Toyama Pty Ltd v Landmark Building Developments Pty Ltd
Document type: Decision Impact Statement
Venue: Supreme Court (4541/02)
Judgment date: 28 February 2006
Date published: 11 March 2010

Summary of decision:

Overview of facts:
Landmark and Toyama were co-owners of a property. Landmark owned two-thirds of the land as tenants in common with Toyama, which owned one-third. Trustees for sale of the property were appointed. The contract for sale provided that the sale was a taxable supply under the GST Act. | Development approval had been given by the Council for the erection of a 14-unit development upon the land. A house containing two residences was situated on part of the land. The land was marketed as a development site. The trustees expected that the land would be purchased by a developer, the house demolished, and new units built on the site. | Prior to settlement, two private rulings were obtained from the Tax Office. The advice in these rulings included that the sale was input taxed on the basis of physical characteristics of the premises and that no 'enterprise' was being carried on by the trustees. | Landmark contended that the sale was not a taxable supply and that, as a result of the trustees' alleged mistake in describing the sale as a taxable supply, the trustees acted in breach of trust and were liable to compensate Landmark. | The Court concluded that the sale was a taxable supply and in any case the trustees did not fail to exercise the requisite standard of care. | Issues decided by the court or tribunal | Although the case concerned a claim for equitable compensation against a trustee, White J considered GST issues in his judgment. | 1. Private Rulings | White J held (at 4168) that the issue was not whether the private rulings were wrong, but whether the trustees had breached their duties. Determination of that issue 'cannot be precluded by the opinion of an officer of the ATO'. | 2. Enterprise | The judge held that the trustees were carrying on an 'enterprise', that being a series of activities done in the form of a business for s 9-20(1)(a) purposes. | 3. Residential premises to be used predominantly for residential accommodation | His Honour considered the interpretation of the expression 'to be used predominantly for residential accommodation' in subsection 40-65(1) of the GST legislation. Broadly that subsection provides that supplies of real property are input taxed to the extent that the property is residential premises to be used predominantly for residential accommodation. A similar issues arises under paragraph 40-35(2)(a) in relation to supplies by way of lease, hire or licence. | His Honour concluded that the expression requires a prediction of the use of the property and that the main factor to be considered in making that prediction is the subjective intention of the purchaser or lessee. | The Commissioner was not a party to the proceedings. His Honour noted in his judgement that his conclusions on the GST issues would not bind the Commissioner. | Nevertheless, the comments in the judgement relating to the interpretation of the expression 'to be used predominantly for residential accommodation' have been carefully considered by the Tax Office.

Issues decided:
Although the case concerned a claim for equitable compensation against a trustee, White J considered GST issues in his judgment. | 1. Private Rulings: White J held (at 4168) that the issue was not whether the private rulings were wrong, but whether the trustees had breached their duties. Determination of that issue 'cannot be precluded by the opinion of an officer of the ATO'. | 2. Enterprise: The judge held that the trustees were carrying on an 'enterprise', that being a series of activities done in the form of a business for s 9-20(1)(a) purposes. | 3. Residential premises to be used predominantly for residential accommodation: His Honour considered the interpretation of the expression 'to be used predominantly for residential accommodation' in subsection 40-65(1) of the GST legislation. Broadly that subsection provides that supplies of real property are input taxed to the extent that the property is residential premises to be used predominantly for residential accommodation. A similar issues arises under paragraph 40-35(2)(a) in relation to supplies by way of lease, hire or licence. His Honour concluded that the expression requires a prediction of the use of the property and that the main factor to be considered in making that prediction is the subjective intention of the purchaser or lessee. The Commissioner was not a party to the proceedings. His Honour noted in his judgement that his conclusions on the GST issues would not bind the Commissioner. Nevertheless, the comments in the judgement relating to the interpretation of the expression 'to be used predominantly for residential accommodation' have been carefully considered by the Tax Office.

ATO view of decision:
The Tax Office is concerned that the approach outlined by his Honour may cause difficulties to vendors in particular cases as a result of the liability of the vendor being determined on the basis of the subjective intention of the purchaser which may not be known to the vendor. As a practical matter, the vendor may not be aware of a relevant change in the purchaser's intention which may impact upon the vendor's GST liability and contractual remedies may not always be effective for any misrepresentations that may be made. | The Tax Office notes that the considerations that led to the interpretation by the Full Federal Court, in the decision in Marana Holdings Pty Ltd v Commissioner of Taxation [2004] FCAFC 307, of the word 'intended' in the definition of residential premises also apply in respect of the phrase 'to be used predominantly for residential accommodation'. In particular, the person having the relevant intention is not identified in the Act. | For these reasons, the Tax Office respectfully prefers the view that an objective approach is required to the interpretation of the phrase 'to be used predominantly for residential accommodation'. Accordingly, the Tax Office will continue to administer the provisions in accordance with the views in GSTR 2000/20 pending further judicial clarification. | While the Tax Office will continue to administer the legislation on this basis, it will also seek further judicial clarification of the issues if an opportunity arises in other litigation. The Tax Office has agreed to provide test case funding for a Federal Court case which is likely to provide judicial guidance on this issue. | His Honour's conclusion is contrary to the view published by the Tax Office in Goods and Services Tax Ruling GSTR 2000/20 : Goods and Services Tax : commercial residential premises that the expression 'to be used predominantly for residential accommodation' is to be applied objectively by reference to the characteristics of the premises. Entities making supplies of residential premises that rely on that Ruling continue to be protected where section 105-60 of the Taxation Administration Act 1953 applies. | The following Tax Office precedential decisions have been reviewed and it is not considered that they require amendment as a result of this decision: GSTR 2000/20 | GSTR 2000/20 | Sunchen Pty Limited as Trustee of the Sunchen Family Trust and Commissioner of Taxation [2008] AATA 838 | Sunchen Pty Ltd v Commissioner of Taxation [2010] FCA 21 | In his reasons for decision in the Sunchen case, delivered on 18 September 2008, Deputy President Block of the Administrative Appeals Tribunal considered the decision of Justice White in the Toyama case. Deputy President Block indicated that he preferred the view that an objective test is required under s 40-65(1) but considered he should decide the application for review on the basis of the test outlined by Justice White as a judge of a superior court. | In the particular circumstances of the matter, the Tribunal decided the case in favour of the Commissioner. The taxpayer lodged an appeal against the Tribunal's decision to the Federal Court of Australia. | The Commissioner requested that the Court have the matter heard by a Full Court. The Court declined that request. | In a judgement delivered on 29 January 2010, Perram J also indicated that he preferred the view that s 40-65(1) requires an objective test. However, his Honour held that, as he did not consider the decision of White J in Toyama to be plainly wrong, he should as a matter of judicial comity follow that decision. Nevertheless, the case was decided in favour of the Commissioner as Perram J found no error of law in the decision of the Tribunal. | The taxpayer has appealed against the decision of Perram J to the Full Federal Court. | Pending the decision of the Full Court in the appeal, the ATO will continue to administer s 40-65(1) in accordance with GSTR 2000/20 and taxpayers who rely on that Ruling will continue to be protected where section 105-60 of Schedule 1 to the Taxation Administration Act 1953 applies.

Administrative treatment:
Implications on current Public Rulings & Determinations | None.

Legislative references: A new Tax System (Goods and Services Tax) Act 1999 9-20(1)(a) 40-65(1) 40-35(2)(a)
Case references: Northern Engineering Pty Limited v Federal Commissioner of Taxation 42 FLR 301 29 ALR 563 80 ATC 4025 10 ATR 584 Marana Holdings Pty Ltd v Commissioner of Taxation 214 ALR 190 2004 ATC 5068 57 ATR 521 Sunchen Pty Limited as Trustee of the Sunchen Family Trust and Commissioner of Taxation [2008] AATA 838 Sunchen Pty Ltd v Commissioner of Taxation [2010] FCA 21
Subject references: GST whether sale of property was input taxed as residential premises to be used predominantly for residential accommodation Whether 'enterprise' was being carried on