held that the purchase and sale of a large quantity of whisky was an adventure in the nature of trade.)
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trade to exist, "more than a mere realisation of an investment asset is required and that the character of the activity as a whole needs to be considered."48 In concluding its discussion of "an adventure or concern in the nature of trade" in MT 2000/1, the ATO comment that the question of whether there is a trade or an adventure in the nature of trade is a question of fact and degree.49 At this point a pessimist could be forgiven for understanding from this statement that any attempt to distil principles from the cases concerning the existence of a trade is a fruitless exercise. Pearce50 comments that the description of the enquiry as to the existence of a trade as being a "question of fact" is only a half-truth. According to Pearce, the actual position was made clear by the House of Lords in Edwards51 and can be stated in three propositions (or steps).52 First, the primary facts and secondary conclusions of fact from the case are questions of fact (to be found, in the United Kingdom context, by the Commissioners). Second, the construction of the word "trade" used in the (income) tax legislation is a question of law. Third, an inference involving fact and law must be drawn (again in the United Kingdom context, by the Commissioners) as to whether the facts found in the first step constitute a trade as construed from the second step. Based on Pearce's propositions, the determination of whether a trade or an adventure or concern in the nature of trade exists should not, therefore, produce a "random" or arbitrary result. In determining the nature of a transaction, there is still, however, an elusive factor:
the features which are necessary to give a transaction the character of a business deal or of a trade of dealing on a single occasion, include an elusive factor that is more than purpose to profit. This elusive factor may not be capable of any more precise defining than to say that the transaction must be the sort of thing a business man or man in trade does.53
To illustrate the concept of an adventure or concern in the nature of trade, MT 2000/1 provides, inter alia, two contrasting examples of land subdivisions.54 In the first example (Example 11), the subdivision of a 2.5 hectare lot into two lots and sale of the second lot, would constitute "the mere realisation of a private asset"55 rather than an adventure or concern in the nature of trade. In the second example (Example 12), the subdivision of a 500 hectare block of land into 15 hectare lots and the sale of those lots at auction would be in the form of an adventure or concern in the nature of trade. The view of the ATO is that the transaction has a commercial flavour because of the way it was undertaken (employment of engineers, roading contractors etc).56 MT 2000/1 provides no further guidance on the factors to consider in respect of the subdivision and sale of land or isolated transactions generally. The above two examples
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MT 2000/1, para 73. Ibid para 74. 50 Pearce, above n 42, 144. 51 36 TC 207; [1955] 3 All ER 48. 52 Pearce, above n 42, 144-145. 53 Parsons, above n 33, 162. 54 MT 2000/1, para 74 (Example 11 and Example 12). 55 Ibid. 56 Ibid. In determining whether a "taxable activity" exists when land is subdivided the New Zealand Inland Revenue Department lists the following factors as being relevant to determining the existence of a "taxable activity": the scale of the subdivision, the level of development work, the number of sales of subdivided land, the time and effort involved, the level of financial investment and the commerciality of the transaction: Inland Revenue Department Tax Information Bulletin (1995) 7:2, 10 ("TIB"). The greater the development work etc the more likely that a taxable activity exists. The New Zealand courts similarly place much emphasis on the level of development work; see, for example, Case S70 (1996) 17 NZTC 7431; Case T40 (1997) 18 NZTC 8267: and Case T60 (1998) 18 NZTC 8449.
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are at such different ends of the spectrum that their practical application to actual circumstances will be limited. These examples leave many unanswered questions. For example, would the conclusion in Example 11 differ if the taxpayers had sold both lots (at auction) or subdivided the 2.5 hectare block into three or four or five sections and sold all the sections. More generally, where is the dividing line between "the mere realisation of a private asset"57 and a realisation amounting to trade? The next part reviews the principles adopted in the United Kingdom to determine in what circumstances an adventure or concern in the nature of trade exists. The application of these principles to the subdivision and sale of land is also considered in part 3. Those badges are: (i) (ii) (iii) the subject-matter of the realisation; the length of period of ownership; the frequency or number of similar trans-actions by the same person; supplementary work on or in connection with the property realised; the circumstances that were responsible for the realisation; and motive.
(iv)
(v)
3. THE "BADGES OF TRADE" 3.1 Background

Schedule D of the United Kingdom Income and Corporation Taxes Act 1988 ("ICTA") taxes the profits or gains of a "trade". The term "trade" is defined in s 832(1) of the ICTA to include "every trade, manufacture, adventure or concern in the nature of trade." (emphasis added) These provisions have remained essentially unchanged in the various United Kingdom Income Tax Acts since last century. The Radcliffe Report identified (from case law) six relevant considerations (or "badges of trade") to determine whether a transaction of purchase and sale, which had generated a profit or gain, should be treated as a trading transaction.58
(vi)
These badges are not exhaustive. The United Kingdom Inland Revenue Inspectors Manual ("IM")59 lists nine badges.60 In addition to the six recognised by the Radcliffe Report, IM125a lists the following three additional badges: (i) (ii) the source of finance; existence of similar trading transactions or interests; and method of acquisition.
(iii)
IM 125 comments that the nine badges are a summary of the present classification of the badges of trade.61 These nine badges are
MT 2000/1, para 74. Radcliffe Report, above n 6, para 116. The report concluded that there should be no single fixed rule for determining the existence of a trade. 59 Available at [http://www.inlandrevenue.gov.uk]. 60 See IM125a. IM120-IM 135 deal with whether there is a trade in existence generally and IM2603-2633 with whether there is a trade in existence in respect of land. 61 IM125 notes that "[a] modern review of the badges is Marson v Morton 59 TC at page 391 although the Court disclaimed any intention of the review being exhaustive." IM124a outlines some recent views on the meaning of trade.
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reviewed and discussed in part 3.3 of this article. 3.2 Preliminary Observations by the Inland Revenue The United Kingodom Inland Revenue makes the following points concerning the concept of trade: 1. The question of whether a trade exists is a question of fact.62 2. Usually there will be no dispute as to whether or not a trade exists. "[T]he butcher, the baker and the candlestick maker all know, without getting into semantics, that they are carrying on a 'trade'."63 The meaning of the word "trade" can be an issue where in some way the activities are out of the ordinary, "so as not to be unquestionably 'trading'."64 3. "The definition [of trade] in Section 832(1) is quite broad and even circular in some respects. But it does make clear that activities that, in ordinary language, may not be a full blown trade can nevertheless be taxable [under Schedule D]. The definition brings in transactions that might in some respects be less than full trading operations but are sufficiently close to trade to be included in its meaning for tax purposes."65 4. "It has been suggested that only 'concern' is qualified by the words 'in the nature of trade' so that adventure stands alone. However the Courts have often used the phrase 'adventure in the nature of trade' to describe the test "66 which makes activities taxable. Accordingly, isolated transactions and speculative adventures can be taxable under Schedule D. However, not every such transaction or adventure that produces a profit will be so taxable. 5. The profit must be of an income nature, not a capital accretion. 6. Case law should be seen "as a source of principle rather than as a source of facts to compare with those"67 in the particular case under scrutiny. It will be rare to find a case that is, on the facts, an exact match. 7. Transactions that are undertaken solely to get a tax advantage (ie for fiscal purposes) are not trading transactions even when the outward characteristics of trading are present. In addition to the badges of trade, the transaction(s) must have a commercial purpose.68 8. Difficult taxation problems can arise with land transactions.69
IM121. Note, however, the comments of Pearce referred to in part 2 of this article. IM122. 64 Ibid. 65 IM122b. Whiteman and Milne also note the circular and somewhat unhelpful, statutory definition of trade: PG Whiteman and DC Milne, Whiteman and Wheatcroft on Income Tax (2nd ed, 1976), 256 (para 5-17). 66 Ibid. See, for example, Edwards 36 TC 207; [1955] 3 All ER 48. 67 IM123a. 68 IM124b cites a number of examples including Overseas Containers (Finance) Ltd v Stoker 64 TC 473 and Coates v Arndale Properties Ltd 5 [1984] 1 WLR 1328. 69 1M2603. No specific problems are, however, identified in IM2603.
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3.3 The Nine Badges of Trade 3.3.1 The Subject-Matter of the Realisation
While almost any form of property can be acquired to be dealt in, those forms of property, such as commodities or manufactured articles which are normally the subject of trading, are only very exceptionally the subject of investment. Again, property which does not yield to its owner an income or personal enjoyment merely by virtue of its ownership is more likely to have been acquired with the object of a deal than property that does.70
that these types of assets are acquired other than as a subject of trade."75 The Inland Revenue76 comments that the income yielded by the "investment asset" must, however, be considered alongside the expenses associated with the transaction. Thus, where the purchase of property is financed by borrowing, on which interest is payable, the outgoings may match or greatly exceed the income received from the asset so that this income bearing nature of the asset becomes much less or even of no importance. In this scenario, any intended benefit to the owner of the asset can only come from the realisation of the asset, which would allow the loan to be repaid. The income, therefore, merely reduces the outgoings until the surplus on sale is available.77 In this context, the asset may have been acquired on terms which are uneconomic as an investment, so that it is crucial that there is a quick sale of the property. Such a transaction would probably be treated as an adventure in the nature of trade.78 In a similar vein, Pearce concludes where land is unsuitable for occupation by the taxpayer or for retention as an income-producing investment, a trade will exist where the taxpayer does not have the financial ability to hold the property
The nature of the property which is bought and sold may indicate the nature of the taxpayer's activity. This test has been decisive in a number of cases where the property purchased and subsequently sold yielded no income or personal enjoyment.71 In these cases the "commodity itself stamps the transaction as a trading venture".72 On the other hand, where the property purchased is of an investment type (ie "something normally used to produce an annual return"),73 it is less likely that the courts will consider its acquisition and sale to be in the nature of trade.74 Investment assets yield income without having to be turned over or traded to do so. The very nature of these assets provides an initial presumption
Radcliffe Report, above n 6, para 116. See, for example, Fraser 24 TC 498. This case involved the purchase and sale of a large quantity of whisky by the taxpayer, which in the words of the Lord President (Normand) was "greatly in excess of what could be used by himself, his family and friends, a commodity which yields no pride of possession, which cannot be turned to account except by a process of realisation ..."(at 502-503). See also Rutledge v IRC 14 TC 490 ("Rutledge") where the taxpayer, who was in Berlin on business connected with a cinema company, purchased one million rolls of toilet paper. The consignment was subsequently sold to one person at a considerable profit. Lord Sands said (at 497): "The nature and quantity of the subject dealt with exclude the suggestion that it could have been disposed of otherwise than as a trade transaction. Neither the purchaser nor any purchaser from him was likely to require such a quantity for his private use". 72 IRC v Reinhold 34 TC 389, 392 ("Reinhold"). 73 Ibid. 74 In Reinhold, the purchase and sale of four houses was held not to be an adventure in the nature of trade. The court considered it important that prima facie the property was a form of investment capable of yielding an income. 75 IM 126g. 76 IM 126h. 77 See for example Cooke v Haddock 39 TC 64 where the interest charges on the rental property far exceeded the rental received. The transaction was taxable. 78 Whiteman and Milne, above n 65, 256 (para 5-17).
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purchased, especially where the purchase price has been paid out of the sale price.79 The subject-matter of the transaction in question can also be relevant to the extent that it is, or is not, property that the taxpayer usually deals in. It is more likely a single transaction will constitute an adventure in the nature of trade if it is in the line of the taxpayer's actual trade.80 The fact that the acquirer of an investment expects that asset to increase in value is not sufficient to constitute an adventure in the nature of trade.
The owner may well make the purchase hoping for an accretion in value and even a realised surplus in due course. But that hope and expectation will not make the transaction a trading matter unless there are other significant indications of a trading intention.81
Pearce observes that because land can be held for use and occupation or as an investment or alternatively for resale as a commercial commodity (ie for trading purposes), whether land is part of an adventure in the nature of trade "in most cases turns on the extent to which the evidence indicates that the land was used as a commercial asset or as an investment."84 The Inland Revenue, in IM2606, similarly state that the relevant consideration in respect of the character of land to be " was it amenity land for the purchaser, suitable for long term investment or ripe for immediate development?" The author suggests that in the case of the sale and subdivision of land, there will be a presumption against trade where the land that is subdivided and sold was originally purchased and used for either farming or rental (commercial or domestic) purposes or was purchased as, and has been occupied as, the taxpayer's residence.85 Clearly in these circumstances, the land has either yielded a return (as a farm or rental property) or, in the case of a private residence, yielded a pride of possession,86 which would distinguish the land from whisky87 and toilet paper.88 The land would be classified as an investment asset rather than a trading asset. In these circumstances the
The Inland Revenue comment that land, more than most assets, can function either as an investment or as trading stock.82 Further, land can be held as an investment and yield no income or be yielding income and still be trading stock.83
Pearce, above n 42, 146. In order to avoid a finding of trade in this situation, Pearce suggests that the taxpayer would need to show that they could have provided the purchase price without selling the property, for example by evidence that the funds could have been supplied by raising a mortgage. 80 Fraser 24 TC 498, 502. 81 IM126i. In the author's view, these other significant indications could include frequency and number of similar transactions (the third badge). 82 IM126h. This point is similarly made by the ATO in respect of land and shares (MT 2000/1, para 71). 83 IM126h. 84 Pearce, above n 42, 146. 85 This is unless the property has been either temporarily farmed, rented or lived in pending development. "The intention to use or occupy the property is not ... conclusive that the property was acquired as an investment if it is merely an intention to use or occupy until a suitable opportunity occurs for resale. In Sharples v Rees 13TC 366, it was held that the fact that the taxpayer had purchased a piece of land with the intention of using it for a poultry farm until it was ripe for sale was not a reason for reversing the Commissioners' decision that the profits on resale formed part of the profits of his trade of speculative building": Pearce, above n 42, 148. 86 IM2616 states that in respect of the sale of a dwelling (not in the context of a subdivision specifically) the fact that the dwelling has been used as the taxpayer's residence is not fatal to a trading contention: MacMahon and MacMahon v IRC 32 TC 311("MacMahon"). In these circumstances it will be necessary to demonstrate that the residence was incidental to the taxpayers primary objective which was to dispose of it by way of trade. 87 Fraser 24 TC 498. 88 Rutledge 14 TC 490.
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commodity itself does not stamp the transaction as a trading venture. If the GST cases on the subdivision of land heard by the New Zealand courts are any indication of the factual scenarios that will be common in the Australian context, this badge will indicate that no trade will exist in many cases. This is on the basis that, apart from one case,89 the relevant New Zealand decisions have concerned properties that were used, prior to the subdivision, by the taxpayers concerned either as private residences or as farms.90 With the one exception noted, in none of the cases that have come before the New Zealand courts was the property acquired for the purpose of subdivision. As always, however, the ultimate finding will depend on a consideration of all the relevant facts of each case. Accordingly, while prior activities such as farming on the land may suggest that the land was not acquired as the subject of trade, evidence of supervening trading (the fourth badge) may support a finding of trade. Other badges could also indicate the existence of trade in these circumstances, such as the length of ownership (the second badge), frequency and number of similar transactions (the third badge) and motive (the sixth badge). If a farm property, for example, has only been owned and farmed for a short interval before subdivision, this may indicate the farming was a secondary activity, the taxpayer's intention in respect of the land amounting to an adventure in the nature of trade. 3.3.2 The Length of Period of Ownership
Generally speaking, property meant to be dealt in is realised within a short time after acquisition. But there are many exceptions from this as a universal rule.91
The Radcliffe Report clearly thought that this was not a particularly strong indicator, a view shared by others.92 Despite this, the Inland Revenue in IM126x comment that a person who has held an asset for many years before disposing of it may be in a stronger position to argue that an investment has been realised than if the sale follows very soon after purchase.93 The fact that a sale occurs after a short period of ownership will help the trading inference if sufficient other badges of trade are present - trading, after-all, implies turning over assets for profit.94 IM2606 considers that the length of time that land is held and, particularly, whether there may have been, at the moment of acquisition, a pre-
Tout v Cook (1991) 13 NZTC 8053. In this case, the taxpayer purchased the property intending to subdivide and sell some of the land, including an old house on the property, and to build a house on the balance of the land. 90 See, for example, Case P10 (1992) 14 NZTC 4066; Case P64 (1992) 14 NZTC 4455; Case P76 (1992) 14 NZTC 4512; Case P83 (1992) 14 NZTC 4553; Case T40 (1997) 18 NZTC 8267; Case T60 (1998) 18 NZTC 8449 (all concerning the subdivision of land previously farmed); Case P54 (1992) 14 NZTC 4379 (which concerned land acquired as a holiday retreat for the beneficiaries of a trust); Case S70 (1996) 17 NZTC 7431; and Wakelin v C of IR (1997) 18 NZTC 13182 ("Wakelin") (which concerned the subdivision of land previously used as a residence). In Newman (1995) 17 NZTC 12097 (CA) the land was acquired for the purpose of building a home for the builder and his family. The land was held for only a short period (18 months) before subdivision commenced. This was, however, because the taxpayer, a builder, ran into financial difficulties and needed funds, hence the subdivision and sale of part of the land. 91 Radcliffe Report, above n 6, para 116. 92 Whiteman and Milne, above n 65, 257 (para 5-18) comment "This test is not of great value; a long period between acquisition and sale will only negative a finding of trading where other factors do not lead to an opposite conclusion." 93 See also comments by the Vice Chancellor in Marson v Morton 59 TC 381, 392 ("Marson"). 94 IM126x. Whiteman and Milne similarly comment that "a quick resale no doubt helps to support a finding of trading where other elements of trading are present, and may lead to the inference of a more important indication of trading.": Whiteman and Milne, above n 65, 257 (para 5-18). The short period of ownership was a factor in favour of trading in Wisdom 45 TC 92.
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arranged sale relevant to establishing whether trading exists in the context of land transactions.95 Whiteman and Milne indicate that it will be very difficult to resist a finding that a trade has been carried on if the sale of the property was contemplated at the time of purchase.96 Such a finding would be even more difficult to resist if the property was only owned for a short period of time prior to sale. While no one badge can be applied in isolation, in the author's view, this badge, more than any other, needs to be applied in conjunction with other badges. For instance, an individual may purchase a residential property, having no immediate intention of sale, yet the next day loses his or her job and cannot keep up the interest payments and outgoings on the house and is forced to sell. The person has the good fortune to sell the property at a profit. In isolation, due to the short period of ownership, this badge would indicate that an adventure in the nature of trade existed. However, in this case, the circumstances of the sale (the fifth badge) and the motive of the taxpayer (the sixth badge) would indicate that no trade existed. Conversely, property may be held for a long time, yet arguably an adventure in the nature of trade may exist. The New Zealand High Court case Wakelin97 is one such example on the facts. In this case, a block of land was acquired in 1976. The owner commenced building his house on the land in 1979. He instructed a surveyor in 1985 to subdivide the land. The land was subsequently subdivided into six lots, including a section with the house on it. The subdivision was carried out, on and off, over a number of years. The five bare blocks were sold between 1991 and 1994. The house property was sold in 1995. The delay in selling the lots was due in part to the state of the market and in part to the fact that the taxpayer was not in a hurry to sell the blocks. From the date of the acquisition of the land to the sale of the last lot, Mr Wakelin had owned the land for almost twenty years, the subdivision itself taking approximately nine years from its commencement to the sale of the last lot. The length of ownership would indicate no adventure or concern in the nature of trade existed. Consideration of other badges, such as the level of development and associated work (the fourth badge) may, however, indicate otherwise.98 The New Zealand GST cases on land subdivision decided to date generally have involved land owned for some period of time prior to the commencement of the subdivision.99 These cases may provide some indication of the various scenarios that will commonly arise in Australia. If that is so, as with the first badge, this badge may indicate that no trade will exist in many cases.
The fact that the taxpayer had contracted to sell the asset before he had purchased it was a relevant factor in finding a trade existed in Johnston 46 TC 463. See also Iswera v Ceylon Commissioner of Inland Revenue [1965] 1 WLR 663 ("Iswera") where the taxpayer's actions concerning the acquisition of land and subsequent subdivision and sale of some of that land, were suggestive of a trade. The taxpayer borrowed to pay the deposit on the property and then made arrangements for the subdivision of the land and immediate sale to the sub-purchasers. This all had to be in place before she could carry out her contract with the vendor of the property. 96 Whiteman and Milne, above n 65, 258 (para 5-18). See for example Eames v Stepnell Properties Ltd 43 TC 678. 97 (1997) 18 NZTC 13182. 98 The subdivision did constitute a "taxable activity" under the NZ GSTA. This was despite the fact that the activity occurred in fits and starts - that did not mean that it was not carried on continuously. Mr Wakelin commenced the subdivision intending to see it through to completion. The activity was also carried on regularly. 99 See Case P54 (1992) 14 NZTC 4379; Case P76 (1992) 14 NZTC 4512; Case P83 (1992) 14 NZTC 4553; Case T40 (1997) 18 NZTC 8267; Case T60 (1998) 18 NZTC 8449; Case S70 (1996) 17 NZTC 7431; and Wakelin (1997) 18 NZTC 13182. In these cases the land, prior to the commencement of subdivision, had been held for at least five years. In Case P10 (1992) 14 NZTC 4066, the farm land subdivided had been owned and farmed by a company. The company was wound up in 1985 and the farm land was transferred to the main shareholder as a capital distribution. The main shareholder commenced the subdivision of the farm land in 1985. The period of ownership by the company is unspecified. Neither are details of the length of ownership reported in Case P64 (1992) 14 NZTC 4455.
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3.3.3 The Frequency or Number of Similar Transactions by the Same Person
If realisations of the same sort of property occur in succession over a period of years or there are several such realisations at about the same date a presumption arises that there has been a dealing in respect of each.100 it is well known that one transaction of buying and selling a thing does not make a man a trader, but if it is repeated and becomes systematic, then he becomes a trader and the profits of the transactions, not taxable so long as they remain isolated, become taxable as items in a trade as a whole Where there is more than one transaction involved the case for trading will be much stronger if the pattern appears to be a series of related transactions occurring at not too great intervals of time, and presenting the appearance of habitual and continuous activity. In contrast the case will be weakened if the appearance is of a number of irregular transactions in different types of property spread over a number of years.102
Repeated transactions of the same kind are more likely to constitute an adventure in the nature of trade than a single isolated transaction. The test of frequency of like transactions must, however, be considered in relation to the subjectmatter. An isolated purchase and sale of property may still be an adventure in the nature of trade if the subject matter is not of an investment nature and yields no pride of possession.101 The Inland Revenue state:
Although an isolated transaction can amount to a trade the systematic repetition of a transaction is a pointer towards trading. Where sets of operations, each set not in itself constituting a trade, are carried out on occasions not widely separated in time, the series of operations may amount to the carrying of a trade not only the number of the transactions but also the frequency with which they are repeated [should be considered]. Thus 10 transactions every year would, all else being equal, be more likely to amount to trading than say 2 transactions every year. In Pickford v Quirke 13 TC at page 263 Rowlatt J stated:
Based on the third badge (and in the absence of other badges to the contrary), a straightforward subdivision of land into two allotments, which involves no development work, is unlikely to constitute an adventure or concern in the nature of trade. The subdivision is an isolated transaction, there is no repetition or frequency of activity. The first example in MT 2000/1 confirms this view.103 This conclusion could change if, for example, the motive (the sixth badge) of the taxpayer in engaging in the transaction was clearly to make a profit and the property was held for only a short period of time (the second badge).
Radcliffe Report, above n 6, para 116. See, for example, Fraser 24 TC 498. 102 IM126e. 103 MT 2000/1, para 74. In that example (Example 11), the subdivision of a 2.5 hectare block into two lots and sale of the second lot, in the view of the ATO would not constitute an adventure in the nature of trade. According to MT 2000/1, para 74, it constitutes "the mere realisation of a private asset." No details are provided in the example as to the level of development and associated work required, if any, to subdivide the land, other than the fact that the survey and subdivision is approved. The New Zealand courts (see Newman (1995) 17 NZTC 12097 (CA) and the New Zealand Inland Revenue Department in TIB, above n 56, 10 have likewise concluded that such an activity is not a "taxable activity" for New Zealand GST purposes. As an aside, the author notes the similarity between the facts in Newman and those in Example 11 and wonders whether Example 11 was based on that case. Newman concerned the subdivision of a 2.7 hectare section into two lots, one of which was retained by the taxpayer (to build his residence). The subdivision was straightforward, not involving any development work on the property.
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When a taxpayer is involved in more than one subdivision, the issue for determination in respect of the third badge, will be how many similar transactions are required by the taxpayer to present "the appearance of habitual and continuous activity" (and thus an adventure in the nature of trade) as distinct from "a number of irregular transactions"?104 In addition, where such transactions occur over a period, what interval of time will indicate a sufficient degree of repetition to constitute an adventure in the nature of trade? In respect of this badge, Whiteman and Milne observe that "[n]o general rule can be laid down as to how many "bites" an investor can have before he constitutes himself a trader " 105 The case for the existence of an adventure or concern in the nature of trade will, however, be strengthened if the purchase and subdivision of land is undertaken in a systematic and organised way and at relatively close intervals of time. In addition, the presence of other badges such as the fourth badge (the level of supplementary work on the property realised) will also be relevant to whether the activity constitutes an "enterprise". In Pickford v Quirke,106 four similar transactions constituted a trade.107 Lord Hanworth MR observed in the case:
When, however, you come to look at four successive transactions you may hold that what was, considered separately and apart, a transaction to which the words 'trade or concern in the nature of trade' could not be applied, yet when you have that transaction repeated, not once nor twice but three times, at least, you may draw a completely different inference from those incidents taken together.108
In Rellim Ltd v Vise109 a company acquired a number of houses, a farm and 13 acres of land by four separate purchases. Six years later, the land, the farm and two of the houses were disposed of by five separate sales. It was held, in part due to the number of similar transactions, that the profits derived were trading profits. As indicated in part 1, the equivalent concept to an "enterprise" in the NZ GSTA is that of a "taxable activity" which focuses on whether an activity is carried on "continuously or regularly".110 The words "continuously" and "regularly" are not defined in the NZ GSTA. The courts have interpreted "regularly" as being concerned with repeated exercises and "continuously", on the other hand, to be concerned with an ongoing project or projects.111 The two words are complementary. While the New Zealand test (of a "taxable activity") is clearly a different statutory test to the test for an "enterprise" in Australia, the term "regular" bares some similarity to the third badge. In Case N27,112 for example, Bathgate DCJ
IM126e. Whiteman and Milne, above n 65, 260 (para 5-20). 106 13 TC 251 ("Pickford"). 107 In Pickford, a director of a spinning company formed a syndicate to purchase shares of a mill-owning company. The company, once acquired sold its assets to another company, at a profit to the syndicate. The director in question was subsequently involved in three similar transactions, although the members of the syndicate were not always the same. The director's participation in these transactions constituted a trade. This was in spite of the fact that each of the four transactions considered separately would not constitute an adventure in the nature of trade. 108 Pickford 13 TC 251, 269. 109 32 TC 254. 110 See note 9 above. 111 Based on the New Zealand courts interpretation of the phrase "continuously", the author does not consider that the term is directly relevant to the consideration of this badge. For example, in Case N27 (1991) 13 NZTC 3229, 3238, Bathgate DCJ said that "continuously" means the "activity has not ceased in a permanent sense, or has not been interrupted in a significant way ...". 112 Case N27 (1991) 13 NZTC 3229.
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stated that "regularly" embodies "a steadiness or uniformity of action, or occurrence of action, so that it recurs or is repeated at fairly fixed times, or at generally uniform intervals, to be of a habitual nature and character"113 (emphasis added). The New Zealand authority on the term "regular" may therefore, be relevant to a consideration of the third badge. The view of the New Zealand Inland Revenue Department ("IRD"), as outlined in an example in a Tax Information Bulletin, is that the undertaking of three similar straightforward subdivisions over (what appears to be) an eighteen month to two-year period, is sufficiently regular in nature to constitute a "taxable activity" and be subject to GST.114 There is another aspect of the application of this badge to the subdivision of land that requires consideration - that of the "one-off" subdivision of one block of land into a number of allotments and the sale of those allotments.115 In one sense, such a subdivision is an isolated or "one-off" activity. It is not repeated. The alternative view, however, is that within the subdivision itself there are a number of "subdivisional acts" which may be repeated or have to be undertaken for each lot, and, in that sense these "subdivisional acts" are repeated.116 Accordingly, on this view such an activity, by virtue of the repetition of acts within the one overall activity may constitute "an adventure or concern in the nature of trade" and be subject to GST. Based on the second example in MT 2000/1 it appears that the ATO will adopt this second view and treat such "one-off" subdivisions as constituting an adventure or concern in the nature of trade.117 If this view were not to be adopted, there could be many sizeable isolated subdivisions which would not be subject to GST because of their "one-off" nature. No further guidance on this aspect of the third badge is provided in MT2000/1. For example, if the taxpayer in Example 12 had instead subdivided the land into three or four or ten blocks, would that still constitute "an adventure or concern in the nature of trade" or rather "the mere realisation of a private asset", as for the first example in MT2000/1? Where a block of land is subdivided into a number of sections, how many sections (ie how much "repetition") are necessary to constitute a trade etc? As a general principle in New Zealand, the subdivision of land into three additional sections, that involves only minor work and cost will not constitute a taxable activity.118 This principle is, however, primarily based on the fact that the activity is not carried on "continuously" (rather than "regularly") and should, therefore, be treated with caution in the Australian context.
Ibid 3239. TIB, above n 56, 13 (Example 5). The TIB cites the example of a taxpayer, Chris, who after researching the property market purchases an allotment of bare beachfront land which he intends to subdivide. The land is subdivided into two sections and sold two months later. Soon after the sale he purchases a similar property, which he also subdivides into two sections and then sells both lots. Chris repeats the same exercise a year later. While, in the view of the IRD, each activity may not amount to a "continuous" activity, the taxpayer's overall activity of subdividing is "regular" in nature because the process is repeated over time. Chris would be carrying on a taxable activity of subdivision from the time of the purchase, and subdivision, of the first property. 115 This is to be distinguished from a taxpayer who subdivides blocks of land on a regular basis and is thereby carrying on a business. 116 These acts could include arranging survey plans, engineering reports, installation of water, power and telephone lines, as well as obtaining the services of lawyers and real estate agents. 117 MT 2000/1, para 74. In this example (Example 12), the taxpayer, Bob, inherits a farm from his parents. He decides not to retain it and engages a surveyor to survey the 500 hectare property to establish how many 15 hectare lots it can be subdivided into. Once approval for the subdivision is received from the local council, he hires an engineer and contractor to build access roads for the lots and to install services such as sewerage, water and electricity. The lots are sold at auction. The ATO state that these activities are in the form of an adventure or concern in the nature of trade. They have a commercial flavour because of the way the subdivision was undertaken. The ATO refers to the action of Bob as "activities" rather than one overall subdivision activity. 118 A McKenzie, GST - A Practical Guide (6th ed, 1998), para 1301.
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Where an isolated subdivision does constitute an adventure or concern in the nature of trade, and part of the land is retained, perhaps that part containing a residence, and sold at a later date, there will be an issue as to whether the subsequent sale of that remaining block is part of the (earlier) trading activity and subject to GST. The Inland Revenue, in IM2616, states that in respect of the sale of a dwelling (not in the context of a subdivision specifically), the fact that the dwelling has been used as the taxpayer's residence is not fatal to a trading contention (MacMahon). Where a residence exists, from the Inland Revenue's perspective, it will be necessary to demonstrate that the residence was incidental to the taxpayer's primary objective which was to dispose of it by way of trade. The author believes that the taxpayer's motive (the sixth badge) may be especially relevant to determining the applicability of the GST to the remaining block of land. In order for the subsequent sale of this block not to be subject to the GST, the taxpayer will need to demonstrate that at the time the property was acquired there was no intention to make a profit from the sale of the remaining block. Rather the intention was to profit only from the subdivision of the part originally sold and to retain the balance. No guidance is provided in the examples referred to in MT 2000/1 or in the ruling generally on this point.119 One final feature of the application of this badge is that a subsequent transaction may result in an earlier similar (isolated) transaction becoming part of an adventure or concern in the nature of trade, even though the earlier transaction did not, and would not, on its own constitute a trade.120 Thus, in Pickford,121 the participation of a director in four similar transactions constituted a trade. This was despite the fact that each of the four transactions considered in isolation would not be regarded as an adventure or concern in the nature of trade (and at the stage of the completion of the first and arguably also the second transaction, no trade existed.) This last feature could have a significant impact when applied to taxpayers involved in subdividing land. Assume that a taxpayer undertakes a simple subdivision of an allotment into two sections and sells those sections (in year one). It is unlikely that this subdivision on its own would constitute an adventure in the nature of trade. The taxpayer would not therefore register for, nor account for, GST on the sale proceeds. Three similar subdivisions are undertaken in the subsequent three years, one subdivision per year (ie in years two, three and four). The repetition of this subdivision activity may mean that the four subdivisions together constitute an adventure in the nature of trade and an "enterprise". This could have major GST implications, not only for the taxpayer in failing to register for the GST in year one, when the first subdivision occurred, but also for failing to account for the GST on all,four subdivisions. 3.3.4 Supplementary Work on or in Connection with the Property Realised
If the property is worked up in any way during the ownership so as to bring it into a more marketable condition, or if any special exertions are made to find or attract purchasers, such as the opening of an office or large-scale advertising, there is some evidence of dealing. For when there is an organised effort to obtain profit there is a source of taxable income. But if nothing at all is done, the suggestion tends the other way.122
The IRD in this scenario consider "that only the newly-subdivided allotments form part of that person's taxable activity. The allotment containing the original home is separate from the taxable activity of subdivision and sale. Therefore, if the person later sells the residential home (and curtilage), that sale is not made in the course or furtherance of the taxable activity of subdivision. GST will not apply, provided that the residential home (and curtilage) do not form part of the assets of another taxable activity carried out by that person": TIB, above n 56, 12. 120 Leach v Pogson 40 TC 585. 121 13 TC 251. 122 Radcliffe Report, above n 6, para 116.
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Thus, three individuals who purchased a cargo vessel, and over four months converted it into a steam drifter and sold it at a profit, were carrying on a trade.123 In cases concerning real property transactions, emphasis has been placed on expenditure incurred to enhance the value of the land as an indicator of trading.124 "If, however, the expenditure is consistent merely with a landowner wishing to realise his asset at the best possible price, this will not be treated as an indication of trading."125 In Taylor v Good,126 the taxpayer purchased a house which held long-standing sentimental connections for him for 5,100. He intended originally to live in the property with his wife and family. It became evident that this, however, was impracticable. He prepared plans for a development, procured suitable road access and obtained, after an appeal, planning permission for ninety dwellings on the property. The taxpayer did not offer the property for sale, rather was ultimately offered 54,000 for the property, which he accepted. The proceeds were not taxable, there was no trade as the taxpayer merely took "steps to enhance the value of the property in the eyes of a developer who might wish to buy for development."127 It is unclear whether the conclusion would have been the same had the taxpayer undertaken the actual subdivision himself. There is, however, at least an argument, based on Rand v Alberni Land,128 that the conclusion would not have been any different. In Alberni Land, a number of land owning individuals formed a company through which to realise their interests in the land. The company spent money in clearing the land, forming roads and in procuring a railway company to bring a line to open up the area. Some land was sold and the proceeds were put back into the remaining land. This work was held to be merely enhancing the value of the land or simply realising it, the activity was not trading. Rowlatt J indicated that the case was not far from the line (from being a trade). The line was not, however, crossed. Rather, the Court held that:
If a land-owner, finding his property appreciating in value, sells part of it, and uses part of his money still further to develop the remaining parts, and so on, he is not carrying on a trade or business; he is only properly developing and realising his land.129
Based on these cases it is arguable that much subdivision work would be consistent with the owners of the land simply realising their land at the best possible price. Taking the New Zealand decision Case S70130 as an example, the taxpayers, who wished to sell their property as a whole, decided to prepare a scheme plan of subdivision into four lots (plus the house lot) "to enhance the value of the property".131 The taxpayers subsequently proceeded with the subdivision when no buyer could be found for the entire block. In the language of the United Kingdom cases, they were merely realising their land at the best possible price and therefore, no trade would exist.132
IRC v Livingston 11 TC 538. It is interesting to note that this was an isolated transaction, yet within the larger single transaction there were a number of smaller connected transactions undertaken as a result of converting the vessel. 124 See IRC v Toll Property Co Ltd 34 TC 13 as distinguished in Reinhold 34 TC 389. 125 Whiteman and Milne, above n 65, 261 (para 5-23). 126 [1974] 1 WLR 556 ("Taylor"). 127 Ibid 560. The Inland Revenue (IM2615), in respect of this case, comment that: "The obtaining of planning permission prior to sale does not, in itself, define a transaction as a trading transaction ... It may however provide evidence of intention and thus add weight, in certain circumstances, to a trading argument." 128 7 TC 629 ("Alberni Land"). 129 Ibid 638-639. 130 (1996) 17 NZTC 7431. 131 Ibid 7433. 132 Likewise, in Case T60 (1998) 18 NZTC 8449, the taxpayers subdivided and sold their farm, rather than selling it as one block, as real estate agents advised it would be easier to sell the farm in subdivided lots.
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The Inland Revenue133 refers to the concept of supervening trading, ie an asset acquired as a capital asset or as an investment is subsequently developed or dealt with in such a way to become stock of an adventure in the nature of trade.134 In respect of land, the greater the change in the character of the land, the stronger the argument that there has been supervening trading. The Inland Revenue comments:
Development only of the infrastructure (for example, the division of land into plots, the construction of access roads, the installation of mains services) of land previously acquired as a capital asset does not signify an appropriation to stock in trade and does not automatically allow [the Inland Revenue] to argue supervening trading. Such development merely enhances the value of the capital asset in the owner's chosen market place - that of the developer/purchas-er.135 The Company are doing no more than an ordinary landowner does who is minded to sell from time to time, as purchasers offer, portions suitable for building of an estate which has devolved upon him from his ancestors This is not the case where land is from time to time purchased with a view to resale Again, a landowner may lay out part of his estate with roads and sewers and sell it in lots for building, but he does this as owner, not as a land speculator. This Company is not a Company incorporated for the purpose of dealing in land It would be different if a landowner, an individual, entered into the business of buying and selling land; but the case of the owner, whether of land, or pictures, or jewels, selling his own property, although he may have expended money on them in getting them up for sale, is entirely different; he sells as owner, not as trader.137
This statement is based on The Hudson's Bay Company Ltd v Stevens.136 The taxpayer company, established by Royal Charter in 1670, owned large tracts of land in North America. It surrendered to the Crown its territory and rights in exchange for, inter alia, a right to claim, within fifty years, a twentieth share in certain lands from time to time as the lands were settled. The company was required to pay a proportionate share of the survey expenses. The lands subsequently granted from time to time were sold. The case concerned the taxation of 177,857 derived in 1903 by the company from the sale of land. The English Court of Appeal held the company was not carrying on the trade of dealing in land and the proceeds were not taxable:
This view draws further support from Pilkington v Randall,138 where Salmon LJ commented:
I do not read the decision of this Court in Hudson's Bay Co v Stevens, or the decision of Rowlatt J, in Rand v Alberni Land Co Ltd as laying down a proposition of law to the effect that, whenever a property owner develops his land by making roads and laying sewers and selling plots, he can never be carrying on a trade. This would be opening the door very wide to modern property developers. I think the highest it can be put is that usually in such circumstances the property owner is not carrying on a trade 139
133 134
IM2613. This concept is based on dicta from several cases including Taylor [1974] 1 WLR 556. 135 IM2614. 136 5 TC 424 ("Hudson's Bay"). 137 Ibid 436, 437-438. 138 42 TC 662 ("Pilkington"). 139 Ibid 673.
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If the ATO and Australian courts adopt the approach of the United Kingdom judiciary (and Inland Revenue) many subdivisions, which may include infrastructure such as construction of roads etc, of land originally acquired as an investment asset or residence, will be characterised as the taxpayer simply maximising the assets realisable value and not as an adventure in the nature of trade. 3.3.5 The Circumstances that were Responsible for the Realisation
There may be some explanation, such as a sudden emergency or opportunity calling for ready money, that negatives the idea that any plan of dealing prompted the original purchase.140
reason(s).142 The sale of sections in these circumstances, prima facie would not constitute an adventure in the nature of trade. This statement needs to be qualified by adding there may be other badges present, such as the second badge (frequency) which could still indicate that a trade exists. 3.3.6 Motive
There are cases in which the purpose of the transaction and sale is clearly discernible. Motive is never irrelevant in any of these cases. What is desirable is that it should be realised clearly that it can be inferred from surrounding circumstances in the absence of direct evidence of the seller's intentions, and even, if necessary, in the face of his own evidence.143
No trade was therefore found to exist in West v Phillips,141 when a builder sold houses which he had built and had held as an investment for many years. The Commissioners had found that the houses became trading stock when the builder set up a sales organisation to dispose of them. On appeal the Court, however, found that this inference of a change in intention was unjustified. The taxpayer had decided to sell the investment houses for reasons unconnected with his trade (relating to rent control, increased taxation and the rising cost of repairs) and therefore, the investment houses remained outside his trade. In the context of land subdivisions, it may be, for example, that land is subdivided when the taxpayer is short of money or due to some other
The test of trading is an objective test. Accordingly, the presence or absence of an intention to make a profit is not conclusive of a finding of trading - "if he [the taxpayer] adopts commercial methods his motives may be immaterial."144 A profit seeking motive is, however, evidence of a trading activity.145 It was stated by the Privy Council in Iswera146 that if a taxpayer's " acts are equivocal, his purpose or object may be a very material factor when weighing the total effect of all the circumstances."147 The Inland Revenue's view,148 where land is concerned, is that the acquirer's intention at the
Radcliffe Report, above n 6, para 116. 38 TC 207 ("West"). 142 In Newman (1995) 17 NZTC 12097 (CA) the builder had purchased 2.7 hectare as a lifestyle block for himself and his family. However, financial pressures resulted in the property being subdivided and the rear lot being sold. The taxpayers in Case T60 (1998) 18 NZTC 8449 similarly decided to sell their farm (by subdividing it) as a result of financial difficulties. In Case P64 (1992) 14 NZTC 4455 and Case S70 (1996) 17 NZTC 7431, the taxpayers were motivated to sell their properties due to health concerns. 143 Radcliffe Report, above n 6, para 116. (The Radcliffe Report, the United Kingdom cases and the Inland Revenue Inspectors Manual all use the terms "motive" and "intention" synonymously.) 144 Whiteman and Milne, above n 65, 251 (para 5-12). 145 "In nine cases out of ten ... the fact that the taxpayer bought property with the intention of reselling it will provide evidence which will at least justify the Commissioners in a finding of trade and may in combination with the other evidence be conclusive." Pearce, above n 42, 147. 146 Iswera [1965] 1 WLR 663, 668. See note 95 above. 147 An equivocal case was described in Kirkham v Williams 64 TC 253 (per Nourse LJ) as one in which "the facts, where viewed on their own, ...[do] not tell you whether the land acquired was acquired as trading stock or a capital asset.": IM127a. 148 IM2607.
141
140
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moment the land was acquired is of crucial importance. To be taxable, it is therefore necessary to identify an intention to trade at the moment of the acquisition of the land.149 Further,150 an intention sometime in the future to dispose of land at a profit does not automatically entail an intention to trade.151 Land can be acquired as a capital asset in the knowledge that it will increase in value and one day realise a "profit" on disposition. The fact that, in the interim, the land may produce no investment income, is not conclusive,152 Motive may be important, especially in the sole borderline cases. In Pilkington,153 executor and his sister were entitled to his father's residuary estate, which consisted of real property. After a difference of opinion concerning the disposal of the property, the sole executor acquired his sister's interest. He went on and constructed roads on the land and installed drains and services and went about selling the sections. The executor argued that the sales were merely realisations of inherited property. The English Court of Appeal held that the profits made were trading profits:
The fact that the sole executor purchased his sister's interest with the intention of making a profit was treated as the most important factor in reaching this conclusion, and, indeed, there can be little doubt that if there had not been such an intention the majority of the Court would have reversed the Commissioners.154
Where there are dual motives, such as acquiring land to provide accommodation for an existing trade and for eventual development and resale at a profit, IM127b states first, it must be determined if one of these motives is a trading motive. Second, it must be considered to what extent that motive colours the whole transaction as being a trading transaction. The "motive" of the taxpayer may be of particular importance where the taxpayer's acts are "equivocal".155 The presence or absence of a profit making motive will also be especially important for individuals and partnerships of individuals. Where either category of taxpayer carries out an activity, or series of activities, to constitute an enterprise there must be "a reasonable expectation of profit or gain".156 If the factual situations in the New Zealand cases involving GST and the subdivision and sale of land can be used as a guide, this badge will have limited application in the Australian context. In the New Zealand cases, the various blocks of land involved were either originally
In the income tax context, Parsons comments that in Whitfords Beach 82 ATC 4031, Gibbs CJ and Mason J in effect "treated the case as if there had been a new acquisition of the land by the company, this time for the purpose of development and sale, because the new proprietors of the company had acquired the shares in the company for the purpose of moving the company to undertake the development and sale of the land." In his view, the case confirms that the acquisition of property for development and sale may be viewed differently from the development and sale of property acquired for some other purpose. "If there had been no change in shareholding in Whitfords Beach, and the old shareholders had moved the company to undertake the development, the circumstances would presumably have been held by all judges to be a mere advantageous realisation": Parsons, above n 33. 164. 150 IM2608. 151 Reinhold 34 TC 389. 152 Marson 59 TC 381. 153 42 TC 662. 154 Whiteman and Milne, above n 65, 265 (para 5-25). The presence of an intention to make a profit appears to be the crucial difference between this case and Alberni Land 7 TC 629 and Hudson's Bay 5 TC 424. But for this intention, the Court indicated in Pilkington that the transaction would not have constituted a trade. Pilkington can be contrasted with McClelland 70 ATC 4115. In that case, the Privy Council held that a taxpayer who had inherited land with her brother, and sold some of her land in order to raise funds to buy the share owned by her brother, was not engaged in an adventure in the nature of trade. There was insufficient evidence to show that the taxpayer had intended to hold the land as anything other than as an investment. 155 See note 147 above. 156 GSTA, s 9-20(2)(c). Of the New Zealand cases cited (see notes 89 and 90) only one, Case P54 (1992) 14 NZTC 4379, did not involve a subdivision undertaken by an individual or partnership of individuals (husband and wife). Case P54 (1992) 14 NZTC 4379 was concerned with a subdivision undertaken by the trustees of a trust.
149
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farmed by the taxpayer157 or the taxpayer resided on the property prior to its subdivision.158 In these types of situations it will be difficult to infer that, at the moment the particular property was acquired, there was a motive to subdivide. Finally, the presence of a disclosed intention to trade, while being evidence of trade, will not necessarily make the particular transaction an adventure in the nature of trade. In Reinhold,159 the taxpayer admitted that he had bought and sold four houses intending to make a profit. This did not amount to a trade when other factors were taken into account, in particular the nature of the commodity, which in this case would normally be used for investment. 3.3.7 The Source of Finance: IM126v As indicated the Inland Revenue outline a further three badges of trade in addition to the six already discussed. The first of these is the source of finance.160 This test and the following two tests were not part of the badges identified in the Radcliffe Report. At the outset, it is therefore, unclear what importance the ATO and Australian courts will accord to these tests. In respect of the badge of finance:
The purchaser of an asset may have to borrow money specially in circumstances which indicate that from the first he has to sell to repay the loan. He may undertake the purchase in the expectation that he will pay for it out of the proceeds of the sale. [This may indicate trade].161
As an example of this badge, the Inland Revenue cite Wisdom162 where the taxpayer purchased and subsequently sold silver bullion. The purchase was financed by loans at a high interest rate in circumstances where it was clear that it was necessary to sell the bullion in the short term to repay the loan and eliminate the interest liability. The Inland Revenue in IM2606 state that where land is concerned, it is relevant to consider whether a loan was necessary to fund the purchase of land, and if it was, on what terms. It is submitted that this test should be used with caution, as it is normal practice to borrow to fund the purchase of a property, whether it be a farm, or commercial or residential property. The existence of loan finance will not necessarily indicate the presence of a trade. The terms and level of any external finance could also send the wrong signals as to whether trade existed. It is not inconceivable, for example, for a farm to be purchased with large external debt financing, in the expectation of a rise in future produce prices. Such a rise never eventuates and the taxpayer cannot service the debt and is therefore required to sell. The most effective method for the taxpayer to sell the farm and repay the debt may be to subdivide the farm. The debt was never incurred in respect of the subdivision and, even if further debt was incurred to subdivide the land, due to the presence of other badges (circumstances responsible for the realisation and lack of profit motive), there arguably will not be an adventure or concern in the nature of trade.
Case P10 (1992) 14 NZTC 4066; Case P64 (1992) 14 NZTC 4455; Case P76 (1992) 14 NZTC 4512; Case P83 (1992) 14 NZTC 4553; Case T40 (1997) 18 NZTC 8267; and Case T60 (1998) 18 NZTC 8449. 158 Case S70 (1996) 17 NZTC 7431; Wakelin (1997) 18 NZTC 13182. See also Case P54 (1992) 14 NZTC 4379 (where the land was acquired as a retreat for the beneficiaries of a trust) and Newman (1995) 17 NZTC 12097 (CA) (in which the land was acquired for the purpose of building a house). 159 34 TC 385. 160 The second ("Existence of similar trading transactions or interests") and third ("Method of acquisition") are discussed at paras 3.3.8 and 3.3.9 below, respectively. 161 IM126v. 162 45 TC 92.
157
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In respect of the subdivision of land, the author suggests the test will only be a useful indicator of trade where there is a clear motive to subdivide land at the time it is purchased and with that purpose in mind, funds are borrowed to acquire the land. Where the taxpayer already owns land and monies are borrowed to fund the subdivision of land, the link between the borrowing and subdivision may also indicate a trade. It may equally, however, simply support a finding that the taxpayer is wishing to realise the value of his or her land at the best possible price. 3.3.8 Existence of Similar Trading Transactions or Interests: IM126L Under this badge, a transaction which is similar to those of the taxpayer's admitted trade, may also be a trade.163 Similarly, the United Kingdom courts have also considered possible connections that the particular transaction under review has with the taxpayer's main trade. Thus "a one-off purchase of silver cutlery by a general dealer is much more likely to be a trade transaction than such a purchase by a retired colonel."164 In respect of the subdivision and sale of land, the application of this badge will depend on the individual facts of each situation. It is, however, interesting to observe that of the New Zealand cases referred to already in this article, except for Newman165 where the taxpayer was a builder, the subdivisions were not similar to, or connected with, any admitted "trade" of the taxpayer.166 3.3.9 Method of Acquisition: IM126z An asset that is acquired by gift or inheritance is less likely to be the subject of trade on its subsequent sale.167 According to IM126z, for an asset acquired by gift or inheritance to become the subject of trade, it must be shown that at some point subsequent to acquisition, and before sale, the asset became trading stock or an adventure in the nature of trade (ie there is supervening trading).168 The Inland Revenue further states that the change of intention must be demonstrable, perhaps through documentation or, in the absence of such overt indications, the inference of change will have to come from other sources. This will depend on the nature of the asset. Work done on the asset may assist the inference. In the case of land, this arguably will be the main indicator of any changed intention in respect of inherited or gifted land. The issue, however, for the revenue authority and taxpayer alike will be whether, in fact, the actions taken (eg subdivision) show a change of intention or the actions are merely an effort to maximise the asset's realisable value as a capital asset. In the second example in MT 2000/1,169 where, in the view of the ATO, an adventure or concern in the nature of trade would exist, the subdivided land was inherited. Clearly the subdivision work in that example was sufficient to displace any presumption against trade as a result of the farm being inherited.
See, for example, Harvey v Caulcott 33 TC 159 where a builder successfully claimed that certain properties built by him and then sold many years later were investments and not part of his trading stock. The Court said there was a special onus on him to show that the properties were investments and not trading stock. The Inland Revenue in IM2617 reiterates this special onus on builders. 164 Marson 59 TC 381, 391. 165 Newman (1995) 17 NZTC 12097 (CA). 166 In Case P54 (1992) 14 NZTC 4379, however, the trustees of the family trust had, prior to the subdivision the subject of the case, conducted another subdivision and returned GST on the proceeds of that subdivision to the IRD. 167 See Hudson's Bay 5 TC 424; Williams v Davies 26 TC 371; and McClelland 70 ATC 4115. 168 Taylor 49 TC 277, 287 (per Megarry J). 169 MT 2000/1, para 74 (Example 12). See note 117 above.
163
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4. CONCLUSION Whether a person is carrying on an "enterprise" for the purposes of the GSTA will often be clear, especially where the activity conducted constitutes a business, or is conducted in the form of a business. Many activities, such as isolated transactions by their very "one-off" nature will, however, lack the requisite repetition and organisation to be in the form of a business. The subdivision of land is one such example, except where the taxpayer is a developer or dealer in land. In order for an "enterprise" to exist when isolated transactions are carried on, the issue therefore becomes whether there is an adventure or concern in the nature of trade. The ATO states that the United Kingdom law (on the badges) is "a useful starting point"170 in considering the meaning of the phrase "an adventure or concern in the nature of trade." Based on this statement the ATO can be expected to refer to the United Kingdom cases and the Inland Revenue's interpretation of the law, when determining whether an "enterprise" exists. No doubt the Australian courts will also seek guidance from the United Kingdom cases when considering the phrase "an adventure or concern in the nature of trade." With this in mind, how useful and reliable in fact are the badges of trade? Parsons comments:
Any attempt to state the United Kingdom law on the meaning of trade in the context of an isolateed venture is fraught with difficulties. Authorities seem to go in pairs, the one appearing to stand for some proposition, the other contradicting that proposition. The explanation of the seeming contradictions, we are told, is that the United Kingdom regards the existence of a trade in a particular case as a question of fact, and it follows from the United Kingdom system of appeals that a court, which must find an error of law, cannot upset the finding by the Commissioners, save where the only reasonable conclusion on the basis of the stated case contradicts the conclusion of the Commissioners Another difficulty is that the United Kingdom authorities, while recognising the distinction between continuing business activities and an isolated venture, have not sought to formulate that distinction.171
Of the six badges identified in the Radcliffe Report, the first badge, the subject-matter of the realisation, is considered to be probably the most useful and to be a strong indicator in a number of cases.172 Yet, unlike whisky or toilet paper, as land can yield income or "pride of possession", this first badge may not prove to be such a strong indicator in the case of the subdivision and sale of subdivided land. Alston comments that badges two through six are "vague and riddled with exceptions."173 The second badge:
the length of time of ownership - is intended to apply so that a person is said to be engaged in a trade if he buys and sells within a short time. But it can also be applied in reverse where, for example, a taxpayer holds onto property until the best time to sell or until he has had time to work on it to bring it into a more marketable condition.174
The author believes that the third badge175 and the fourth badge176 will be significant in determining the nature of any subdivision activity for GST purposes. Each badge however, raises issues that the ATO and Australian courts will need to consider. For example, in applying the t h i r d b ad g e , w h a t d e g r e e o f r e p et i t i o n i s
170 171
MT 2000/1, para 68. Parsons, above n 33, 161. 172 A Alston, "Isolated transactions and the badges of trade Part 2", (1983) Current Taxation 27, 30. 173 Ibid. 174 Ibid. 175 The frequency or number of similar transactions by the same person. 176 Supplementary work on or in connection with the property realised.
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necessary to constitute a trade? With the fourth badge, the difficult issue is to determine the difference between the mere advantageous realisation of land (or sale of a private or domestic asset) by way of subdivision and circumstances which are an advantageous realisation that amounts to a trade.177 The circumstances responsible for the realisation (the fifth badge) will be a factor that taxpayers will use in support of their activity not being a trade. Of the six badges outlined in the Radcliffe Report:
Perhaps the least useful is the sixth - motive. As it is usually inferred from existing circumstances, one of the other badges must be present before it can be taken into account. 178
Not all badges will be present in every case. Two badges may be present, yet contradict each other. In Reinhold,179 despite the taxpayer admitting an intention (motive) to profit from buying and selling four houses, the subject matter of the transaction overrode that admission. The badges should therefore, at best be seen as "signposts" indicating the potential characterisation of a transaction. They are "merely various factors which alone or in combination have been held decisive in different cases."180 The uncertain application of the concept of "an adventure or concern in the nature of trade" will place practitioners in an awkward position.
On the one hand, if it is contended that the particular activities are not an adventure or concern in the nature of trade, and so do not give rise to assessable income, and it turns out that this is erroneous, then not only will the taxpayer be liable to income tax but also, if the taxpayer was required to be registered, to a GST liability, possibly without the ability to claim input tax credits. On the other hand, if the taxpayer registers as an enterprise for GST purposes this may well foreclose any arguments that, for income tax purposes, there is a mere realisation).181
In respect of individuals and partnerships of individuals, for an enterprise to exist there must be "a reasonable expectation of profit or gain". It is unclear whether the ATO and Australian courts will equate this phrase to motive and, if so, whether they will distinguish between motive and intention. It remains to be seen what weight is accorded to the remaining three badges of trade (source of finance, existence of similar trading transactions and the method of acquisition).
Due in part to the many different factual
177
Parsons, above n 33, 163 after citing Taylor [1974] 1 WLR 556, Alberni Land 7 TC 629 and Pilkington 42 TC 662, comments that: "The basis of a distinction between circumstances which are a 'mere' advantageous realisation and circumstances which are an advantageous realisation that amounts to a trade, is not evident in the cases." Parsons goes on to review Whitfords Beach 82 ATC 4031 where the principle concern of the Australian High Court was the concept of an advantageous realisation in the context of whether there was an isolated business venture. "The absence of any precedent that will explain the conclusions of Gibbs CJ and Mason J that there was an isolated business venture is starkly evident in the way each judge made use of authority. Gibbs CJ concluded there was an isolated business venture after rejecting Official Receiver (Fox's Case) (1956) 96 CLR 370 and accepting Scottish Australian Mining Co Ltd (1950) 81 CLR 188. Mason J (163-164) reached the same conclusion after accepting Fox's Case and rejecting Scottish Australian Mining." 178 Alston, above n 172, 30. 179 34 TC 385. 180 Pearce, above n 42, 145. 181 Author unspecified, "Beware - the GST is not as discrete as it appears to be" (1999) 34 Taxation in Australia 66, 67.
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scenarios that can arise with the subdivision of land, the New Zealand courts have struggled with attempting to determine when a "one-off" subdivision satisfies the requirements of a "taxable activity" contained in the NZ GSTA.182 It is suggested in conclusion that in Australia also, based partly again on the multitude of different factual scenarios that can be expected to arise and partly on the nature of the badges of trade, that tax practitioners, the ATO and Australian courts alike will struggle to determine when an adventure or concern in the nature of trade exists, both in respect of the subdivision of land and with "one-off" transactions generally.
182 Following a number of TRA decisions including Case P54 (1992) 14 NZTC 4379 and Case P64 (1992) 14 NZTC 4455 and the High Court decision in Newman v CIR (1994) 16 NZTC 11229, it appeared virtually any subdivision would comprise a taxable activity on the basis that even the most simple subdivision comprises a number of sequential steps including instruction of a surveyor, lawyer and real estate agent, and is thus carried on continuously. The New Zealand Court of Appeal in Newman (1995) 17 NZTC 12097 rejected this approach. The Court specifically stated that it was not desirable for it to issue guidelines on what subdivisions did comprise a "taxable activity". Rather, the Court stated the test of whether there is a taxable activity is one of fact and degree, requiring an overall view of the relevant activity to be taken.
Andrew J Maples is a Lecturer in Taxation and Business Law with the Department of Accountancy, Finance and Information Systems, University of Canterbury, Christchurch, NZ. He was formerly an Assistant Tax Manager in the Christchurch office of Price Waterhouse (now PriceWaterhouseCoopers).
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An "enterprise" does not include (GSTA, s 920(2)):

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Part 4 concludes with some final comments and observations.

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NZ GSTA, s 6. See note 9 above.

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3. THE "BADGES OF TRADE" 3.1 Background

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